Reverse auctions are a great tool for buyers to save money, but many suppliers tend to be apprehensive about participating in them. Suppliers do not like participating in reverse auctions because they are typically viewed as a race to the bottom in terms of pricing.
There are more apprehensions which we will articulate in this article. We will also take a look at the remedial measures a buyer must take to ensure auctions are competitive and the best bid is placed by the most capable supplier.
Understand suppliers’ apprehensions about participating in reverse auctions
When it comes to participating in a reverse auction, suppliers are wary about who else will be in the pool of participating vendors. Suppliers fear that they will be pitted against unqualified or inexperienced vendors who will try to undercut their prices, compromising the quality of the product or service.
Incumbent suppliers may also worry about the fairness of the auction. They may feel that their knowledge of the buyer’s needs and the standing relationship they have with the buyer are not given enough consideration. This can make them feel devalued and uncertain about the outcome of the bidding process.
Large and established suppliers may further worry that a reverse auction only takes into account price, and does not measure their ability to deliver on the project or meet customer needs. They feel the auction does not adequately differentiate between different companies, especially if one has more experience or resources than the other.
Finally, suppliers will be wary of poor buyer behaviour while conducting reverse auctions. Buyers tend to place phantom bids, not award business as per prior commitment or tend to negotiate further with the supplier post-auction. Such buyer actions demerit the effort and cause mistrust among the suppliers.
Communicate the benefits of reverse auctions to the suppliers
While supplier apprehensions have merit, the truth is that reverse auctions offer several benefits to the participating suppliers. Buyers need to ensure they inform suppliers of these benefits as well as other insights important to them.
One of the biggest benefits of reverse auctions is the level playing field it creates for all participating suppliers. They can see their competitive positioning vis-a-vis other suppliers and place further bids accordingly. They can trust the system instead of the words of a buyer! In other words, all suppliers have an equal chance of winning the business.
Reverse auctions open up new opportunities for several suppliers. The auction process allows suppliers to reach a much wider audience of buyers than they normally would have access to. This can lead to more business and larger contracts for many suppliers, reducing their sales costs.
Also, while winning the auction is often the primary goal, there are other benefits to participating in a reverse auction. If a supplier does not win, they still gain insights into what their competitors are offering and the market value of their products.
Effectively manage every apprehension of the suppliers
Supplier apprehensions must be proactively addressed. If suppliers feel that reverse auctions are detrimental to trust-based relationships with the buyer, this needs to be managed on priority.
Communicating the award scenario to the suppliers prior to the auction and adhering to it builds trust. How many suppliers will be awarded the business? How much share of the business can the best bidder expect? Would there be any further qualifying steps for a new supplier? Greater the clarity on the outcome, the higher the competition from suppliers.
Explain to suppliers that you are not on a mission to find the ‘cheapest’ supplier. On the contrary, past performance and better capability are valued and factored into the auction. This ensures that the most capable supplier wins, not the cheapest on price alone.
If you have done a pre-qualification of suppliers prior to the auction, go ahead and communicate this to all the participating vendors. This will demonstrate the integrity and seriousness your company has when it comes to reverse auctions.
In summary, buyers must acknowledge that suppliers are wary of participating in reverse auctions. Their prior experience with other buyers, perhaps from the same industry, also set their perception regarding the process. These apprehensions are critical to be addressed because supplier participation is critical to the success of any online auction.
Krinati offers Program Management Services are tailored to assist you in executing a successful eSourcing program. To do this, we focus on communicating the right message to suppliers and address their apprehensions. We also train users on the dos and don’ts of eSourcing as well as providing event management for sourcing events.