Revisiting Reverse Auctions

Over on Supply Excellence, Tim Minahan has done an excellent job recently surfacing comments and debate around the use of reverse auctions. While I would encourage you to read all of the recent posts, one in particular does a good job sharing a range of perspectives on the effectiveness of auction strategies. While I plan to offer my own analysis of CAP's recent reverse auction study in the coming weeks -- which Tim and others have already covered and which I'll comment on at a later date -- it is worth sharing the skeptical thoughts of one practitioner who writes to Tim that, "I have conducted two reverse auctions. [In] both cases, sales people left the company shortly after. Prices dropped significantly as did the commissions of the sales people. [In] both cases, the replacements were not as good as prior and we were [faced with] additional work for them [because] we were not a key account anymore. If service is important, be very careful."

While Tim suggests that "being careful" is advice we should all take, he strongly disagrees with the rest of the reader's statements. But are reverse auctions beginning to lose favor, at least in some circles as the CAPs study suggests? According to Tim's citation of the CAPs study, e-sourcing users are only deploying reverse auctions for 5.4% of their total spend. Personally, that number feels low to me. But if it is accurate, perhaps we have already crested the reverse auction wave. Another piece of evidence which is in line with this finding came in the form of an anecdote that I heard the other day. The anecdote came secondhand from a practitioner at a large, Chicago-based company which has licensed e-sourcing tools for some time, yet also rarely uses the reverse auction component. Perhaps we all need to learn, as Tim suggests, that "the market transparency and competitiveness of reverse auctions does not relinquish buyers from doing their homework on suppliers. In fact, because of the agreement to award business based on certain criteria, supply managers must be even more diligent in their vetting of supplier capabilities" before an auction. And maybe this is why, as Tim points out, organizations sometimes realize "less than satisfactory results" after running them -- and are reducing their overall usage as a result.

Jason Busch

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