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- October 15, 2015
Reverse auctions are the fastest way for sourcing teams to get to the best price for goods or services. There’s nothing like the competitive bidding environment to find out which vendors are hungry for your business, what kind of deals they’re willing to make, and ultimately to get the biggest discounts.
They’re also a lot of work, especially if you don’t have an e-sourcing solution. Most sourcing organizations don’t run as many auctions as they could –or should--even when they do have an e-sourcing solution.
Why? Many practitioners think only certain items and categories can be auctioned. The difficulty of conducting reverse auctions without e-sourcing solutions has done nothing to change that thinking. They continue to think of reverse auctions more as a special event reserved for a handful of select categories than a key pillar of their sourcing program. They’ll often accept a small discount from the incumbent vendor rather than run an auction.
Contrary to popular belief, I think you can run a reverse auction for just about anything—direct and indirect goods, and even services. And you should. Today’s e-sourcing tools make running auctions so much easier that we can flip the auction-as-special-event mentality on its head. Instead of thinking about whether something merits a reverse auction, you should always be auctioning, unless there’s a reason not to. Otherwise, you’re leaving money on the table.
It all comes down to apples
The key to “always auctioning” is being able to define what you’re buying in enough detail that you can collect apples-to-apples bids. This takes some up front work, but it can be done, even for direct materials and services, which are two areas many people don’t even consider for reverse auctions.
I’ve seen reverse auctions for burial vaults and translation services, among other things you wouldn’t necessarily think would lend themselves to reverse auctioning. I’ve even seen an auction for HVAC maintenance services, which a lot of people would rule out automatically because it’s a service and it’s fairly complex. However, we were able to define the level of service we expected, how many routine visits we wanted vendors to make, and at what intervals. We defined what we considered periodic maintenance, and what we considered to be over and above that. We got specific enough for apples-to-apples bidding and ran a successful auction.
Most of this is homework you’d do for any strategic sourcing project, but it’s usually done after engaging suppliers. With auctions, you just need to do the homework earlier in the process before engaging suppliers in the auction event. Go back and review past bills of goods to find specific line items. Order samples for things like fabric that can vary from manufacturer to manufacturer even when the specs are the same. Ask questions internally and socialize your specs internally to get feedback.
Do an RFI. Nine times out of ten you’ll learn something new and valuable from that process. Run a pre-bid event to make sure it’s really apples to apples. By collecting all this information in your e-sourcing tool along the way, it’s fast and easy to turn that into a reverse auction.
When you can’t auction
When can’t you auction? When you’re looking to get pricing for items that are not well-defined, or that are not definable. For example, if you’re asking vendors to build a new widget you've designed, but you haven’t specified how to build it or what materials to use, you can’t auction that. Nor should you. You’re going to get apples and oranges from different vendors because they're going to propose different ways of doing things, which is exactly what you want.
You should still use your e-sourcing tool to gather the information, answer vendor questions all in one place, and keep the playing field as level as you can. But what you’re really trying to figure out at this point: is this thing biddable?
You also shouldn’t run auctions in a seller’s market. When prices are going up, or manufacturers are at capacity, or there are only one or two vendors who provide what you want to buy, you’re not going to get the kind of competition you need to have a successful auction.
Finally, you can only auction so often. If you auction for t-shirt fabric one year and you get a 50% price drop, you’re not going to do much better if you auction it again in a year. Unless there’s been a major market shift, you probably want to wait a while.
Regularly scheduled auctions
On the other hand, there are some auctions you should run like clockwork. For example, a marketing group that I worked with held a quarterly auction for signage. We had no view into how busy the sign making companies were, other than the auction.
The vendors knew we ran the auction every quarter, and if they had a lot of capacity, they would bid aggressively. If they were filled up, not so much. They could manage their workloads, and we didn't have to be experts on their business. We let the auction do that work.
The old fashioned way is to allocate resources only to those items that seem like obvious candidates for reverse auctioning. That’s leaving way too much money on the table. E-sourcing technology makes it so much easier to run reverse auctions that there are very few instances where you shouldn’t be doing them. With the right tools and a few tweaks to your process you can easily make reverse auctions the rule, rather than the exception.