Reverse Auctions
For a long time reverse auctions were considered to be the same as online auctions. Since eBay came on the scene, online auctions have become much more common for both private and business users; they have been a regular feature for years where the aim is to attract simultaneous offers in a secure environment. Online auctions are a way of creating markets with significantly shorter handling times for buyers.
Before holding an auction, there are five main questions to consider.
Which type of auction is best suited? There are lots of different models that can be used, depending on the competition. There is, for example, the typical British reverse auction, with prices starting high and decreasing with each bid, and the winner is the one with the lowest bid at the end. Different from this is the Japanese reverse auction, with prices also starting high but going down automatically in rounds, with the suppliers having to confirm the new lower price in each round, or dropping out. The winner is the last man standing. The Dutch reverse auction is often used in big market halls for mass auctioning: here the prices start low and automatically go up every few seconds. The auction comes to an end when the supplier presses the buzzer and accepts the current price level. There are many other types of reverse auction.
At what point should the auction be held? One option is immediately following the initial negotiations with selected suppliers. Timing is important—an auction can shorten the entire tendering process.
How many suppliers should be included in the auction? (An auction can also be used to identify possible suppliers from the get-go.) If the main objective is to complete the tendering process as quickly as possible, no more than 20 suppliers should be considered. However, if the purpose is to obtain information on the suppliers' pricing structures, this limit can be disregarded.
What will the pricing structure be? If the intention is to procure a large number of individual items via the reverse auction, pricing should relate to a whole basket of products. Where only a limited number of items are involved, individual bids and pricing offers are preferably.
How long should the auction last? A meaningful auction cannot be completed in less than 30 minutes. On the other hand, if it takes more than two hours, time will be wasted. Timings need to be set in advance and stuck to, depending on the number of items to be procured, the price structure, and the complexity of specifications.
The online auction should relate to clearly specified product groups in order to avoid any misunderstanding. But even the most efficient auction cannot operate without open-minded and Internet-friendly suppliers.
Reverse auctions are more than just online auctions. When online auctions first came on the scene, a great deal of attention was given to this new way of buying and selling. Nowadays the same principle is applied by many companies to niche categories not particularly suited to online auctions: that is, parallel negotiations are conducted without an online tool. Strictly speaking this is not an auction, but the principle remains the same. Companies invite shortlisted suppliers at the same time and conduct parallel negotiations in different rooms, constantly providing immediate feedback to competitors and driving down prices while sorting any queries.