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Reverse Auctions: Bad Idea?Purchasing, Reverse Auctions --- 2006 Jean-Philippe Massin, 5,463 views
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This article written by Jim Ericson in 2001 is one of the gems of the www.Line56.com library, examining as it does one of the central (and most timeless) issues in e-business: the reverse auction. Enjoy!
Reverse auctions are an integral part of strategic sourcing. But, what’s little talked about is the fact that participation in reverse auctions has absolutely fateful, and often harmful implications for both buyers and sellers. There’s nothing like a free, open auction to drive efficient pricing of goods, right? It’s true, online reverse auctions between businesses provide a competitive bidding space for suppliers to have a fair crack at buyers, and give manufacturers a chance to lower their cost of goods. What’s little talked about is the fact that participation in reverse auctions has absolutely fateful, and often harmful implications for both buyers and sellers. Click here to find out more!
Cozy on the surface, reverse auctions pull the covers off of longstanding business relationships. Thanks to the Internet, buyers know more about their suppliers than ever before. While some suppliers simply choose not to participate, others reluctantly open their books to customers demanding to know the cost basis of products they are paying for. In the process, some buyers abuse reverse auctions, drive margins down to the point of their suppliers’ survival, and thoughtlessly weaken the stability of their own industries. Others take a more involved stance, but now demand that suppliers are as aware of cost and efficiency as they are. According to the experts, both trends are spreading.
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October 29th, 2007 at 8:57 pm
Hi , I would be interested to read more about this, but your link to ‘reead more’ is not working. Whom can I contact?
October 29th, 2007 at 11:04 pm
Rianne, I’m afraid the link is dead as line56 website is off since a while. You could find it here: http://www.wilsonweb.com/cat/cat.cfm?page=2&subcat=cb_B2B-Market
but you’ll have to pay to register.
October 29th, 2007 at 11:57 pm
If you want a decent paper on e-Auctions to complement this one, try the wiki-paper at:
http://www.esourcingwiki.com/index.php/E-Auctions_in_Sourcing
no payments or registrations required, courtesy of Iasta.
June 28th, 2010 at 2:30 pm
The issue about reverse auctions being good or bad is interesting, due to the fact that reverse auctions ought not to be used in all cases, not only for goods but also for services.
The Brazilian Government established reverse auctions as the default procurement method through a Decree. That is, if the administration desires to use another procurement method, the procurement officer needs to justify its use. This is the same as to exclude more efective methods in the name of so called savings that, in the long run, cost the tax payer more, seeing that the procurement officer will not expose himself to the risk of having to justify a differente procurement method.
Just to give the reader an example, recently a public company did a reverse auction to contract specialized training courses and the market survey indicated a price range with reputable suppliers. Seeing that the Legal Department indicated the need to use reverse auction, the winner presented a price 1/3 of the market value.
One needs to question (and these are only a few of the unanswered issues):
- Will there be quality in the service to be rendered?
- Is the supplier capable of executing the contract?
- Will the market be developed with such prices practiced?
- What will be the cost of having to retender, if the contract falls through?
August 1st, 2010 at 9:49 am
Reverse Auctions is not a bad idea. However, when opting for Reverse Auctions, the following basic criteria should be fulfilled:
a) Enough competition exists;
b) Compressible margins available for the category;
c) Large spend base exists;
d) Standardized category of Procurement;