eAuctions & Reverse Auctions in Procurement
By Hugo Britt | November 9, 2021
If you don’t have time for lengthy and difficult supplier negotiations, you may want to consider using e-Auctions to speed up the process and drive down prices.
What is an eAuction?
eAuctions, short for Electronic Auctions, are real-time, online negotiation events between the purchasing organization (you) and a group of pre-qualified suppliers. By negotiating in a group setting, eAuctions remove the need for one-on-one negotiations with several suppliers.
What is a Reverse Auction in Procurement?
Reverse auctions are the most popular type of eAuction. In a reverse auction, the traditional roles of buyer and seller are switched. Instead of buyers incrementally raising their bids for a product or service, sellers incrementally lower their prices until the buyer accepts a bid.
For example, your company may be looking for a supplier to build a new parking garage. Several pre-qualified construction companies are invited to join an online reverse auction at a certain date and time. Once everyone is online via an e-sourcing platform, the first bid is launched. Rules vary, but in this instance, each bid must be placed within two minutes of the previous. Eventually, no further bids are placed and the purchasing organization accepts the final bid.
Pre-qualification must be carried out before the eAuction to ensure that every participant meets all RFP requirements and fully complies in a regulatory sense. As eAuctions are predominantly focused on cost, pre-qualification is important for making sure other factors are considered including risk, sustainability, service levels, innovation, social procurement, and so on.
Pre-qualification can be the most time-consuming part of the eAuction process if it is undertaken manually, but many software providers are offering solutions to automate this process.
Pros and cons of reverse auctions in procurement
Benefits of reverse auctions include:
- A structured, formal process
- Procurement efficiency
- Time savings by eliminating one-on-one negotiations
- Process transparency where suppliers can see each other’s bids
- Significant price reductions through supplier competition.
While reverse auctions provide cost and efficiency savings, they also come with the following challenges:
- An over-focus on price at the expense of other considerations. As every procurement professional knows, the lowest price doesn’t necessarily mean the best value.
- Ethical concerns: reverse auctions are great for transparency, but the purchasing organization must abide by rules and ethical considerations. For example, if any information is provided to one bidder, it must be provided to all bidders to ensure fairness.
- Number of participants: eAuctions are best used for highly competitive categories with low complexity and well-defined specifications and standards. The more participants involved, the better the competition will be.
- Several eAuction types: There is a bewildering array of eAuction types with different processes and rules including list auctions, CherryLot auctions, Cherry Picking auctions, Dutch auctions, and Japanese auctions. If you’re new to eAuctions, it pays to keep things simple at first and stick with a basic reverse auction.
- Tech trouble: As with any electronic process, it is a good idea to run a test eAuction before the real eAuction to check that everything works.
Another way to eliminate the need for supplier negotiations
If you’re looking for simplicity, partnering with a group purchasing organization (GPO) like Una is another way to eliminate the need for lengthy, one-on-one supplier negotiations.
With hundreds of supplier partners and thousands of contracts ready to go, Una can save you money, time, and effort in popular categories.
Contact Una to learn more.