6 Reasons Why Reverse Auctions Fail to Deliver the Desired Results

 Reason 1: Inviting unqualified suppliers to the auction event

Auctions should immaculately be the final step in the negotiation process. Negotiating with suppliers post the auction is a big no-no. Also, qualifying suppliers post the auction has its drawbacks too. Assume the smallest-ranked supplier is disqualified post the transaction. The coming ranked supplier will misdoubt the veracity of the event and will probably be irritated.

Reason 2: Poor supplier management

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

Some common supplier queries are the following:

  • Why is the buyer even conducting reverse auction sourcing? We’ve serviced them well over the times and delivered good value, so why this change?
  • Are we fighting against suppliers that have poorer manufacturing facilities compared to ours?


Reason 3: Having price as the sole criterion for the award

This point can not be stressed enough. Not just the suppliers, but internal stakeholders within the association ( from Quality, Manufacturing, and After- Sales) too need to be assured that the procurement team isn’t out to confirm deals with the cheapest suppliers.

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

Reverse auctions too need to support this. When suppliers with varying capabilities take part in the same auction, the benefits of the more capable supplier need to be reckoned with.

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


Reason 4: Selecting the wrong category for the auction

Category dynamics play a major part in the result ( read savings) of a reverse auction. For example, opting an item with hardly any compressible margin, say sheet metal fabricated particulars, won’t deliver any measurable savings even though the spending amount may be high.


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 prospects helps suppliers in pricing their offerings correctly, especially when the bidding gets competitive. We can not look forward to the suppliers that have been awarded the business meeting the unstated needs latterly. While the reverse auction process gets criticized for this, this frequently happens in offline negotiations too.

For commodity-driven categories, a long-term agreement without any price factoring doesn’t work.

The award criteria are an important motivator for suppliers in supplier management services. When a supplier places the lowest bid, they anticipate winning a large share of the business. So buyers need to plainly mention the intended share of the business. Will it be awarded to a single vendor? To 3 vendors? If 3, also what’s the typical share for each? If it’s a new supplier, also what’s the ramp-up period & process to achieve the stated share of the business?


Reason 6: Lack of management support

Studies show that the application of reverse auctions has better results when it has a top-down approach. With the management’s support, the following was achieved

  • Supporting functions worked together with purchase teams to deliver bigger results. This encouraged invention and a focus on several cost-reduction regulators as well.
  • Resistance from suppliers to involvement in online auctions was more managed. Suppliers could smell a serious buyer intent to negotiate via reverse auctions across a broad set of orders.

Krinati provides Program Management Services that help consumers achieve optimum results from their eSourcing initiative. Our eSourcing playbook helps our consumers navigate through every phase of the journey– train users, shortlist orders for cost reduction, manage suppliers, address change management, set up a review mechanism, etc.

Original Source: 6 Reasons Why Reverse Auctions Fail to Deliver the Desired Results 

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