We’ve dedicated quite a bit of time speaking to the virtues of the RFP process. Indeed, if you’re sourcing any complex good or service, running a Request for Proposal, is a great way to gather and evaluate the data the will ultimately support the decision you make. While running a comprehensive sourcing event makes sense in many scenarios, there are other situations where price is the overriding criterion. If that is the case, and the product/service being sourced is steeped in commodity rather than complexity, you might have a good candidate for a reverse auction.
When executed properly, reverse auctions can significantly reduce a company’s purchasing cost, while maintaining quality and service levels. By leveraging the right tools, you can enjoy a process that is efficient and expedient. And we’re not the only ones who think so. In fact, reverse auction usage saw a huge spike in 2017.
Evidently, more and more organizations are recognizing how reverse auctions can drive better business value. If you’re not using reverse auctions yet, you may be wondering, “What are they seeing that I’m not?” Here are some benefits that will support your efforts to drive adoption of this sourcing technique.
1. Significant cost savings
Most people have only witnessed auctions on TV or in movies. The formula is almost always the same though…. A person in the front of the room points to bidders as the price for some item goes up, up, up. It makes sense then that the opposite dynamic is in play in a reverse auction. Vendors compete to provide a product or service, pushing the price down, down, down.
Smart sourcers will make sure that any specifications are clearly communicated the vendors. (Ideally, this should happen well in advance of the reverse auction itself!) Done right, reverse auctions can be one of the fastest ways to reduce cost without sacrificing the supplier’s quality of service. The data bears this out too, with buyers regularly reporting cost reductions around 10-20 percent.
2. Gets you to the finish line faster
Some sourcing processes are bound to be time consuming. If you’re buying a complex, mission-critical system, there’s no way around it. Using an eSourcing suite like Vendorful can automate much of the cumbersome pieces, but ultimately, you will be relying on human evaluation across a range of criteria. But in the event that you’re purchasing commodity goods, it does not necessarily make sense to use the same process. If your primary focus is on finding the provider with the lowest price, an RFQ might make sense in lieu of an RFP. And beyond that, a reverse auction might make sense in lieu of an RF Anything.
Reverse auctions give buyers the opportunity to level the playing field, fairly and efficiently. They foster a transparent bidding environment where both buyers and vendors have a clear understanding of the specifications and the importance of cost. Weeks or months of verbal and written negotiation with potential vendors can be reduced to a few hours or less.
3. Helps build and maintain supplier relationships
If you work in sourcing, you might have raised your eyebrows when you read the heading. We, too, were surprised when we heard rave reviews about the reverse auctions from some vendors. Given the nature of the process, we, like many sourcing professionals, assumed that the tradeoff for better pricing could be a strained buyer-vendor relationship. So we were certainly heartened to hear such effusive praise from vendors. What did they like?
- Transparency. Vendors might not like feeling like they are in “a race to the bottom.” However, when the buyer acknowledges from the beginning that price is the primary factor in the decision-making process and runs a high-integrity process, it’s much easier for vendors to get on board.
- Speed. Like buyers, vendors have a fixed amount of time in their day. While getting top dollar for a product or service sounds ideal to a vendor, that needs to be balanced against the amount of time that is invested to win the deal. For commodity goods, the cost borne by the vendor in a protracted sales process can easily offset the somewhat higher price achieved by having done so. Put differently — the buyer is not the only one who benefits by quickly getting to the finish line.
Organizations that have not used an eSourcing tools probably haven’t even contemplated running a reverse auction. And even among those organizations who have embraced sourcing software, there may well be apprehension when considering running a sourcing event other than an RFX. But if your organization buys any sort of commodity product or service, reverse auctions can be powerful weapon in your sourcing arsenal.
If you have more questions on how reverse auctions can drive better business value for your organization, let us know in the comment section below.
And if you want to learn more about Vendorful’s Reverse Auction capabilities — or even take reverse auctions for a test drive — please don’t hesitate to get in touch with us today.