What is the single most important factor in sustaining success in reverse auctions?

September 5th, 2008

The most important factor in sustaining success over the long term in reverse auctions is a high quality source of new suppliers.

The most important factor in sustaining success over the long term in reverse auctions is a high quality source of new suppliers.

Although the numbers vary by provider, it is common knowledge that attaining the best on going results from a reverse auction has a direct correlation to the number of suppliers agreeing to participate. If your source of supply data is limited, then including new blood every time you run an event is incredibly difficult. As a result the process by default ends up as just a new way to continue to award business to the same suppliers. As such there may be productivity increases with limited additional reduction in cost of goods.

Let?s consider the following scenario.

Suppose your provider only has a limited source of new suppliers and in this example can only find six local suppliers to invite to a particular auction. Using great sales skills most will likely agree the first time to participate for the opportunity to win your business. It is at this critical planning stage that thought be given as to what will encourage these suppliers to participate the next time and the next?

Suppliers like retailers are not always the same size. History indicates that smaller suppliers will most likely bid early and fish in order to determine a larger competitors? pricing relative to their own. Smaller suppliers will also drop out or stop bidding after the early rounds. Lacking creative approaches (more on this later) to working with small suppliers, most will likely not agree to compete in the future as they consider their chance of winning the business unrealistic. Suppliers that finish first or second or incumbents that are displaced generally may agree to participate the next time around, but fewer suppliers and the lack of perceived competition will make the rerun of this auction less successful.

Lacking a robust source of new suppliers, and in this case we only have a total of six available how many should be invited to participate? Should all be invited? Most providers will have different views on this question.

This author offers the following. This is the creative part. When considering the future, do retailers want events or do they want continuous process improvement that drives continuous savings. There are several possible solutions to consider. In this example only invite four participants to the first event. This will create a reasonably competitive environment for your auction. Let?s make the assumption that this is an annual contract that will be repeated in twelve months. When this event is repeated the two largest suppliers will most likely agree to return. You could now invite the two suppliers that were not included in the original auction. This will create a competitive auction for the second year or cycle. An additional thought may be to not invite all of the largest suppliers to your first auction, in order to manage the quality of your suppliers for future events.

Although this type of creative thinking supports continual process improvement in the use of reverse auctions, the lack of a more robust supplier database will limit the potential savings much beyond the second event, particularly if a best practice suggests a minimum of six to ten suppliers in order to drive the best possible results…

Make sure to ask your provider how many suppliers they have in their supplier database, it will determine your future success.

I look forward to your comments.

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