E-Commerce: Reverse Auction Sites
The recent internet based technological advancement has had major impact on the supply chains management and specifically sourcing strategies. One of the most adopted technologies in this field is the use of reverse auctions also known as electronic/online reverse auctions.
In traditional auctioning, also called forward auctions, a seller offers a product and the interested parties bid up on it, the highest bidder ends up taking possession of the product. Reverse auctioning is the other way round since the buyer controls the prices up to a certain degree. When a buyer is interested in an item which is for sale by more than one seller, they come to bid competitively with decreasing bids in an attempt to sell their item. They occur mostly online as compared to traditional auctions which take place at physical locations.
For this arrangement to work, these services are accessed online via private software companies called “market makers”. These companies usually offer support to both the buyers and the sellers. A reverse option usually begins when a buyer prepares an electronic RFQ and submits it to the market makers (Williams , 2007) . Qualified suppliers who have passed certain specified conditions are then invited to bid in either a closed or open bid system.
In a closed bid format, the buyer accepts all the bids within a specific time frame after which the bids are opened all at the same time, only the buyer and specific supplier usually knows the contents of the bid. In an open bid reverse auction, suppliers bid usually in one day or within a few hours, where everyone can see the bids creating a more competitive environment thus enabling the decrease of price substantially.
The popularity of reverse auctions has had a very significant impact on both manufacturers and suppliers as well. They have also played a tremendous role on in the increase of international business forcing suppliers to find new ways of staying afloat as the market becomes a more competitive environment.
Companies such as Boeing, GE, HP, Sun Microsystems and much more have adopted the use of reverse auction to purchase supply in bulk. A 2006 E-Sourcing Survey showed that the number of people using E-sourcing had increased to 31% from 15% in (Williams , 2007) The following essay is designed to explore this scenario and identify the benefits and even a few challenges of reverse auctioning as compared to traditional methods of purchasing and supplies.
Speed of doing business
Online reverse auctions allows the supply management team of a company to get involved in an auction in real time without the need to travel hence speeding up the buying process. Since the bidding is given a limited time schedule, it forces both the suppliers and managers to make quick decisions instead of postponing them because any delay may lead to the risk of losing a deal. Before this tool was in effect, the buyer had to create a complex RFP and go on to distribute it to suppliers, wait for their responses, then go through each of their proposals individually in order to make a decision, by employing the use of reverse auction software, months or weeks of negotiations can now be reduced to a few days making reverse auctioning a much faster way of purchasing goods than the traditional RFX process Williams , 2007) . For example, America West Airlines view this considerable reduction in time for price negotiation as a competitive advantage since it has reduced its price negotiation times from initially three or more weeks to as little as 20 minutes.
Cost saving
Cost savings is another important advantage of reverse auctioning, as buyers are able to obtain the lowest possible price from the participating bidders. Cost savings could come as a result of the increasing competition among the suppliers, or optimizing market conditions such as surplus inventory in the market place. In the United States, it is reported that the average cost savings brought about by reverse auctioning is about 15%. This is about 3 to 5 times that of traditional forward bidding (Williams , 2007).However, depending to a specific industry and company, this value can range anywhere from 5% to 90% also depending on the product or service involved. Williams , 2007) In the UK, savings is reported to be approximately 18% as compared to forward traditional bidding. This fact further fuels the much seen preference for reverse auctioning by companies.
Easy Selection Process
Unlike traditional procurement methods which could not portray much about an individual supplier, reverse auctions enable the buyers to ease the vendor selection process by leveling this playing field. The company to be supplied posts the specifications of what products it needs and according to the feedback, they can make an informed decision of which vendors can/ cannot meet these requirements which saves time and money.
Disadvantages
The following are the few shortcomings associated with reverse auctioning:
For the buyer, reverse auctions might focus too much on pricing and forsaking the quality of the product. Since focus is put in identifying and mostly selecting the lowest bid, the buyer might find themselves with very low quality products due to failure to look into the reputation of vendors thoroughly.
Heavy reliance on reverse auctioning may also prove disadvantageous to a firm which uses it for all its procurement needs. The buyer may be missing out on possible vendors who are both affordable and with a good reputation but is more reliable in a long term basis.
References
Williams , C.L. (2007) An Overview of Reverse Auctions. Retrieved April 24, 2012 from www.swdsi.org/swdsi2010/SW2010_Preceedings/papers/PA114.pdf
