Reverse Auctions: Quantifying the Savings Delta

There's been quite a bit of discussion of late around the value of reverse auctions. Considering that CAPs says that their usage is down and anecdotally, I continue to hear more companies are using them as an exception and not the rule, it's logical to conclude that interest in them has peaked (at least for now). But as someone who has played a role in many bidding events over the years, I still believe they have a critical place in certain market environments, however difficult it can be to quantify their value.

Hopefully this task just got a bit easier . Over on E-Sourcing Forum, David Bush recently posted a case study which does as good a job as any at showing the incremental value an auction can bring on top of other negotiation techniques. David sets up the situation by describing a "control" environment that is not optimal from a supplier relationship perspective because of a case of supplier double bidding jeopardy. David notes that "a mid-level buyer had gone out to market with a formal RFP and finished negotiations with the vendors with some award recommendations. At this point, the VP decided he still wanted to test the reverse auction, despite the internal communication problem. After some smoothing over with disgruntled suppliers, the auction process started and submitted final bids were used as preliminary bids in the auction."

The results for this market which encompassed some $1.4 million in spend in a "highly specified operational indirect category" show that there's still savings to be had even after a multiple round manual negotiation. To wit, "after about an hour of activity, the final results were in and our client was able to implement an additional 4.7% in savings." So there you have it. Close to a five hundred basis point delta pre-auction negotiated to post-auction. Granted, this number might be significantly more -- or less -- in certain categories based on a variety of factors such as number of suppliers, capacity and the impact of underlying commodity price inflation, but it’s a good delta to keep in the back of your mind before deciding whether or not to take out the auction gavel.

- Jason Busch

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