How a Reverse Auction Can Create Competition for Non-Commodity Products
This blog is a follow-up to one of our previous posts titled “THREE TIPS FOR RUNNING A SUCCESSFUL REVERSE AUCTION”. Today, we will further elaborate on the topic and explain how it can be used in an unconditional manner; for non-commodity products.
Reverse auctions are typically used when the products being bid on are identical between suppliers, leading to the low bid winning the award; however, reverse auctions have also proven successful when the products are similar, but have varying levels of quality and specifications.
The format of a reverse auction creates an extremely competitive environment because the suppliers can see where they stand in comparison to their competitors. Even if “Supplier A” knows they have the premium product compared to their competitors, when they see that they are 40%, 50%, 60%+ higher in price, that acts as motivation for them to reduce their bid because the gap is so significant. They want to be a financially viable option despite knowing they won’t be the low-cost provider.
When to Use?
The ideal time to use a reverse auction (when the products are not commodity-based and identical) is when the project schedule doesn’t allow for multiple rounds of negotiations and follow-up discussions. It acts as a tool to create the highest level of competition in a short period of time. To be successful, there is some upfront due diligence that should take place prior to the live event:
- The specifications from all the suppliers need to be approved by the Procurement Team, prior to the auction taking place.
- If a supplier is offering a product that the Team will not consider, regardless of how financially attractive, that supplier should be disqualified from participating.
- Once all products have been pre-approved by the Team, the auction will be an effective tool.
When using an auction under these circumstances, overcommunication is key. Suppliers will be skeptical early on, especially when they believe their product is superior in comparison to the products of their competitors. Unlike traditional auctions, it needs be communicated that the lowest cost bid doesn’t necessarily win the project; price is one of many components, that will be evaluated by the Team. Getting your suppliers comfortable with the environment will lead to a smooth event and a successful outcome.