Auctions and Sustainability

Reverse auctions are unsustainable. They force suppliers to lower their prices to such a degree that they risk being driven out of business (bad for economic sustainability) and incentivise suppliers to cut corners in order to deliver at such low prices (bad for social and environmental sustainability.

OK, so this is an extreme caricature, but I am sure that some of you will identify to some degree or other with the sentiment.

And yet, forward auctions are a central tenet of carbon emission trading (good for economic, social and environmental sustainability).

So where’s the disconnect?

Truth be told, reverse auctions are just a tool. They can be used in a sustainable way or an unsustainable way.

Here’s one way you can use a reverse auction unsustainably:

  • Include suppliers of all different kinds of quality, even ones you are not really going to be prepared to deal with
  • Bid just on price
  • Wait for high quality suppliers to drop their prices in an attempt to compete with the lower-quality suppliers
  • Then just use the information you gained from the reverse auction to beat your incumbent into accepting a price decrease

Any time you buy something at a price that is lower than what the supplier can genuinely afford to sell at you are damaging not only your supplier relationships but you are damaging the economic sustainability of the supplier marketplace. And you may well be causing knock-on effects that damage environmental and social sustainability as your suppliers struggle to deliver at the agreed prices.

Here’s one way you can use reverse auctions sustainably:

  • Weight the different suppliers so they are competing on a genuinely level playing field
  • Be prepared to award the contract to a supplier who provides best overall value for money rather than simply best price

So long as suppliers are bidding on a level playing field, the prices they are prepared to offer should be sound. Or at least you can see where different quality suppliers really drop out of the bidding. Certainly from a theoretical point of view, an auction run on a level playing field is the best way of allocating goods and services to those who value them most. In the interests of practicing what you preach, this is the approach I took in my recent reverse auction for software development services.

This may mean paying more on a per unit basis, but if you’ve done your sums right in the weightings part of the project you’ll be better off overall. As will your supply market.

Happy smiles all round.

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