Six Questions to Determine if a Reverse Auction is Appropriate for Your Sourcing Project: Part 2

In Part 1 of this series, I explained how the contract status and having clear specifications / requirements can drive the success of your reverse auction.  Click here to read Part 1. Today, we will cover 4 more elements to consider when developing your reverse auction project and strategy.

Is the spend volume attractive?

  • The bigger the potential business award, the more likely suppliers are to compile all of the pre-auction information such as non-price factors in an RFI or RFP.  Supplier participation and feedback will be improved if suppliers are enticed enough by the prospect of winning the business in the reverse auction process.

Is this a custom or specialized product or service?

  • Highly specialized items have fewer qualified suppliers and less room to move on price. In addition, brand name items are sourced directly from the manufacturer or distribution network. Manufacturers may limit the distributors’ participation in the bid process.

Can several suppliers provide my product or service?

  • Although some auctions can be successful with as few as two qualified suppliers participating, generally the more qualified, the better. Iasta recommends 3-8 bidders participating in a reverse auction to enhance the competition.  Too many suppliers in the reverse auction, and suppliers will feel that due diligence was not completed prior to the event.  If you have too few suppliers, there may not be enough competition to warrant a successful reverse auction.

Am I willing to switch from my current supplier?

  • The buyer must be willing to switch from the incumbent. The current supplier will have no motivation to participate if the threat of changing suppliers is not there.

Remember, reverse auctions should not always be awarded to the lowest price bidder, although they can be depending on the sourcing strategy.  Try to factor in non-price factors you are considering for your award ahead of time by making bid adjustments to account for these factors. Once adjustments have been made, let suppliers know the award will be made to the best ranked supplier in order to have the most competitive bidding environment possible. The pricing results from the auction should be upheld and post-Reverse Auction pricing negotiations should be avoided if possible.

Following these tips will help set the appropriate precedent for future negotiations and help your strategy remain successful over time.

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