Online Reverse Auctions:

Common Myths versus Evolving Reality

 What is Reverse Auction?
• Dynamic bidding events initiated by a buying
company sending out a request for quotation.
• Suppliers communicate their best offer via an online
system.
• Supplier cannot see the identity of competitors, but
can see the current quote in relation to the other
bids.
• Supplier may submit multiple bids during auction in
order to underbid a new lowest quote.

• Very competitive setting can result in true market

price.
 Benefits of Reverse Auctions
• Cycle time saving for buyer & sellers

• Increased buyer reach

• Creation of new markets for sellers

• Price visibility & efficiency

 Disadvantages of Reverse Auctions
• Possible deterioration of trust and long-term
relationships.

• Resistance from suppliers

• Retaliation from suppliers

• More preparation for suppliers & buyers

• E.g. Data gathering & Analysis, Detail Request for
proposal (RFO)
 Overall Opinion about Reverse Auctions
• Mixed

• Conflicting reports

• Due to common myths about reverse auctions

 Common myths about reverse auctions
• Reverse Auctions are only About Price

• Reverse Auctions are only suitable for

Commodities

• Reverse Auctions damage the Supplier-Buyer

Relationship

• Repeat Reverse Auctions result in decreasing

savings

• Reverse Auctions are dying

 Myth 1
• Reverse Auctions are only About Price

• Received negative notion that it drives supplier’s

price toward zero.

• Overshadow other performance attributes of a

product.
 Reality :Reverse Auctions are only About
Price
• Several buyers use TCO approach in buying. e.g.
usage, disposal, storage costs.

• Multiple attribute weighting system is used. e.g.

quality, delivery, service - lowest bid did not
guarantee the business.

• Several buyers used reverse auctions to shortlist the

competitive suppliers and keep the price out of
discussion for post bid negotiation.

• Accept it as effective mean to reduce price.

 Myth II
• Reverse Auctions are only suitable for commodities

• Generally used for standard or less complex

products.

• In standards products, number of suppliers are higher

– result in more price benefits.
• Reality : RA are only suitable for Commodities
• Several buyers used it for complex engineering
products.

• Most important is to do homework before RA

• - Selections of suppliers based on capability
• - Precisely specifying product specification
• - Preparing the RFO
• - Use consultant for market knowledge and RA
• - Use two-stage purchase process
 Myth III
• Reverse Auctions damage the supplier-buyer
relationship

• Pressure on price make suppliers hostile towards

buyers.

• Suppliers retaliate in the forms of secrecy about cost

saving developments and assign low priority to
buyers.

• Trust and commitment can be lost.

• Reality : RA damage the Supplier-Buyer
Relationship
• Supplier perceive RA as a negative Phenomena

• 2/3 of the buyers feel that RA improved the

relationships with suppliers.

• Educate the supplier about RA & its benefits

• Use third party for RA to maintain integrity
• Provide help during the auction event –
communications.
• Specify and follow rules for selection of bids
• Obtain feedback.
 Myth IV
• Repeat RA result in decreasing savings

• First time RA can result in 20 to 50 % of costs

saving.

• Repeat RA save up to 2 to 5 %.
• Reality : Repeat RA result in decreasing
savings
• One firm reported 25% savings with reverse
auctions in the first year,
• Followed by 20%, 17%, and 15% in years two,
three, and four, respectively.
• Repeat RA reduce saving but validate the price,
and largely depends on market conditions
• - Technology improvement/innovations
• - Supply & demand
• - New suppliers or customers
• - productivity gains/capacity of suppliers
• Generally repeat RA offer less saving.
 Myth V
• Reverse Auctions are dying

• Several firms do not plan to use RA.

• Overall use of RA is declining.

• Reality : Reverse Auctions are dying

• Other firms suggest that:

• It’s a valuable buying tools, but usage will depends

on type of product or situation.

• Used for identifying competitive suppliers.

• Then, buying products offline based on other

attributes.

• Make the vendors honest about their costs and

margins.
Thank You

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