Introduction to the Competitive Bidding Proces
The term reverse auction has been used a great deal in procurement circles and has been touted as the biggest and best way for companies to reduce purchasing expenses. Yet, many companies are still reluctant to get involved in the hoopla because they do not understand exactly how the process works nor do they understand all of the potential benefits. Reverse auctions and the competitive bidding that comes with it are not difficult to understand once a person sees or experiences them firsthand. This article will attempt to provide some insight into the dynamics of the competitive bidding process for reverse auctions.
Competitive Bidding Example
For example, lets assume Buyer A has a new project coming up and that project is going to require him to purchase 500 rolls of wire. He may already have a supplier he uses for the purchase of wire but perhaps that supplier charges $100 a roll and he wants to see if he can get a better deal with another vendor. Buyer A decides to use a reverse auction. The first step in the reverse auction competitive bidding process is for Buyer A to explain in writing his particular project needs. He needs to be clear, of course, so that potential vendors will understand his requirements and will be able to bid accurately. Buyer A can then send this description, along with an invitation to bid, to as many possible vendors as he would like. He can also include his current vendor as well.
Once vendors receive the information that can then decide how much to charge Buyer A for the 500 rolls of wire. They then place a bid that includes that amount as well as some details about other services they may add or other useful information that the buyer may need to make a final decision. The vendors are able to see and compare the other bids available, although they usually are not able to see the names of the companies, which have placed them. Because they can see the competing bids, vendors realize that to be in the running for the project they must offer a competitive price and this may mean going back to the drawing board to determine just how low they can go without sacrificing their profit margin completely. Bidders can also ask Buyer A questions regarding the project and Buyer A can do the same. He can also ask vendors with whom he is most interested in doing business to lower their bids. Furthermore, bidders can elect to be notified if their bid has been beaten by a lower one so that they can place a new bid if necessary.
Buyer A can review the bids, streamline them based on certain categories like budget or deadlines, and can compare them based on other elements as well, such as any value-added services that have been included in the bid and past performance indications. Based on all of the data at his disposal, Buyer A can then choose the vendor he believes can best supply his rolls of wire at an affordable price without jeopardizing the quality of the goods. This type of competitive bidding scenario is much different than the way many businesses today select a vendor. Companies no longer need to request complex RFPs nor do they need to limit their bid invitations to local businesses. Vendors from around the globe can equally participate in the reverse auctions and, in many cases; these bidders can win the project.
Obviously, the greatest benefits of this approach to vendor selection are reserved for the buyer. Not only does he get more options than he normally would, but he is almost always guaranteed a significantly lower price. Some businesses, in fact, have reported cost reductions of up to 30% thanks to competitive bidding. Vendors can also benefit from reverse auctions because it allows them to compete on equal terms. In the past, businesses would send their projects out to only a select number of vendors who they had worked with in the past. It was difficult for new vendors or smaller sellers to get their feet in the door. Today, those problems are no longer as relevant due to the introduction of reverse auctions.
Of course, not everyone thinks reverse auctions are wonderful. Some vendors complain that focusing solely on price and not on quantity is a mistake while some buyers have been burned too-good-to-be-true bids. However, despite what the critics say, the bottom line though is that reverse auctions usually do save money.