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reasons why reverse auction fail

6 Reasons Why Reverse Auctions Fail to Deliver the Desired Results 

Reason 1: Inviting unqualified suppliers to the auction event

Auctions should ideally be the final step in the negotiation process. Negotiating with suppliers post the auction is a big no-no. Similarly, qualifying suppliers post the auction has its demerits too. Assume the lowest-ranked supplier is disqualified post the auction. The next ranked supplier will doubt the veracity of the event and will likely be peeved.

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Reason 2: Poor supplier management

Suppliers would much rather compete in a transparent and fair market, where their capabilities can be fairly evaluated. They prefer to participate in auctions with similarly capable suppliers. They doubt an unclear selection and shortlisting process. Having a simple auction tool is critical to ensure suppliers aren’t discouraged from participating in online auctions.

Some common supplier queries are the following:

  • Why is the buyer even conducting a reverse auction? We have serviced them well over the years and delivered terrific value, so why this change?
  • Am we competing against suppliers that have a poorer manufacturing facility compared to ours?

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Reason 3: Having price as the sole criteria for award

This point cannot be stressed enough. Not just the suppliers, but internal stakeholders within the organization (from Quality, Manufacturing, After-Sales) too need to be convinced that the procurement team is not out to sign deals with the cheapest suppliers.

Hence, the reiteration of the earlier point on the supplier qualification process is extremely important.

Reverse auctions too need to support this. When suppliers with varying capabilities compete in the same auction, the benefits of the more-capable supplier need to be accounted for.

Read this article – Transformed Pricing helps in comparing prices from dis-similar suppliers – that details why Total Cost auctions are an absolute necessity.

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Reason 4: Selecting the wrong category for auction

Category dynamics play a major part in the outcome (read savings) of a reverse auction. For example, selecting an item with hardly any compressible margin, say sheet metal fabricated items, will not deliver any measurable savings even though the spend may be high.

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Reason 5: Unclear specifications, terms and award criteria

Conducting online auctions assumes that precise specifications can be drawn up for the product being sourced. Having precise specifications and service expectations help suppliers in pricing their offering accurately, especially when the bidding gets competitive. We cannot expect suppliers that have been awarded the business to meet the unstated requirements later. While the reverse auction process gets blamed for this, this often happens in offline negotiations too.

For commodity-driven categories, a long-term agreement without any price factoring does not work.

The award criteria is a key motivator for the supplier. When a supplier places the lowest bid, they expect to win a higher share of the business. So buyers need to clearly mention the intended share of the business. Will it be awarded to a single vendor? To 3 vendors? If 3, then what’s the typical share to each? If it’s a new supplier, then what’s the ramp up period & process to achieve the stated share of the business.

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Reason 6: Lack of management support

Studies show that the implementation of reverse auctions has a better outcome when it has a top-down approach. With the management’s support, the following were achieved:

  • Supporting functions worked jointly with purchase teams to deliver on bigger goals. This encouraged innovation and a focus on several cost-reduction levers as well.
  • Resistance from suppliers to participate in online auctions was better managed. Suppliers could sense a serious buyer intent to negotiate via reverse auctions across a broad set of categories.

Krinati provides Program Management Services that help customers achieve an optimum outcome from their eSourcing initiative. Our eSourcing playbook helps our customers navigate through every phase of the journey – train users, shortlist categories for cost reduction, manage suppliers, address change management, set up a review mechanism and much more.

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