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A Reverse Auction - how does it
work ? Well it works just as it's described. The "buying" organisation lists the desired commodity/service for sellers to competitively bid on. Consider one of the most popular auction tools - eBay. This is a classical auction, where the seller lists the goods and buyers bid in increasing increments of price. The high bidder wins the right to purchase the item. The seller gets to set an initial price (the price to start the bidding at) or may use a reserve price (in this case, the lowest price a seller will obligate itself to take, although bidding may start lower). Either way, it is the minimum price at which the seller is willing to part with the item. The seller may also have some terms and conditions that are considered to be fairly standard - payment accepted, delivery terms and costs, and the time associated with transfer. These are terms with which buyers are well acquainted, and the same terms will apply in a reverse auction. A reverse auction lives up to its
appellation by having prices fall. The eBay auction example, the high bidder
wins. No supply manager would accept the highest bid, so in reverse auctions, the
prices decline. A "buyer" will post a price at which the bidding will
start. This is an important strategy function. How low will the initial price
be? Most often, the recommendation is to start at your "last good buy"
price or an industry standard price. It's important to start at a reasonable point
at which "sellers" would want to bid. Just like in a regular auction, you
want to encourage suppliers to bid. The actual reverse auction
is just a small part of the work that needs to be done. Most of the work surrounding
a reverse auction takes place prior to the actual event. Some of these tasks include
identifying suppliers to participate, pre-qualifying them, inviting them to participate
and informing them about the technology being used. A reverse auction is a powerful
tool for finding new suppliers or working on prices with the old ones. In either
application, though, it is important to define everything upfront. You need to give
enough information to the sellers so that they can bid appropriately and you can
accurately compare one bid to another. This means defining everything.
Quality, delivery terms, payment terms, location of use, quantity required and in what lot
size, and how you do business with your suppliers are all questions that suppliers need to
have answered before the reverse auction. Anything that you can
describe well can be reverse-auctioned. This includes goods and services. The
key is that the item must be discrete - that is has features that are measurable.
This might be a year's supply of water delivered for a departments water cooler or 25 tons
of plastic resin. It could be the next three years' worth of raw material or a
consolidated buy with your suppliers for office supplies, janitorial services, or contract
labour needs. The key, again, is to be able to describe what you want to purchase,
in terms of quality and specificity, to make your requirements clear to a supplier.
Doing this will ensure that you are able to compare apples to apples. Is a Reverse Auction
Right ? Key things to think about
when deciding if a reverse auction is right for a particular commodity include:
These are important
questions to be able to answer in creating a reverse auction. Some commodities lend
themselves well to the format, but others take quite a bit more effort and expertise. Using a Reverse Auction
Service This is one reason why
several firms offer reverse auctions as a service. Auctions have the potential to
offer real benefits, but significant expertise can be required. Properly executed, a
reverse auction has the potential to yield an additional 8 percent to 20 percent savings
for an organisation below it's current price. To achieve these results, however,
certain dynamics must be coordinated such as the number of bidders, the dollar value of
the reverse auction, the compressibility of the commodity, and, more important, the design
of the event. This is why, for a first foray into reverse auctions, it may be best
to use an experienced firm for advice on structuring the reverse auction. Even
simple commodities, in which the auction is not well executed, will not yield the desired
results. Consultants offer these kinds of services, but some firms together with
many online marketplaces or exchanges also offer these services, but some firms together
with many online marketplaces or exchanges also offer these services in addition to the
software platforms or applications. As a consumer of these
services, you need to be aware of the concepts that will enable your organisation to work
well with your partner or "auctioneer." The best way to work together is
to lay out a plan before the auction. Ensure that good purchasing processes are
being followed. A reverse auction is simply the execution of what is essential a
request for quotation (RFQ) process. There is not any less work involved in a reverse
auction; rather the tool enhances the result by creating a competitive market dynamic in
which potential suppliers bid for your business. Unlike the old process of single
bids, or even two or three rounds of bidding, reverse auctions result in a continuous and
dynamic event of tens and even hundreds of individual bids. This is the fun part of
the event. Senior management, supply management, suppliers, and partners are all
dynamically connected and instantaneously receive feedback on the results. Reverse Auction
Checklist Ensure a successful event
by beginning with a good definition of a reverse auction. The following checklist is
suggested for inclusion in any supply manager's reverse auction definition.
Following these steps will ensure that you work well with your technology partner and achieve a successful outcome. In the next article on reverse auctions, the different methods used within an auction to get the maximum effect during the event will be discussed |
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