Reverse Auctions Move Industry Forward

The direct benefits of reverse auctions include cost reductions, fast determination of prices and the availability of cost data for wider use. Indirectly, auctions promote cross-brand co-ordination of strategy, the consideration of non-traditional suppliers, and the consolidation of the supply base.

These benefits would seem to demonstrate that reverse auctions are the way to go for on-line purchasing. So why has the uptake not been more rapid?

Researchers at Warwick Business School have recently completed research within the automotive industry and have found that there is a perception that they can damage long-term supplier relationships, detrimentally affect total cost and quality and increase the workload of buyers. There is also significant scepticism regarding whether all commodities are suitable for such auctions.

"The research concluded that these negative perceptions were false and that the main constraints for the implementation of reverse auctions are attributable to a lack of understanding, both by individuals and organisations" said Will Harman.

"Our analysis of practical experience led us to conclude that strategic supplier relationships and the use of auctions are not mutually exclusive" added Jan Tribiahn of Warwick Business School.

"Auctions can reduce total cost, do not compromise quality standards, and they can be used for almost any commodity."

The research concludes that increasing the speed and scale of implementation of reverse auctions will prove beneficial. Commodities should be prioritised to ensure the greatest return against effort. The use of relevant technology is important as initial sourcing will become easier and the capture of cost data will be improved. Specialised auction implementation teams can overcome potential fears and workload issues amongst buyers. The use of auctions could be taken into account when determining buyers' performance measures.

Note: A reverse auction is where a company puts a part or service out to tender with a guide price, detailed specification and delivery date. All those interested will then bid on line at a defined date and time. The bidding is open for all taking part to see and the price is bid down, typically with a number of competitors dropping out along the way. At the closing time the buyer can then make a choice and does not necessarily have to go for the cheapest option.