Reverse auctions as we we know them today started in the mid 90s. So now seems about the right time for them to be going through their poor, misunderstood phase.
Tim Cummins writes a great analysis of how buyers reap what they sow: screw your suppliers when times are good and you can’t expect your suppliers to queue up and looking for win-win opportunities when the markets move against you.
Two years ago, IACCM was warning its members that the change was coming and that suppliers were shifting their loyalties – for example, they were investing their marketing dollars in emerging markets, rather than their traditional (disloyal) customers.. We alerted buyers to the fact that they would pay a price for alienating the supply base. But the good times rolled on – commoditization, reverse auctions, confrontational contract terms – these were just some of the ways that buyers showed their lack of loyalty to the traditional supply base in their haste to grab low prices and exert their dominance.
A timely warning, and nothing contentious, you might think. But now read the paragraph again and see how “reverse auction” is equated with “showing disloyalty to your suppliers”.
This is to put the cart before the horse. It’s (short-sighted) buyers who screw suppliers, not reverse auctions. And don’t forget that short-sighted buyers are able to screw suppliers with all kinds of methods: you certainly don’t need an auction to demonstrate disloyalty to your suppliers. You can screw a supplier perfectly well using certain contract clauses – but that is not to say that contracts are a bad idea.
From my own experience: I recently awarded a contract for software development services via a reverse auction. I have a good relationship with both the current and previous supplier. I believe this is because I was open and up front during the whole process (including explaining to the incumbent why I was going to market). The reverse auction in fact helped the decision making process be more transparent. And the contract was far easier to implement than would have been the case without an auction.
In that example the reverse auction helped both with achieving the right price and with helping build the supplier relationship.