Gearing up for more reverse auctions in 2008

This is from Supply Management in May. A quote from John Paterson, VP & CPO at IBM:

Sellers are more aggressive in their terms and pricing as they desire to maintain capacity and revenue streams. Sharp buyers recognise this and will typically look to place more business up for bid, take actions to renegotiate contracts, and seek out new suppliers. As always buyers should recognise markets change over time and they should do nothing that will damage their buying position when it becomes a sellers’ market again.

In these sorts of conditions reverse auctions are a great tool because they are able to cut through long-held assumed market prices and uncover exactly where suppliers are willing to go. But note John’s sage advice about not abusing market power. Again, reverse auctions, done well, are a good foundation on which to build solid supplier relationships (this has certainly been the case for me).



2 responses to “Gearing up for more reverse auctions in 2008”

  1. Hi David. There are a 3 different questions in there so here’s the short answer to each and hopefully an explanation of why:

    1. What is my opinion? It is counterproductive in the long run
    2. Is it fairly common? There’s a range of views here. In EU Public Procurement it’s illegal. In private sector buying I am sure some buyers do it a lot.
    3. Is it abusing the system? I don’t know whether I’d call it abuse. But certainly it’s not in the long-term interests of the buying organisation.

    Here’s one example: A buyer in a retail organisation ran an auction once. He then went to his incumbent, using the price data from the auction, to ask for a saving directly from that incumbent. This worked very well for the buyer in year 1. He got his saving targets and got a pat on the back from his managers. But by year 3 what had happened? New suppliers had given up competing for the contract because they didn’t trust the buyer to stand by the results of the auction.

    This is an important point because it emphasises that for a buyer focussed on the short-term, post auction negotiation seems like an obvious way to gain additional benefits. But a more strategic view would look to the long-term impacts on the supply market of how suppliers perceive this kind of behaviour.

    It’s also instructive that the EU rules on using auctions make this kind of activity illegal (for buyers in the public sector). This is further evidence that this kind of activity is frowned upon.

    But it’s a little more work up front for the buyer to put together sufficient what-if scenarios and weighting the individual bidders in order to come up with a result that covers all the bases and doesn’t require further post-auction bidding.

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