Also recognized as e-auction, e-sourcing, eRA or procurement auction, this is a procedure being utilized in procuring industrial business-to-business deals. It is a purposeful auction type, wherein the role of the seller and the buyer is reversed, to achieve the chief goal of driving purchase costs or prices downward. Unlike in a normal auction event otherwise called as forward auction, the buyers participate to get hold of services or goods, while in a reverse auction, the sellers are those who compete to acquire business.

This type of auction is actually considered as a technique by most supply management organizations and purchasers to appropriately spend their management budget. It is also viewed as a significant part of tactical sourcing and overall supply management decision making.

In a common auction, the sellers present an item or product up for selling. Consequently, buyers will bid for the product and the highest bidder will have the opportunity to purchase the goods at an amount predetermined at the end of the bidding event.

In a reverse auction, a buyer makes an agreement with a market maker who carries out the needed preparations to make the auction possible. The procedure includes: looking for new suppliers, training and preparing new and present suppliers, organizing the auction, directing and managing the event, and providing auction information and notice to buyers to aid in making necessary decisions. The market maker then will issue a request asking for RFQ or quotation to buy a particular good or group of items.

At a prearranged date and time, about five to twenty suppliers will log on to the auction website and will key in several quotes. These quotes show the costs and prices at which they consider supplying the services or goods on demand or request. Due to the real time processing of the quotes via internet, there is a dynamic bidding process that takes place. This facilitates in achieving quick descending price pressure, which is impossible to attain though traditional procedure of static 3-quote paper-based bidding.

The pricing that the buyer achieves in the reverse auction exhibits the narrow market that was created during the auction process. As a result, it is probable that better value such as improved delivery performance, better quality, lower prices, enhanced technical capabilities, etc. may be acquired from suppliers who are not involved in the bidding procedure or by other ways such as joint process improvement and two-way cost management.

All parties participating in the auction, which are the market makers, sellers and buyers, must strictly follow the auction policies and industry code of conduct if they ve actually set any. Misunderstanding and other issues occur when one or more parties fail to follow the auction regulations. Issues and concerns may range from simple quandaries to court litigation.

Buyers should note that the reverse auction does not present affirmative results all the time. They should not presuppose that in every auction there will be huge savings, either on the total cost basis or on the unit prices. The savings from these events can range from negative to neutral (on the fence) to positive savings.

Tags: eauction, era, esourcing, procurement, reverse

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