Reverse auctions are one of the most prominent trends in procurement today. While this approach to finding suppliers simply wasn't feasible a decade ago, today it has allowed both businesses and vendors to reap some significant benefits. In a reverse auction, the buyer creates a listing of the company’s specific project needs. For example, if the company needs to purchase spools of wire from a supplier, then the company would detail the exact specifications and quantity of the wire they required. The buyer then posts this listing of requirements and invites potential vendors to give quotes on the cost of fulfilling those needs. Essentially, the vendors are competing against one another so lower quotes have an advantage. At the end of the auction, the buyer then chooses a winner based on several important factors, including cost, delivery time, and vendor reputation.
E-Procurement Solutions with Real Impact
Reverse auctions and their popularity have had a tremendous impact on both manufacturers and on suppliers. Manufacturers have been able to streamline the vendor selection process and have made it easier on themselves to select the right supplier for each project. These auctions have also played a critical role in the increase of offshoring. Reverse auctions have also forced suppliers to find new ways of staying competitive. Since price is not the only factor, vendors have been forced to bring more added value to their goods and services, such as extra warranties, training, or other options.
Despite their profound impact, reverse auctions aren't the perfect solution for every project. They do have some weaknesses, as well as a number of strengths that have caused them to become a dominant force in modern procurement. In order to determine whether reverse auctions are the best strategy for a business, both the pros and the cons need to be weighed.
Advantages and Disadvantages of E-Procurement Software
Reverse auctions do offer a number of advantages. First, they do open up competition. Many manufacturers are today doing business with vendors they never knew existed a year ago simply because they were located on the other side of the globe. By allowing businesses to expand their horizons, reverse auctions have given them the tools to truly find the best and most affordable suppliers. Another strength of reverse auctions is that they speed up the entire procurement process. While before, the buyer has to create a complex RFP, distribute it to potential vendors, wait for their responses, then sift through each of their proposals individually in order to make a decision, today the entire process can be completed in 3-7 days instead of weeks or months.
Regardless of these benefits, reverse auctions still fall short in some areas. Because reverse auctions seem to emphasize cost over other qualifications, many buyers may choose the lowest bid only to find out that the shoddy workmanship, low quality products, and slow delivery times cost them more in the long run. Reverse auctions can also be detrimental to the supplier-buyer relationship that is essential for some goods. For example, if only a handful of vendors can provide the raw materials a company needs, and that company places the project up for auction instead of simply using its long-term vendor, chances are that they will lose the goodwill of that vendor and will find it difficult to work with them again. Furthermore, when only a small number of vendors can provide a specific good or service, reverse auctions do not always deliver cost savings and can sometimes cost the buyer more.
Reverse Auctions: A Popular eProcurement Software Trend
Most businesses feel that the strengths of reverse auctions outweigh their weaknesses, hence the reason why they are so popular. Another method of online procurement that works well in some industries is trade exchanges. In trade exchanges, a number of separate companies in a specific industry join together to create specifications for suppliers. Large suppliers are then allowed to participate in the vendor selection process. Unlike reverse auctions, which are open to almost any size vendor, trade exchanges are usually limited to the big players in the field. Many successful trading exchanges are often set up by several large players in an industry.