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3 Reasons to Engage in Reverse Auctions

By David Wyld

There are several misperceptions associated with reverse auctions.

For one, they are often considered a “necessary evil” on the sales side of the equation but not for use in the rest of an organization’s value-creation activities. For another, they are often considered (1) a way to squeeze a supplier to provide the best price possible and (2) a power play by Fortune 500 and Global 1000 companies to capture every possible cost savings.  

Reverse auctions are integral to an organization’s sales department: To sell products and services domestically and globally in today’s increasingly competitive B2B, B2C and B2G markets, a company’s sales efforts must include engaging in reverse auctions.

But reverse auctions offer other opportunities: They have the potential to streamline the company’s value chain and improve its competitiveness, no matter the size, industry or location of the firm.

And there is more to reverse auctioning than finding the “winning” supplier in a competition for lowest-priced goods or services. Today, organizations can employ reverse auctions in a far-more-sophisticated manner.

Evolution of Reverse Auctions

Reverse auctioning has evolved into a multifaceted event, one in which competing companies can bid based on parameters other than price. Buyers now can evaluate bids based on optimal product/service, quality, service level, delivery method or mix of those criteria to fit their needs. This helps assure that the “best deal” from a reverse auction is truly the best one for all parties involved — including those downstream from the buying organization in the value chain.

This new paradigm of reverse auctioning is available through a growing number of third-party reverse auction providers and through procurement solutions that offer new capabilities for competitive bidding, both as hosted and PaaS (procurement-as-a-service) offerings. Such offerings are readily available to large firms as well as smaller organizations and even public agencies.

As more companies seek to procure increasing amounts of their inputs, technology and supplies through reverse auctions, supply management practitioners will need to make strategic and tactical choices as to how — and how often — to engage in them.

Reverse Auction Opportunities

By using reverse auctions across your value chain, you can dramatically improve your company’s sales, speed and efficiency metrics while also ensuring that supply chain functions will have a significant — and demonstrable — impact on the bottom line.

Here are three areas of opportunity:

  • Procurement. Too often, companies that routinely engage in reverse auctioning as part of their sales and marketing strategies fail to use it when procuring raw materials and other inputs for their product and service offerings. This disparity can be traced to a lack of communication and coordination between executives across the organization’s value-creation activities. While this issue needs C-level attention, procurement professionals must do their part to ensure that their organization is using reverse auctions for acquisition activities as well as bidding. This is one of many ways that procurement can add value to the organization.
  • Acquisition of necessary services. Companies often don’t leverage reverse auctioning to properly vet whether they should look internally or seek external providers for a necessary function, such as payroll, accounting, janitorial or even coffee services. Thus, they may be missing out on possible benefits like cost savings, reduced downtime and improved service levels. Employing a well-crafted reverse auction to test the marketplace enables an organization to determine the best approach from both cost and quality-of-service perspectives.
  • Logistics and distribution. There are many opportunities to employ reverse auctions for the “final miles” of an organization’s value chain. Reverse auctions are increasingly used in selecting distribution and transportation services, no matter the size of an organization’s needs in these areas.

Additionally, competitive bidding can also be employed to find the right providers for post-delivery functions, including reverse logistics and customer-service provisioning. And again, price is only one parameter in such decisions, as quality, speed and customer satisfaction also are critical considerations. For example, a seller of computer hardware and peripherals would need a robust level of post-sales customer support (via multiple platforms) as a way of ensuring customer satisfaction. By using a reverse auction to vet third-party customer-support suppliers, the seller can determine the best match. And through proper contract management in the post-auction execution phases, the service levels specified in the reverse auction-based bidding can be assured over time.

Making Reverse Auctions Work for You

Reverse auctions aren’t just for use by sales departments or as a measure to get the lowest price. This type of competitive bidding offers opportunities that can make significant impacts on both performance and financial metrics.

Thus, the operative question for supply management professionals is: Where can you better employ reverse auctions throughout your company’s value chain?

It’s time to start encouraging the use of reverse auctioning across your organization so you can better compete — and win — in whatever market you are in.

David Wyld is a professor of management at Southeastern Louisiana University in Hammond, Louisiana.

 

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