How Modern-Day Full Service Reverse Auctions are Creating an Environment Where Everyone Wins
| by Procurex, Inc.
When you search for products and services, you want the best price. But when selecting a supplier, you need more than just discounted pricing. You insist on top credit ratings for any company you work with. You need to hire more local and diverse suppliers. You have a long list of specifications, and for many, that list of non-price requirements can go on and on.
Here’s the good news. With modern-day full-service reverse auctions, you get it all: great prices from qualified vendors, who meet every one of your non-price qualifications. Reverse auctions bring a laser focus to procurement. They’re web-based sourcing events where vendors compete for your business by dropping their price each time they bid.
If you are looking for the best deal, there’s really no better way to do it.
Still, even though reverse auctions have been held successfully for decades, we run into the same objections on a regular basis. Here are six reverse auction myths that we frequently hear — and the reasons why none of them are true.
Myth 1: With a reverse auction, it’s only about price.
This is an extremely common misconception about a strategy that’s really no different than the normal sourcing and procurement process.
Just like a traditional RFP process, you still are in charge. You weight the different price and non-price factors that are important to you in the sourcing document. At the end of the reverse auction, because it isn’t only about price, the lowest bidder doesn’t always come away the winner.
After all, as anybody in procurement knows, landing on the “best value” vendor doesn’t necessarily mean securing the lowest price. Just like with any bid process, in a reverse auction, both price and non-price factors are critical to the success.
Myth 2: Reverse auctions are only for commodities.
Janitorial Supplies? Office supplies? Yes, reverse auctions work great when you want to secure the staples you use every day.
But reverse auctions are now sophisticated enough to help you find any number of items and services – from energy, such as natural gas or electricity, to services, such as waste hauling and security, to technology, including laptops and supercomputers.
What’s more, non-commodity categories often have much higher margins for suppliers, which means bigger opportunities for savings.
The trick to a reverse auction is to normalize the requirements for vendors and come up with a common set of price and non-price factors that will pull in vendors and ensure plenty of bidding, and a good strategic souring reverse auction partner will help you with that.
Myth 3: Reverse auctions take too much time.
Reverse auctions may take some time in the beginning. But, once many organizations add up the total amount of time spent on the process, that extra time is minimal. It is actually more of a time shift from the end of the process (reviewing binder after binder of RFP responses) to the beginning of the process (honing in on the non-price criteria that matter most) – and pays off in big savings and time efficiencies elsewhere.
Once an organization goes through a few reverse auctions, subsequent events happen much faster because they are more familiar with the process. The net effect is not only lower costs but increased efficiencies within their organization’s procurement, which frees their staff up to work on other projects and priorities.
Myth 4: We don’t buy enough to warrant a reverse auction.
Actually, you might be surprised. When we hear clients throw out this objection, we analyze their spend. And, in many cases, it turns out that their estimates of what they’re actually buying are way off.
This can happen for a couple of reasons:
In some cases, a deeper look into an organization’s spend turns up information that is a revelation to even our clients. Perhaps, for instance, once they look at the costs for particular items such as office suppliers or IT cabling across departments or locations, the total adds up to much more than expected.
In other cases, organizations can aggregate spend, grouping different baskets of items together. So, perhaps an organization spends only $10,000 on pens and pencils. It wouldn’t make sense to run a reverse auction on something of this size. But, if you add ink and toner purchases into that basket, the package skyrockets to a six-figure total – and becomes reverse auction worthy.
Organizations, often with help from a strategic sourcing reverse auction partner like Procurex, decide what goes in the basket. Suppliers then decide how they will price it, perhaps taking a loss on the pens and pencils so they can win the more lucrative ink and toner deal.
And, finally, while a single-year contract may be too small to warrant a reverse auction, a five-year contract adds tremendous value, becomes a more attractive contract for suppliers to bid on and, in turn, increases competition and lowers costs.
Myth 5: A reverse auction can’t beat state contract prices.
Many of our government clients have access to special contract prices offered to state and local agencies. At first blush, they might seem like a great deal. But, it’s a well kept secret that those contracted prices aren’t always the best and lowest.
Need proof? Reverse auctions drop them even lower. After all, committed versus “potential” spend has a powerful pull among suppliers.
With a reverse auction, the start price is the state contract price. Once the final bids are tallied, Procurex has always beaten the state contract price – 100 percent of the time.
Myth 6: They are incompatible with strategic vendor relationships.
Let’s be honest: Vendors don’t love reverse auctions. They do require more work. Suppliers also would prefer to continue to charge higher margins for their goods and services. But their complaints are a good sign for buyers. It means reverse auctions are having their intended effect – lowering costs.
What’s more, you probably aren’t the first buyer to suggest one. More and more organizations are conducting reverse auctions. And vendors, big and small, are agreeing to them. In private industry, they are common.
So how do you balance strategic vendors and best price?
Organizations’ strategic vendors are still invited to the table in a reverse auction. Customers can bring any vendor to the event. Through a supplier search, Procurex also typically suggests more suppliers to add to the list.
Transparency and Procurex’s ability to recognize and incorporate non-price factors into a reverse auction also play a critical role in ensuring suppliers have an equal opportunity to secure an organization’s business and that non-price variables are always factored into the equation.
And, there are some benefits for vendors. For instance, they get to see how they square up against the competition and they can compete in other areas than just price. Vendors also have multiple opportunities to bid and know where they need to be to win, verse a traditional paper process which provides only one opportunity to bid and vendors don’t know where they need to be on pricing till the bid has already been awarded. Others have told us that they learned how to negotiate their supply chain more efficiently to become more competitive all around.
Still not convinced? Consider this: We typically don’t have any trouble finding qualified vendors to bid in a reverse auction. During the average event, three or four vendors typically show up. In some cases, we have double or triple that number.
Reverse auctions have come a long way since inception, providing you the best qualified vendors at the best possible price. When searching for an e-auction partner you want a company that will become an extension of your procurement team and work with your team and end user every step of the way in a full-service capacity – from data specification development to vendor training as well as post-auction activities.
Look for a reverse auction partner who will:
- Analyze your spend to see just how much of an item or service you really need.
- Guide you toward the creation of the best bid document to ensure multiple vendors can participate and can bid competitively.
- Bring vendors on board and help them navigate the web-based system to ensure a fair and transparent process and event.
- Follow up with buyers and vendors after the auction.
Experience. Support. Qualified bids. Best deals. That’s what you’ll get with a modern-day full-service reverse auction partner.
Watch: The Six Myths of Modern Reverse Auctions in Procurement
About the Author
Krystle Kassab is the Director of Global Strategic Sourcing Sales at Procurex. She has 20+ years of supplier and distribution knowledge and experience. She’s held high profile leadership positions and recognized achievements as a supplier in the higher education, finance, retail, healthcare, manufacturing, distribution, food and hospitality industries. She specializes in forming strategic alliances and programs.
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