It is widely acknowledged by buyers that reverse auctions have led to significant cost savings for various buying requirements. This can be attributed to the reverse auction tool that inexpensively connects buyers and sellers worldwide and supports competitive bidding while driving the price of an item to its true market value (Monczka, Handfield, & Giunipero, 2009). But unlike other procurement methods, the suppliers can review their bids depending on the prices stated by other market suppliers.
Procurement refers to a process of obtaining goods and services. It involves the process of preparation and processing of a requisition through to receipt and approval of the invoice to the payment. Its involves purchase planning, standards determination, specifications development, supplier research and selection, value analysis, financing, price negotiation, making the purchase, supply contract administration, inventory control and store , disposals and other related functions (WebFinaance,Inc., 2011). In any regular auctions, there are single sellers and many potential buyers bidding for the item being sold. Reverse auction is used for e-purchasing using the internet (an e-auction) but on the contrary, it involves one buyer and many sellers. Reverse auction are electronic processes where multiple sellers of a product are vying for the business of a single buyer. This results to the price of the products being driven down.
It’s very important for the reverse auction tool to be well integrated within the strategic sourcing process to harness its full potential. It should therefore have the ability to adapt to new changes in the market, to incorporate financial controls in driving down the costs and in the elimination of waste. It should therefore continue until a pre-established bidding period ends or until no seller is willing to bid any lower, whichever comes first (Monczka, Handfield, & Giunipero, 2009). In regular reverse auctions, prices are revealed to all sellers, however, the identity of the competitors remains anonymous. On the other hand, in rank reverse auction, sellers are only told their relative rank and thus are not aware of their competitors’ prices (Monczka, Handfield, & Giunipero, 2009). The general idea is that the buyer specifies what they want to purchase and offers it to many suppliers who do their bidding to be awarded the contracts to supply the goods (OECD). Generally the main purpose for the reverse auction is to allow the buyer to get the best quality service or product for the company.
A typical internet reverse auction is conducted by large national-account end users and the participating suppliers are generally the major producers. The buyer generally issues invitations to suppliers to participate. In most cases, these invitations tend to be sent to the major producers of the service or the product needed. Normally, the purchaser should not specify where the product to be supplied should originate, or should be produced so as to allow as many suppliers as possible and also increase the chances of a best competitive bidding (United States International Trade Commission)
Before the purchase of any product or service through the online auction, a price performance measure needs to be conducted first. The most common price performance measure includes actual price versus the planned purchase price comparisons, actual purchase price(s) compared to a market index, comparisons of actual price to actual purchase prices for individual and aggregated items between operating plants or divisions within an organization, and target prices achieved (Monczka, Handfield, & Giunipero, 2009).
The highly priced law materials are the major products that can be purchased through online auctions. These materials are vital for any manufacturing industries and therefore they have many reliable suppliers all over the world and especially the developed countries. Online auction brings together the buyers and the sellers of different products and services and therefore the company can also identify the suppliers for different types and options for the same product based on the background and the general financial position of the company. I addition the manufacturing company uses the machinery that require regular servicing and occasional parts change. It’s therefore important for the company to evaluate the products being given in the market and also the benefits accrued on them. For example during the purchase of new machinery then the company should check for the efficiency of the machine, its durability, availability of the parts for the machine or if the company offers any after sale services like installation and maintenance and if so, for how long. The choice of the product should also incorporate the cost of upgrading it if the need arises (in that it should easily adapt to the new technological advances in the global economy).
The most important factor to consider while making the choice of the product to purchase through an online auction is the consumer. Normally the consumer dictates what will sell or not and therefore the consumer altitude should be assessed before the purchase of any material intended to be used in the manufacturing company. This is mainly in form of tastes and preferences. It’s therefore crucial for any company to do a market research to identify the preferences of its market (the consumer). This way the products being bought over the online auction will have the greatest effect on the final product the company is willing to produce. In this case the research company can be contracted to do the research on the consumer in terms of economic status, tastes and preferences that will guide the online auction process.
After the conversion of the requirements or requisitions into purchase orders or contracts, the company needs to decide on which method of procurement to use. There exist several methods of procurement they include: competitive bidding, direct negotiations and single source acquisition. A successful e-auction requires the development of a preauction strategy, which sets goals, targets specific potential partners, and clearly lay out the applicable rules to be followed throughout the process (Pearcy, Glunipero, & Wilson, 2007). The list of the suppliers contains companies formally accepted through quality and performance criteria, along with potential suppliers that have been involved in the similar tendering process before. The process of determining the suppliers normally involves the company deciding which contracts are to benefit from the reverse auction procurement and then the suppliers are initially evaluated and invited to participate in the bidding process.
During the selection for the participants for online auction, the general company relation with the suppliers should be put first. Suppliers with a long history with the company should be put first and contacted for them to participate in the online auction (Pearcy, Glunipero, & Wilson, 2007). This is meant to maintain the relationship status although it’s generally affected by the reverse auction method of procurement. The selection of the suppliers the reverse auction should not look at the buyer seller relationship though the whole process threatens it. The research suggest the use of a relational approach when using reverse auction for the relationships that are strategically important for the institutions overall outlook and growth in the long term (Monczka, Handfield, & Giunipero, 2009). therefore the execution stages of any reverse auction should be independent.in the offer phase of the reverse auction process, rules should be accurately explained to the parties, prior to the conducting of the actual R/A event .this increases the chances of a successful reverse auction.
Lastly the company needs to embrace the emerging technologies in the supply management in the identification and building of the supplier relation. These emerging technologies include the guided buying, advanced supply planning, win-win sourcing optimization, content enabled analytics and knowledge networking among others.
Guided buying refers to an e-tool that combines e-purchasing systems with virtual catalogs, search engines, and web agents to help guide employees to preferred sources of supply and also to preferred sourcing processes and personnel. Advanced supply planning tools provide a linkage from sales and operations plans to supply planning and back again.it also includes translating demand(volumes and variability) upstream across multiple tiers of the supply chain and improves risk analysis, decisions on hedging tactics, and other tradeoff analysis(e.g. make vs. buy, transportation ,inventory). The win-win sourcing optimization techniques and supporting tools allow suppliers to better match their capabilities with those of the buying firm and create more win-win scenarios and fewer win-lose ones. Rather than the using the winner takes all bidding process geared toward price and cost, or having the buyer guess which lots to create for different suppliers. It allows buyers to open up their market baskets to suppliers that can then do their own demand management to flexibly bid in order to harness their best capabilities and put their best foot forward (mitchell, 2007).
Another tool that may help in the selection and reduction of the risks involved is the content-enabled analytics. The usage of this tool may help the company to do predictive analysis such as price or cost forecasting, profitability planning, and supplier or market risk analysis. Lastly the use of knowledge networking will help in making vital decisions in awarding of the contracts. Knowledge networking refers to the process of using the internet-based collaboration tools and services to better capture and disseminate supply knowledge both internally and externally (mitchell, 2007).
After the completion of the bidding process and the supplier have been selected then their level of cooperation should be assessed. This cooperation is important if the supplier will have continued interaction with the buying firm. Normally, the more cooperative the supplier is then, the greater the relationship with the buyer will be and the probability of being awarded another contract will be. This cooperation is greatly affected by the initial cost of the bid. Price is the most controversial element in the reverse auction phenomenon. Researches have strongly supported that relational contract structures are negatively related to the purchase price reductions (Monczka, Handfield, & Giunipero, 2009). Institutions pursuing a more market based (bid and buy) approach have made significant savings in their budgets but have also lost on the suppliers relations. It’s inevitable for these firms to assess the tradeoff between obtaining lower prices(that may or may not be sustainable) and the opportunity cost of not choosing suppliers that can provide assistance in vital non price related areas (e.g. product design) when addressing and designing their appropriate reverse auction structure.
In conclusion, the main role of procurement in a company is to raise the competitiveness of the company in terms of lowering the cost of doing business, improving the inventory control, improvement of the quality and the durability of its products. Reverse auction helps in the provision of the most competitive prices for the products or the services for the companies that embrace it. This is in terms of the purchase prices and after sales services that come with the products bought.
Reverse auction have been criticized of simply looking for price reductions without any regard to the existing or future business relation. The fact is that the use of reverse auction reduces the time associated with the supplier selection and the award process. However, this addition time saving will be mitigated by the increased time required to build and maintain relationships (OECD). In addition the use of reverse auction have been in the forefront in the achievements of the strategic cost management, benchmarking, supplier development and most importantly in the reduction of the prices paid for the products and services.
The benefits of the reverse auction outweigh the odds for its use. Its therefore important for the companies involved in procurement to consider the use of reverse auction in their procurement process.