Critical thinking relative to supplier selection and engagement is required if you want to host quality reverse auctions?

December 15th, 2009

If you wish to host successful reverse auctions a robust supplier database is key to encouraging competitive bidding and creating a sustainable process.

A logical focal point for hosting a competitive reverse auction is to assemble your present suppliers that you hold in good standing for a particular category. These are suppliers from whom you have sourced products using traditional means in the past. In general the principal is the more suppliers that participate, the better your potential results will be. However this also requires some strategic thinking because you are beginning a process that you want to use on a recurring basis. As such inviting the same suppliers again and again may seem to make sense, but may not encourage the type of continual compression that you are looking for. This is a significant reason why it is important to have access to the most robust supplier data possible. As an example; if you can only locate six local suppliers for a particular reverse auction, they will all most likely agree to participate the first time around. However consideration should be given as to what will encourage them to participate the next time and the time after that? Suppliers will almost never be the same size. As such the smaller vendors will most likely bid early during an event and then drop out after the early rounds. These suppliers will most likely not agree to compete in the future as they consider their chance of winning the business unrealistic. Incumbent suppliers that re displaced as well as new suppliers that finish first or second in the bidding process will agree to participate again, but a lack of adequate competition will make the rerun auctions less successful.

The strategic questions should be; if we only have six suppliers available how many should we invite to participate? Should we invite them all? Every company will have differing opinions on this subject. When considering the future, do we want events or do we want continual process improvement that drives continuous savings? There are several possible scenarios you might consider. First, only invite four participants to the first event. This will create a competitive environment for your reverse auction. Let’s assume that in twelve months you want to repeat this auction and the two largest suppliers agree to return. You could now invite supplier’s number five and six that were not included in the original auction. You have now created a competitive auction for the second year or cycle. A second thought might be to not invite all of the largest suppliers to your first auction, in order to manage the quality of your suppliers for future auctions. This type of critical thinking supports continual process improvement in e-procurement implementations.

We look forward to and appreciate your comments.

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