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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:

• How much spend does your organisation have in this area?
• Are there enough suppliers in this space to make it competitive?  Usually, five is a good minimum, and in sophisticated cases, it may be as low as three.
• Is what you want to auction compressible (does it have a decent margin) so that supplier have room to bid?
• Do you have a good understanding of how this commodity works so that you can structure an auction?
• Do you have long-standing relationships with any one or two suppliers for the commodity, and if so, why?  What is valuable about the relationship?  Would an auction harm the relationship, causing a loss in the value you get from your supplier partners.

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.

1. Purchasing process excellence
2. Adequate participants
3. Information sent out weeks beforehand to suppliers.
4. Train all of your suppliers and participants on the tool beforehand.  It is important to train on the technical aspects of the tool itself as well as the concept of reverse auctions for your procurement staff.
5. Pre-qualify your suppliers to ensure that once they are permitted to bid, they can fulfill the requirements.
6. Award the business after a quality control check.  Once the winner is identified, ensure that you give due diligence to the assessment of the supplier.
7. Decide on and adhere to the rules and ethics defined beforehand with your auctioneer/technology partner, as well as procurement standards.
8. Select good technology partner(s).
9. Complete an auction analysis of how the event should work:
• What is the market (vertical or horizontal)
• What is the revenue source?
• What partner links are required?
• Do a dry run.
• Get questions answered early.
10. Execute the event per plan.

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