Reverse Auction

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Reverse auction

Background

Reverse auction, also known as downward price auction, is a kind of competitive bidding event where more than two suppliers compete for a single buyer’s business. During the bidding period, the price is driven down, as the suppliers compete for the chance to offer their specified product/service at a price which is set by the market environment of the reverse auction. Such auctions are commonly used by organizations and companies as a tactical way to achieve their sourcing objectives (Shalev, M. E. and Asbjornsen, S. (2010)).

1. How should a reverse auction fit into the overall procurement strategy? 1.1 When to use reverse auction

To begin with, it should be known that reverse auctions are not suitable or appropriate for all different types of procurement strategies. In other words, the pitfalls of reverse auctions are numerous but limiting reverse auctions’ uses to some certain circumstances can be worthwhile. Normally, a company’s procurement strategy should depend on the following two dimensions: * The profit impact

The volume they purchased/ percentage of the total purchasing cost/ impact on the product quality/impact on the company’s business growth; * The supply risk
Items or service availability/ supply variance/ inventory risks/competitive market demand/ maker-or-buy opportunities/ opportunities of substitution;

Figure 1. Kraljic’s matrix

Figure 2. characteristics of 4 different types of items

Sameer Kumar and Christine W. Chang in their journal said that Lessons learned from industry have shown that reverse auctions are more appropriate when used to purchase indirect materials that can be classified as commodities(supply risk low, many suppliers and not critical ). In another word, non-critical items and leverage items are more suitable and appropriate for reverse auctions.

2.2 How it fit into the procurement strategy
When a company wants to purchase a commodity or off-the-shelf indirect material that has a manufacturer’s part number, they can directly run a reverse auction by inviting dealer-distributors to the event (SAP AG (2006)). Why it is reverse auction not any other type of purchasing tools? The answers of how it fit into the procurement strategy are divided into several parts as below. * Pricing

Reports shows that with the acceleration of the globalization process, companies are experiencing greater competitions, which makes it more difficult to achieve top line growth(Mastroberte, T. (2011)). This economical market environment puts more buyers’ attention on reverse auction as an easy solution to keeping purchasing cost lower and lower. The attention on reverse auction is influenced by reported of 25%-50% saving in multimillion dollar procurements over its applicability( Jap, S. D. (2003)). Without doubted, pricing is one of the most signficant benefit for companies and organizations when they analysis the reverse auction. When used appropriately, reverse auctions will perfectly support the procurement goal of strategic purchasing to significantly reduce the cost of purchases without sacrificing too much on quality and service. * Time

Reverse auctions generally occur in a compressed time frame, anywhere from 20 minutes to about 1 or two hours. As previously mentioned, the short auction time is a really attractive incentive for buyers to choose reverse auctions. Except the shortened bidding window, more conveniences are gained by using reverse auctions. Compared with traditional negotiations which means that numerous telephone calls and faxes are needed in the auction processes, the bidding window and internet provide a portal which both buyers and bidders can transmit not only large but also detailed information about the product, price, specification and pictures as well. * The number of suppliers

Due to the internet, reverse auction can attract suppliers worldwide. On another hand, as geographic boundaries dissipate and...
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