Reverse Auctions: A way forward to bring transparency in procurement process

  1. What is a Reverse Auction?: A reverse auction is a type of auction in which the roles of buyer and seller are reversed. In a traditional auction (also known as a forward auction), buyers compete to obtain a good or service by offering increasingly higher prices. In a reverse auction, it is just opposite to the traditional auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers undercut each other. In other words Reverse auctions are a structured competitive bidding event where two or more suppliers place bids to supply goods or services that drive the price lower over the course of the event.
  2. Why Reverse Auction?: The use of reverse auction technology has become more widespread in response to the growth of the Internet technology and its value as a tool. As the Internet has grown, reverse auctions have evolved as an efficient and structured way to conduct online negotiations with suppliers. In fact, reverse auctions have completely revolutionized the way that many government buyers and large organisations procure goods and services. Reverse auctions offer significant cost savings benefits, result in lower cycle times, increase compliance, enhance transparency, increase collaboration, boost supplier participation, and provide feedback for participants.
  3. Key challenges in traditional way of procurement
    1. Dependent of individual’s negotiation skill: In a traditional way of procurements, companies seek quotes from different vendors in a manual form. It all depends on capability of negotiations to what extent one can do. Reverse auctions have been implemented as a means of reducing corruption and levelling the playing field.
    2. Time consuming: Negotiating with each vendor is time consuming process
    3. Lack of transparency: There is no way which guarantees that negotiations with each vendor done to the fullest
  4. Benefits of Reverse Auction
    1. Competition: In a reverse auction, quotes are sought from each vendor in such a manner that they can see the lowest quote submitted by other suppliers without their name, hence it creates direct competition and bidder is forced to reduce the price to win the RFQ
    2. No dependability: Companies to use technology platforms for reverse auction and no dependability on individual’s negotiation skill. Business owners can sit relaxed
    3. Transparency: As the bidding is done in a live environment, price discovery can be done in a transparent manner
    4. Participation: When done well, reverse auctions boost participation in the buying process. Reverse auctions make it easier for qualified suppliers to participate in the buying process by making it more convenient, giving them real time feedback, and shortening the cycle times for the purchase. This saves supplier time and lowers costs by eliminating an otherwise lengthy and time consuming negotiation. Moreover, the fact that the reverse auction is available over the web makes it more accessible to a larger pool of vendors and provides global access for suppliers. These factors can increase the number of suppliers that are involved in the buying process
    5. Reduced cycle time: The traditional buying process includes locating qualified suppliers, contacting each of these suppliers, obtaining pricing, negotiating with these suppliers and then awarding the business. Negotiating with suppliers can be quite time consuming and effort intensive for the buyer. Reverse auctions offer a way to reduce the complexity and obtain pricing in a quick and structured format that encourages lower bids from suppliers within a designated period of time.
    6. Cost Savings: Reverse auctions can work towards huge cost savings in procurements due to online competition amongst suppliers and transparency of the process. This is a very popular tool of procurement in developed countries. In India also Government including Indian railways has made it mandatory to procure materials and services through their e auction platforms. Many large companies are using this methodology to procure goods and services across the globe.
  5. What is required for successful reverse auction strategy?
    1. Top Down approach: In order to successfully implement reverse auctions, it can be extremely helpful to have the support of higher management. With the backing of higher management, it can be easier to make the changes to the buying process that need to take place since it is supported from the top and are part of the organization’s goals.
    2. Clear Specifications: One important issue that applies to reverse auctions is the importance of clear specifications and requirement. Without a clear definition of what the buying organization requires, the supplier may not understand what they are bidding on. In lack of having a clear idea of what suppliers are bidding on, it is impossible for them to bid their lowest price or even the correct price.
    3. When to use: Reverse auctions should not be used for all purchases. It is important to remember that reverse auctions are only one of many tools available to buyers. Reverse auctions tend to deliver more value when there are common specifications, competitive suppliers base, long lead times, low costs of switching suppliers, low distribution complexity, large purchase size, high savings opportunity, non-strategic relationship with the vendor etc
  6. Technology Platforms: Now a days with increase in internet traffic and advancement of technology driven processes many websites provides facility to conduct reverse auctions in a cost effective, secured and transparent manner. Time has gone when reverse auctions strategy being used for bulk purchases. Now after availability of reverse auction services at relatively lower cost, many small and mid size companies have also started using reverse auction.
  7. About the Author: The author of this article is Mr Hemant Jain who is CFO in a very large Insurance Company in India and can be reached at jainhemantca@yahoo.co.in

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