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Reverse auctions can revolutionize your procurement process

4 Ways Reverse Auctions Can Revolutionize the Procurement Process

The premise of reverse auctions is simple—buyers who want suppliers for a specific product or service ask suppliers to submit bids online. To win the bid, suppliers must then compete with the lowest cost, over a defined period of time.

This new process has naturally attracted the attention of procurement teams. And those teams have definitely experienced savings: according to a recent GAO report, in 2016 the Federal Government saved over $100 million on roughly $1.5 billion of purchases made via reverse auction or almost 7% on average. . Auctions are a definitive way to reduce sourcing costs, in addition to increasing efficiencies and driving better business. In short, reverse auctions—when used correctly—have the potential to revolutionize the procurement process. How? Check out the top 4 ways below.

1. Significantly cuts sourcing time

Traditional sourcing methods can typically take weeks, if not months, to complete. However, strategic automated sourcing platforms are great for getting fast and positive results.

By using a reverse auction platform, months of negotiations and back and forth communication can be reduced to days. A centralized communication platform allows you to easily communicate what you want and need from your potential bidders seamlessly–no need to reach out and communicate your requirements to bidders individually.

Additionally, with standard templates available and by having all the relevant documents in a single platform, procurement teams can focus more on value-added work instead of the tedium of setting up bids manually or tracking down paperwork.

2. Opens more business opportunity

Reverse auctions have proven to be a very effective way for businesses to expand their reach.

For buyers, reverse auctions allow them to access a wider supplier base. You’re no longer limited to your personal network; which means you gain a bigger talent pool.

For suppliers, it also opens up opportunities for them to participate in a bid that they would not have been aware of, if the company used traditional sourcing methods.

3. Levels the playing field for suppliers

Reverse auctions offer a transparent playing field for suppliers. Critical information about the project is available for all vendors participating in the bid on a central message board. This not only ensures easy access to directions and details, but it also means that the same information is given to all the bidders. Suppliers can also see how their bids compare to others.

4. Improves working relationships

Reverse auction platforms conveniently facilitate the price negotiations for a particular project. This is critical in maintaining a healthy working relationship with potential suppliers. Without it, you’ll basically be playing the middle man between all your suppliers. You will have the task of communicating to them directly about what others are willing to offer, ultimately pitting your suppliers against one another. It also establishes an adversarial undercurrent early into your working relationship.

Using an automated sourcing platform goes a long way towards easing the mistrust that is common in traditional sourcing practices.

Streamlining your business’ procurement process through reverse auctions is advantageous. It’s known for cutting down costs and its benefits can potentially revolutionize the entire procurement process.

To find out how Vendorful can help streamline your company’s procurement process, get in touch with us today.

Busting myths about reverse auctions

Busting the 6 Biggest Reverse Auction Myths

The benefits of Reverse Auctions might seem obvious to many. That begs the question — why aren’t they more common? Perhaps the reluctance to use the stems from the myths that prevent organizations from recognizing how they can improve efficiencies, save money, and build better supplier relationships.

To that end, we’ve run down a list of the biggest myths surrounding the Reverse Auction process below and provided some information that, we hope, will increase your comfort level.

1. Reverse Auctions can only be used for procurement in the private sector.

Not true. In fact, federal agencies are leading the way in the public sector when it comes to the adoption of real-time competitive bidding. As far back as 2012, the US government has awarded $1 billion in contracts. Establishing Reverse Auctions as a best practice has ultimately allowed public entities to save millions annually.

2. Reverse Auctions are only applicable for blue-chip companies.

Outside the public sector, Reverse Auctions may have seen broader adoption by larger organizations like Fortune 500 companies as a way to streamline their negotiation process. However, in recent years, small to medium enterprises have also begun to recognize both the value and applicability of such a process.

3. Reverse Auctions are expensive — shifting to this process will be costly.

Reverse Auction platforms are now available as a cloud-based service. This significantly lowers the overhead cost for a business. Following the software-as-a-service model, upfront costs are also reduced. The simplicity and intuitiveness of most platforms also ensure that there is minimal employee training involved. (And per myth #2, more competitively priced, easier-to-use tools have made Reverse Auctions a practical consideration for organizations of all sizes.)

4. Reverse Auctions can only be used to procure commodity goods — they can’t be used to purchase services.

Both goods and services can be effectively purchased following a Reverse Auction negotiation process.

There’s a misconception that services aren’t ideal for the Reverse Auction process given that services typically have dynamic quantities and requirements. Broadly, that may be true, but it doesn’t mean that Reverse Auctions should never be considered when contemplating a service. Indeed when the scope of service can be clearly defined, a Reverse Auction may well be the best approach. It helps organizations determine fair pricing from potential suppliers, which ultimately helps reduce costs.

5. Reverse Auctions are detrimental to the buyer-supplier relationship.

In any business, maintaining good working relationships is key. This is perhaps the biggest reason why companies are so reluctant to use Reverse Auction platforms. The assumption is that given how Reverse Auctions pit suppliers against one another and generate downward price pressure on the supplier, the process can put a strain on your business’s relationship with potential suppliers.

However, no other platform can provide the level of transparency that Reverse Auction models offer. No other negotiation tool can benefit both purchasers and suppliers and support a fair, open bidding process. Quite simply, Reverse Auctions can actually help enhance trust and credibility. And by “negotiating in real-time,” all of the suppliers save valuable time, which they can leverage more productively. (Interestingly enough, just yesterday, a supplier reached out to us and inquired about how he could find more reverse auctions in which his company could compete. “We do really well there,” he said. “We’ve got a great supply chain.”)

6. Reverse Auctions put too much focus on price.

It’s typical to assume that the lowest bid in Reverse Auction events always wins. However, businesses aren’t bound to choose the cheapest offer. There is other critical information that eSourcing platforms can provide so businesses can weigh the cost against other factors such as past performance, supplier capabilities, support, and quality assurance.

Identifying these long-standing myths about Reverse Auctions and dispelling them is your first step towards tapping a beneficial platform for both your company and your suppliers.

Not using an eSourcing platform or stuck on a hard-to-use system? Contact us to find out more about what Vendorful can do for your business.

Real value of reverse auctions

5 Things that Highlight the Value of Reverse Auctions

Many companies are leveraging reverse auctions as a way to save money. However, cost savings are just one benefit that reverse auctions can provide.

Reverse auctions have the potential to be a critical aspect of your strategic sourcing process, and knowing their full potential is the first step towards maximizing their impact. Below are the top benefits of reverse auctions for organizations.

1. Cost savings

It may be just one of the benefits reverse auctions can provide, but it’s still an important one! Reducing procurement costs can significantly impact a company’s bottom line. In this article by CIO.com, they note that reverse auction software, can lower the cost of procuring products and services by as much as much as 20 percent.

Pitting sellers against each other on an open platform can increase competition and help drive down bids so that a business gets the best price for a particular event. This can allow companies to enjoy short-term profit increases, and long-term savings and investment.

2. Process efficiency

Reverse auctions can help streamline the procurement process, allowing for ease and speed of transactions. Where traditional, forward auctions typically take weeks to complete, online auctions can be concluded—with favorable results—in under an hour.

Documentation can be centralized, allowing for better organization. Coordination with suppliers is also easier given that communication and scheduling can be managed using a single platform.

3. Access to a large supplier base

Reverse auction software can help your team cast a much wider net to find the right supplier. According to Greg Brandyburry, President of RPDE Inc., “Non-incumbents love the transparent and fair process and market visibility when given. What I have seen through the years [is that] small suppliers can compete very nicely with large suppliers when a fair, transparent, level playing field is established.”

The evidence is more than anecdotal. In 2016, FedBid reported that for the prior fiscal year 88% of contracts awarded through their reverse auction platform went to small businesses. When suppliers are selected on the basis of who can provide the best value, rather than who has the more effective sales force, buyers and suppliers win.

4. Improve buyer-supplier relationships

There’s a long-standing assumption that reverse auctions tend to put a strain on buyer-supplier relationships. However, when done right, it can actually help improve working relationships.

On the premise that you’re conducting the whole bidding process openly and with a focus on transparency, you will be able to fairly assess each bidders capability objectively. This implies that you’re making an effort to level the playing field for all participants, which reflects positively on your organization’s values.

Furthermore, reverse auctions are respectful of your suppliers’ time. The whole auction, from start to finish, will likely be wrapped up in under an hour, meaning your suppliers – and you – can spend less time on the selection process and more time delivering value.

5. Increase market efficiency

It’s very difficult to bring multiple suppliers and a single buyer together in an open and constructive bidding environment. Online reverse auctions can help achieve this.

On an eSourcing platform, suppliers are able to view bids from competing vendors and can assess whether their own bids are up to par. Not only are you able to easily review the bids, but it also fosters healthy competition between participating suppliers.

Since the entire process takes place online, it’s easier for you to extend your supplier reach outside of your geographical limitations. This could ultimately lead to global searches that will provide the best cost-savings for your project.

Adoption of reverse auctions is rising simply because it has demonstrated its efficacy in delivering valuable results for businesses. Cost-savings, while an important and significant factor for choosing reverse auctions, isn’t the only thing that it can offer. As detailed above, the benefits of using this platform can be significant. It’s just a matter of learning and recognizing its inherent value for your organization.

Take advantage of Vendorful’s eSourcing platform and find out how you can get the most value out of it for your business. Get in touch with us today.

Types of Reverse Auctions

Which Type of Reverse Auction Should You Be Using?

Advancements in technology have allowed procurement teams to introduce new sourcing strategies and practices. A reverse auction software, for example, can automate and streamline the RFP process steps to increase cost efficiency without requiring months of negotiation. Before going further, we want to acknowledge that cost should not, in the vast majority of situations, be the sole driving factor in choosing a supplier. Indeed, sometimes cost and quality can be inversely correlated. Taking a holistic approach where cost is a key consideration will deliver better outcomes. But that’s for another blog post….

While you might be keen to start saving money in record time, a little homework—a tiny bit, really—is helpful. There are numerous reverse auction types and formats from which you can choose. And selecting the right one could help you reap the most benefits from this tool.

Let’s take a look at some of the most popular types of reverse auction software and examples to help you decide which one best suits your needs:

1. Ranked Auction

Ranked auctions are arguably the most popular auction type given how they can be effective for multiple industries and project types. Most companies choose ranked auctions when they want to engage numerous potential bidders that they expect would be bidding at similar price points.

The key information provided to the suppliers in ranked auctions is their position or rank against the other bids. At any point, the supplier with the leading bid is the only one who has knows what the current best price is.

One potential disadvantage of ranked auctions, however, is that participants who are in the second or third position might get the impression that they won’t have a shot at winning the bid. For that reason, you want to communicate that price is an important consideration, but that a contract won’t automatically be awarded to the low bidder. One benefit to consider regarding ranked auctions is that suppliers tend to prefer them over other auction types since it’s not a pure “race to the bottom” in terms of price. If suppliers feel strongly about the overall strength of their offerings, they will make competitive bids and expect that cost will be one factor in how total value is evaluated.

2. Open Auction (also known as an Open Outcry or English Auction)

In an Open Auction, everyone who has submitted the bid will have full knowledge of the value of the leading bid. Bidding typically starts high—or at a buyer-defined maximum—and falls steadily. This means that all the participants start with a level playing field and all have an equal shot to compete for the winning bid.

A supplier can only submit a bid if its numbers beat the current best price. The process works best when the buyer is comfortable with attaching a value to their project, allowing them to quickly settle negotiations. Bear in mind that this kind of reverse auction software is designed for commodity items where the price is likely the key differentiator.

One common misconception is that buyers are obliged to award the contract to the low bidder. While that is frequently the case, it’s not always so. Even with commodity goods, there can be considerations beyond price that influence the outcomes of these events.

3. Dutch Auction

Dating back to Tulip Mania in the 17th century, Dutch auctions have made their way beyond The Netherlands and out of flower markets. In fact, they’ve been used for public stock offerings.

In a reverse Dutch auction, the buyer will list a product, a quantity, and a price that it would like to pay. Suppliers can elect to opt-in or out for some or all of the quantity. For example, if a buyer wants to buy 10,000 widgets at $10 per widget, suppliers have three choices:

  1. Place a bid to provide all 10,000 widgets at $10/widget.
  2. Decide not to provide any widgets at that price.
  3. Place a bid to provide some portion of the widgets for $10/widget.

Prices increase at a predetermined interval as long as there is an outstanding supply. And in many cases, multiple suppliers can combine to meet the needs of a single buyer. Imagine, for example, multiple rounds of bidding with our widget example.

Reverse Dutch Auction table

In this scenario, four suppliers combine to meet the needs of the buyer. The market-clearing price, i.e., the price at which the buyer can be fully supplied, is $14. In the above example, even though Supplier A, B, and C were all willing to sell their widgets for less, each would receive the market-clearing price of $14. Buyers should take care to set a reserve price, which acts as a ceiling.

(Fun Facts: If you’re wondering if the buyer can buy the specified quantities at the bid prices rather than at the reserve price, they can…just not in a reverse Dutch auction. Rather, this would be the result of a reverse Yankee auction. In that scenario, Supplier A would be providing widgets at two price points and delivering at an average price of $11.33. And while the buyer would pay between $10 and $14/widget, the blended cost of all the widgets to the buyer would be $11.40.)

Although a Dutch auction offers loads of flexibility and can drive down prices, it can also introduce complexity into the supply chain. That complexity can, in some cases, undermine any savings realized in the sourcing process. It’s a useful tool for a buyer to have, but should be considered carefully before implementation.

4. Japanese Auction

Reverse Japanese auctions begin with the buyer’s sending an opening price to suppliers. To participate, suppliers must accept the opening price, signifying that they agree to the requirements defined.

As more bidders agree to participate, the bid price goes down at specific intervals—usually time contingent—with bidders being asked to accept or reject the new price. The whole process continues until there is only one bidder left. A Japanese auction is, in effect, a process of elimination.

A reverse Japanese auction type is ideal when the buyer wants to limit the information available to potential bidders. In addition, a buyer can run it even if there is only one participant on the supplier side. Note, however, that this is also the least popular method of eSourcing among suppliers as it gives them very little feedback. It’s also considered one of the more difficult auction formats for businesses given that it’s challenging to set-up and requires more attention to executing.

Keep in mind that each type of reverse auction will have its own strengths and weaknesses. Choosing the right one depends on what your objectives are and what you need to address. However, regardless of what type you choose, this process will ultimately help you get the most value for your budget, allow you to source suppliers easily, and simplify the complex process of procurement.

Take advantage of Vendorful’s eSourcing platform and find out how we can help improve your procurement process, get in touch with us today.