Reverse Auction Selection Criteria 101

Still today, I frequently get asked questions about how to identify a category to execute a reverse auction. Many times, people are looking for “the answer” (eg, corrugated, office supplies, ICBMs, Space Shuttles) but it does not work that way. While there is no “answer”, there is a framework to think about and make educated decisions. These general rules will get you 90% of what you need in less then 60 seconds:

  • Do we have a competitive supply base? Basically, do you have 3 or more equal suppliers that you trust and would do business with under the conditions proposed? This is really the basis for a much deeper issue of supply chain risk aversion and disruption.
  • Do we have the ability to switch the business? You may not change vendors for a 2% delta in price but you need to have that flexibility. Things like vertical integration or tooling are important considerations. For instance, you just finished your Oracle ERP implementation…it is probably advisable for a switch to SAP to be brought up in a meeting first.
  • What is the contract status? Are we at a point that we can strategically source this item?
  • Do we have the specifications for the item or can it be retrieved from the vendor? Again, this is really a non-starter if you did not get past Item 1 or 2 because you would not have enough vendors and would be tightly bound to the supplier, any way. However, it is a critical issue that must be done to have a successful reverse auction.

I bet that took under a minute and you are now a qualified assessor of reverse auction viability. Congratulations – Class of 2006, go forth and prosper.

3 Responses to Reverse Auction Selection Criteria 101

  1. That’s right, you can assess quite quickly the viability of an auction.
    I would as well suggest to go a bit further to reach 95% 😉 of what you need , with following simple considerations:
    – about the competitive supply base: being careful running an auction when price difference between the best and other initial-offers is higher than 25%,
    – specifications: the offers proposed by vendors shall be really similar, otherwise you might be disappointed by the winner,
    – contract status: you generally never run an auction with a strategic supplier, unless you call for a competition between several potential strategic suppliers/partners
    – Market: if the suppliers you invite know each other – closed market – , they probably will talk together and screw up the auction, agreeing on a way not to be squeezed. In general, when it is the case, you have to find at least another unknown-from-the-others supplier to challenge the closed market.

  2. Jean-Philipe, thank you for the additional feedback and adding the 102 level course information. I recently found your blog based on Spend Matters post by Jason last week. It is very good and I plan to read it regularly. Thanks again for contributing.

  3. There’s a more thorough Excel based tool for determining the opportunity for using an auction here:

    http://www.eratool.net/

    The tool looks at a wider range of factors and provides a more thorough analysis of the opportunity as a result. It is freely available and we know that clients have found the tool a useful introduction the issues surrounding e-auctions.

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