Reverse Auctions: Supplier Strategies

Today I’d like to introduce a guest poster. Andy Moorhouse is Lead Research Consultant with Huthwaite International, a sales performance consultancy, and has produced some (in my view) ground-breaking research on how suppliers should deal with procurement.  He recently shared with me some insights from his research on Combating Reverse Auctions that highlights strategies suppliers have used before, during and after a reverse auction. An extract of his work is below and should make interesting reading for suppliers and buyers alike:

 To further fuel the current reverse auction debate, I thought I would share some recent research findings.
 
As part of our wider research project on the ‘Best practice for dealing with procurement’, during Q3 and Q4 2007, Huthwaite International conducted in-depth interviews with 39 global and national sales leaders to learn about their reverse auction experiences.
 
Our research goal was to identify the successful strategies being used to combat reverse auctions and to help suppliers break through the commoditising effects of this technology.
 
We gleaned many valuable insights from the study, especially around the supplier’s misconceptions of how to approach and participate in reverse auctions (i.e. believing that you need to be the cheapest to secure the contract). Allow me to share an extract from our recent research:

Must you follow the rules?


When analysing the case studies, it was apparent that incumbent suppliers greatly enhance their chances of success by not following the rules set by procurement.
Before presenting the data, I must highlight the research limitations and state that the results only reflect the outcome of auctions in the private sector and that 80% of the participating suppliers have revenues of > $1 billion.
 
Please see the graph below and allow me to illustrate with some examples:

Must You Follow The Process

The strategies for not following the process include:

  • Submitting a proposal but refusing to participate online
  • Telling procurement you will only enter one bid online, which will be your ‘best and final’ offer
  • Rejecting participation entirely.

The European VP of Strategic Accounts for a global logistics company explained their corporate policy of never participating in reverse auctions.  He explained, “We drew a line in the sand and told procurement; we won’t agree to the terms, we won’t access the system.”  

As the incumbent supplier, they have retained two multimillion $ accounts by insisting on meeting with procurement and delivering a proposal in person. One caveat: they have won no new business with this strategy.

We came across many examples of suppliers refusing to play by procurement’s rules during our research. Incredibly, the UK Sales Manager from a global chemical manufacturer explained that when they rejected participation, procurement entered their offline bid into the auction to maintain the perception of a healthy online event!
 
Finally, as suppliers learn the rules of engagement, they now understand that if there are only three real players, refusing to participate may be an effective strategy.

The Sales Director of a global steel tubing manufacturer explained, “When asked to participate we always refuse.” He went on to say, “Auctions in our industry normally fail as the major pipeline contractors cannot get 3 or 4 people together that will compete”

In summary, our research indicates that suppliers are playing the game but learning to bend the rules to their advantage. Remember 4 out of 5 incumbents who bent the rules, secured the contract. Our advice to incumbent suppliers is:

  • Ensure you communicate your intentions and set expectations upfront
  • Follow the process, but don’t follow it slavishly
  • If there are only 3 real players, refusing to participate may be an effective strategy

The full research findings will be published on 2 March 2008, but if readers of ‘Where Next’ are keen to learn more, please let me know and I’ll post some additional insights.

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2 thoughts on “Reverse Auctions: Supplier Strategies

  1. Pingback: Supplier Perspectives on eAuctions « Where Next

  2. We are a custom made component manufacturer of spares, replacement parts and OEM spares for Steel , Cement, Fertilizer, Pulp & paper, Oil and Gas, Petroleum Refinery, Mineral, Mining, ore Processing and alike industries. We are based in New Delhi and for the last 8 months, one of our key accounts has resorted to going in for Reverse Auction for value of business as low as 10,000 USD.

    We did participate in two Reverse Auctions and later on we only place in our bid , see our rank and come out. Since our’s is engineering part/component we find the specifications, drawings, and details are not flawless so that all bidders know “exactly” part is required. We have won only ONE order by resorting to such strategy.

    No of participants are more than 5-7. We are in Rank 5-7 range.
    The Buyer puts our Bid along with incompetent suppliers in attempt to drive down our prices. We know our product value and we do not drive our prices down. We have lost on more than 10 occasions like this. However we are constantly asked to participate otherwise, we are threatened that they will not accept our technical bid.

    From now on, we are thinking of putting in our sealed bid on an RFQ and decline to participate in Reverse Auction. Do you think its wise?

    Low end bidders may be successful in winning business, but at some point will book too much order beyond there capacity. Likewise the industry competitors may have certain capacity beyond which those who are not winning business, might get the business.

    The problem is even OEMs are asked to participate in RA. Our quality and work is at par or better than OEM’s where we provide industry specific high end solution to customers. But Price Buyer turned into Poker Buyer is not the one we should waste our time.

    What’s your take on it? I am trying to read on Game Theory and other relevant literature on Reverse Auction, and Pricing to figure out Supplier Strategies that can work to our advantage.

    Sincerely

    Vishal Kumar
    AAPL
    India

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