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Home : Articles : Reverse Auctions : Supplier Strategy

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SUPPLIER STRATEGY

With reverse auctions becoming so popular, it is highly unlikely that any large supplier of commodities can continue to do business successfully without participating in one. Generally, participation is either met with excitement because of the potential for new work or with apprehension because of the possibility of losing existing work. Regardless of the way a vendor feels about the reverse auction itself, if the vendor wants to come out ahead, then he or she must have a firm strategy in place before the event even begins.

Before planning a strategy, a vendor must know two key things: 1) They must understand exactly how they fit into their current industry and 2) They must fully understand how the reverse auction is going to work. Both of these points are extremely important. First, if a business does not understand how they stand apart from their peers, then they can not effectively communicate that to a potential client. Plus, if the vendor does not fully understand the reverse auction process, he or she may make mistakes that leave them out of the running, such as not asking appropriate questions, providing enough information, or failing to rebid if necessary.

Additionally, the vendor must be well aware of some differences between reverse auctions and traditional purchasing negotiations. First, buyers may request a quote on a large quantity of goods, then request only a small number of them from the selected vendor. While this may seem unfair because the buyer may be receiving a bulk discount on those items when his quantity did not entitle him to one, the vendor must be prepared to either follow through or refuse to take the work. Also, the vendor must be prepared to provide extensive information about their business, their annual sales, their quality assurance standing, and more. All of this information is vital to the reverse auction process, because these qualifications factor into the buyer's final decision.

In addition to the above guidelines, there are a few more things suppliers should keep in mind, particularly during the reverse auction. For instance, when a business decides to switch from using an incumbent vendor to using a reverse auction, the business generally invites the incumbent to participate. While the supplier may feel obligated to fulfill this request or may feel the need to do whatever is necessary to keep the work, he should not agree unless he is seriously ready to bid against himself. The likelihood of an incumbent vendor winning in a reverse auction without significantly cutting their costs or adding additional services to the package are extremely slim, even though they do have an advantage over the other bidders.

Besides refusing invitations, suppliers need to realize that they should never deviate from their normal pricing structure, even if it means landing a new contract. The temptation to bid lower and lower is, of course, one of the things that makes reverse auctions popular among buyers, but it is also one of the things that has driven many vendors out of business. When a company continually charges less than the company’s pricing structure dictates, the result is a dwindling of profits and, eventually, more money goes out of the business than comes in.

Furthermore, vendors must be aware that as the auction's end draws near, they may feel compelled to place a lower bid to improve their chances of winning. Again, they are only hurting themselves with these practices. Unless the buyer has specifically asked for a lower bid there is no point in a vendor reducing his or her price. The vendor may, in fact, actually cheat himself out of money or of a project with such activities.

The bottom line for vendors who participate in reverse auctions is that they need to carefully weigh the benefits of bringing in new benefits with the costs of charging them less for the goods and services they require. To combat the lower prices, vendors must be aware of their niche in the industry and must be able to prove that they have the reputation and qualifications to meet the buyer's specific needs.

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