Procurement Auction – Is It A Better Way To Buy Products?

A procurement auction is also known as a reverse auction.  Unlike a normal auction, the sellers compete to obtain a company’s business. This normally leads to the prices being offered decreasing during the period of the procurement auction.

In a procurement auction, the activities will be targeted towards finding new suppliers and ensuring that any existing suppliers have the opportunity to propose keener prices and better terms. The procurement auction is usually held via e-procurement and has the following activities:

  1. A buyer contracts with a market maker – which is usually a web site that specializes in this work.  Some companies such as Mars have their own sites.  Some market maker sites specialize in government contracts, others in freelance staff.
  2. A RFP (Request For Proposal) is issued on the reverse auction site, for a group of products or a service. The RFP lasts a set time.
  3. Potential suppliers will visit the site and input their quotes to supply these products or services.
  4. This short time period and dynamic bidding ensures that prices rapidly move downwards.
  5. The buyer then awards the supplier contract to the bidder that they prefer. They do not have to chose the lowest price and it is better that they look at the total package of terms, quality and prices.

This type of bidding does have some disadvantages:

  1. Quality is sometimes lost with low bidding.
  2. Suppliers will naturally try to bid low and this may mean that they only bid on a small part of their product range.
  3. Some suppliers that could provide lower prices and better terms could be unaware of the procurement auction.
  4. Some suppliers are tempted to work around the auction rules.
  5. The cost must also be factored in, of moving from existing suppliers.

To counter this there are a number of advantages:

  1. Suppliers are encouraged to bid low and provide good terms in order to win the contract.
  2. They are seen as a fair way of awarding government contracts as well as those from large monopolistic companies.
  3. It is a low cost, much quicker method of finding new suppliers.
  4. Negotiation costs are almost zero.

Reverse auctions can be used for procurement of all sizes from the smallest group of services such as that found is web sites such as guru.com and elance.com to the massive procurements that companies such as the first reverse auction held by American West Airlines.

 

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Get Your Report Now




Purchasing & Procurement Video Presentations


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Purchasing Managers Roles


Purchasing Savings


How to do spend analysis


Winning Supplier Negotiations: Who Really Wins & Why?


Purchase Price Index