Reverse auctions for cost avoidance

March 13th, 2008 at 08:15am David Bush - Iasta

Even in these very turbulent economic times, we are still seeing a large volume of reverse auctions being executed. However, now is a good time to remember the definition of cost avoidance, as explained on the eSourcingWiki and pulled from CAPS.

Cost avoidance is a cost reduction that results from a spend that is lower then the spend that would have otherwise been required if the cost avoidance exercise had not been undertaken.

This accounts for the situations where spend is higher due to higher demand but overall cost per unit is lower, where up-front investments reduce overall spend in one or more categories over a multi-year initiative, and where a process improvement or product replacement resulted in a lower operating cost or cost per unit compared to what the company would have spent had the company not improved the process or replaced the product.

Or to add to these guidelines, cost avoidance can potentially be measured and impacted when the market conditions are raising unit costs but the introduction of competitive bidding lowers the delta between your former pricing and the new escalated pricing.

Although the concept of an on-line reverse auction is not necessarily within the definition of cost avoidance, I have seen it work many times this year already. A recent example in packaging had suppliers with 20% increases across the board. However, the auction concluded with a 1-2% savings in some lots and no more than a 5% increase in the other lots.

As always, it is critical to enforce best practices and know your market and suppliers. This tactic is not a guaranteed outcome, but should not be summarily discounted either.

Email Forward & Bookmarks

Close this Window Bookmark and Share This Page

Save to Browser Favorites / Bookmarks

Ask backflip blinklist BlogBookmark Bloglines BlogMarks Blogsvine BuddyMarks BUMPzee! CiteULike co.mments Connotea

del.icio.us Digg diigo DotNetKicks DropJack dzone Facebook Fark Faves Feed Me Links Friendsite folkd.com

Furl Google Hugg Jeqq Kaboodle kirtsy linkaGoGo LinksMarker Ma.gnolia Mister Wong Mixx MySpace

MyWeb Netvouz Newsvine oneview OnlyWire PlugIM Propeller Reddit Rojo Segnalo Shoutwire Simpy

Slashdot Sphere Sphinn Spurl Squidoo StumbleUpon Technorati ThisNext Webride Windows Live Yahoo!

Email This to a Friend

Copy HTML: 

 If you like this then please subscribe to the RSS Feed.

Powered by Bookmarkify™

More »

Entry Filed under: General, Global Supply Issues/Risk, Reverse Auctions, Supply Management Best Practices