Just what can’t company’s source using reverse auctions?

May 19th, 2009

The answer might surprise you. Absolutely nothing.

The answer might surprise you. Absolutely nothing.

We were speaking with a consultant this morning that asked us a group of questions from a company he was in the process of introducing us to. Two of the questions were related and are as follows.

1. Does it make sense to reverse auction any of our core items?
2. Does it ever make sense not to reverse auction?

Obviously our first conversation centered on what were considered to be core items for this company. This can change from company to company based on the specific industry they serve and understanding frequently used buzz words for that particular industry.

In the retail industry, products are generally broken down into two major groups or classifications which are products for resale and products not for resale. Core items can exist in both categories. An example of a not for resale product/category that a large retailer may consider to be core might be fuel. This is a regular annual expense item that is driven overall by the price of a barrel of oil that can vary widely and be purchased as part of an annual contract that can be tied to a price index such as OPIS. Additionally, fuel can be purchased using spot buys that can be made periodically during the year and are also tied to the same index. Both types of buys lend themselves very nicely to the reverse auction process.

For a manufacturer, a core product might include the raw materials used to manufacture their end user products. This might include metals, plastics, resins etc. All of these core products are also tied closely to a variety of indexes.

The key to using reverse auctions to source any product/category is the quality and availability of the products specification, the availability of alternative or new sources of supply wanting to bid for the business and the quality of the new product compared to what is being used today.

With the above issues covered and understanding that all other data normally considered during the standard procurement process are generally features of most quality e- negotiation tools; companies can be comfortable that any product or service that they use can be sourced using a reverse auction.

Typically when using a reveres auction element of an RFX suite, companies can save time, review more bids and compress pricing or avoid costs in an up market.

We appreciate and look forward to your comments.

Ron Southard

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