What are Reverse Auctions?
Reverse Auctions are generally the preferred eAuction type because it generates the largest savings in conditions with sufficiently high competition. In this eAuction type, the participants compete directly against each other online by submitting lower and lower bids.
Compared to a Forward Auction (as we know them from Auction Houses), the roles of buyer and seller are swapped, so that multiple sellers compete to earn the buyer’s business by incrementally lowering the price of the product of service.
Benefits of Reverse Auctions
Reverse Auctions are often used in e-procurement as part of a broader spend management strategy, with savings generated through competition between the suppliers. Suppliers improve their position in the auction by submitting successively lower bids.
While cost-savings is a primary benefit of Reverse Auctions, achieving greater value is the ultimate goal. Additionally, the autonomous nature of Reverse Auctions allows smaller and more diverse suppliers to compete on a level playing field with larger suppliers.
Savings can also be realized in terms of efficiency. Reverse Auctions have a reduced negotiation phase compared to traditional supplier negotiation with a set auction date that make it easier to meet deadlines.
How a Reverse Auction Works
During the Reverse Auction, after submitting the first bid, the suppliers can typically see their position in the eAuction. The position can either be shown via a traffic light system (green, yellow, or red indicators), ranking, or by having full transparency so all suppliers can see the best bid(s). It is up to the buyer to decide what should be shown to the suppliers during the Reverse Auction.
The Reverse Auction will last at a minimum the predefined duration (30 minutes for example), but each time a bid is placed within the last two minutes of the Reverse Auction, it will automatically extend by two minutes. The Reverse Auction will continue until no further bids are placed in the final two minutes of the auction.
Best Categories to Source with Reverse Auctions
The best categories to source with Reverse Auctions are simple in nature and do not have a high degree of specificity. Here are some examples:
- Printing/copier services
- Broad technology categories
- Raw materials
- Accounting services
- Office supplies
- Janitorial services
- Waste management
- Security guards
Templates for Reverse eAuctions
List auctions are useful if you want one supplier for all products and you have a competitive environment on the total price. If a supplier wants to participate in the Reverse List Auction, they must bid on all lines.
Cherry Lot Auctions are useful if you have several lots (subtotals) and you want one supplier per lot. If a supplier wants to participate on a lot, they must bid on all lines within the lot.
Cherry Picking Auctions are useful to acquire the best price per product and strong competition exists on the individual product lines. This way, suppliers can participate on individual lines. Cherry Picking Auctions are useful if you are not sure how to group the products and/or if the grouping depends on the final winner for each product.