Purchasing ran an article some time ago providing guidelines on running electronic reverse auctions.
They make 7 points presented as questions and answers that buyers should take into account when figuring whether to run a reverse auction. Here are the 7 points:
- The more competition the better
- Do your supplier qualification before the event – protect yourself from having fly-by-night bidders offer an attractive price that then turns out to be unsustainable
- Make the spend in the reverse auction as large as possible to make the reverse auction as interesting as possible for your suppliers
- Make sure your specs are clear and watertight
- Beware of running reverse auctions where a strategic relationship with your supplier is important (reverse auctions may damage supplier relationships)
- Reverse auctions can offer a range of benefits in addition to (or instead of) lower prices e.g. faster sourcing times, a clear audit trail
- Make sure you factor in all non-price parameters as numerical values into your auction
It is a great article and I just want to add a few comments/clarifications from my perspective.
Point 1: The more competition the better. I do agree with this – and generally I would like to see 4 suppliers in a reverse English auction. But bear in mind that in 2008 the auction industry now has more experience across a range of auction designs that can be particularly useful where have limited competition. In particular I am thinking of the successes I have seen with reverse Japanese auctions.
Point 5: Your ability to gain the benefits of a reverse auction, and still have a strategic relationship with your supplier, depends on how well you manage the process and not on whether you include a reverse auction or not. New suppliers are usually happy to win business through a reverse auction. Incumbents are usually unhappy having to compete with anyone to retain your business (whether through a reverse auction or whether simply through any traditional offline mechanism). In my own personal experience I can say that I have got a great relationship with the software development company that I selected via a reverse auction.
Point 7: I still see very many buyers shying away from incorporating non-price factors into their auctions. The good news is that there are nowadays robust methodologies in place to make doing this easier for you than would have been the case even 5 years ago.