Online Reverse Auctions and the Ethics surrounding them – Part I

Nothing makes me cringe more than when I hear buyers say: “I’m only inviting this supplier to the auction so it looks like I have more competition,” or “I have no intention of awarding the business to a new supplier, I just want them to help drive down my incumbent’s prices.”

Hmmmm…, don’t know about you, but I think this presents quite the ethical dilemma. Many suppliers are already skeptical of online auctioning. If this type of process continues to be misused, a company risks some serious repercussions. While this tactic might work the first time, it will be much more difficult the second time around and virtually impossible to pull off for a third.

It is important to remember that while savings are important, there are other benefits generated when an e-sourcing tool is being used by an organization, (i.e. reduce sourcing cycle time, process efficiency/consistency, transfer of knowledge, etc…) and that potential misuse can seriously backfire.

Remember that suppliers do talk to each other and that people in general would much rather talk about what is NOT working than what is (bad news travels fast!). In other words, unethical tactics used by the organization will eventually make their way around the supplier loop. The consequences being: 1) a reduced level of participation from new bidders 2) a mistrust in doing business with that organization and 3) an overall unease in taking part in future auctions. So if you are typically sourcing 1 year contracts, success in subsequent years could be jeopardized.

The ethics of running an online auction must be addressed and internalized by all departments involved in the sourcing process. Additionally, this same process should be clearly communicated to suppliers in order to begin establishing a consistent practice across the organization. Suppliers should hear the same message and be treated equally regardless of who they are dealing with in the organization.

Some guidelines for keeping the online auctioning process ethical:

1.Only invite suppliers you would consider awarding the business to.
2.If the lowest bidder does not win the business automatically, be sure to state that clearly. In addition, clearly state what other evaluation criteria will be used to make the final award.
3. Use a forum through which suppliers can ask questions and responses can be posted. Everyone can be on the same page and suppliers will appreciate the transparency of the process.
4. If a new supplier must differ from your current vendor by a certain percentage in order to win the business, consider the following: 1)penalizing all new bidders by this percentage 2) favoring the current by a certain percentage (objectively determined) or 3) protect the lead bid by this percentage.*
5. If you are not comparing apples-to-apples, determine how you can adapt the auction to make sure it does (e.g. use weighted/scored RFIs to assess factors other than pricing and apply the percentile differences as penalties to the prices submitted online).

By applying these 5 suggestions consistently to all auctions, you can significantly improve the supplier experience and ensure better future successes within the organization.

*Be careful when not awarding to the lowest bidder, if this is repeated too often it could result in the bidders not wanting to take part anymore (especially where one consistently finishes first but is never awarded the business).

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