Reverse Auction as a Strategic Sourcing Tool

Reverse Auction as a Strategic Sourcing Tool

In a technically advanced world today, E-procurement acts as strategic platform for procurement through electronic mediums. One of the key tools of E-procurement is reverser auction. Unlike conventional auctions, reverser auction involves a number of sellers competing to driving down prices for the products or services.

Strategic souring companies are using specialized tools like reverse auction as strategic sourcing initiatives to reduce cost on a continuous basis. Reverse auction is the opposite of the regular auction process in which sellers compete with each other and further price reduces after each bidding cycle.

With the usage of technology today, reverse auction process need not be at the place where all people are present but virtual sessions of reverse auction also help in maintaining anonymity till the lowest bid price is achieved and suppliers are identified.

These can be applicable for engineering products like automotive components and also services like selection of logistics supplier for companies. Companies engaging in reverse auction as a tool of strategic sourcing initiatives are mainly technology based firms with domain knowledge of procurement systems. One team of these companies takes care of backend operations i.e. merging domain expertise with background for customized reverse auction, while the other team which acts as a front-end team takes care of identifying suppliers, assessing supplier capabilities and doubling with marketing initiatives for strategic procurement.

Thus, before selecting a product or service and applying to a typical auction cycle, these companies have to undergo a set of procurement cycle for identifying and short listing suppliers on all other parameters except that of cost, (which is basically taken care by reverse auction process).

Factors like savings opportunity, specifications of the products, the size of the purchase, nature of the supplier relationship, the distribution channel involved etc. play a vital role in designing of reverse auction for a particular product or service. Based on these criterion, companies must apply reverse auctions quite effectively for the large segments of their total purchases.

On the flip side, the disadvantages of reverse auction are that they may or may not be strategic and they don't sustain over a longer period of time as a result they don't facilitate long-term relationships with suppliers, which is against the principals of strategic sourcing. Also, since the basis is cost-driven, other very important criteria including the ability to produce the goods or render a service can be hit. Also, there is a lot of scope for cartelization to happen, which will spoil the essence of strategic sourcing.

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