The Role of Reverse Auctions in Strategic Sourcing

In the entire supply chain, you, as a company, want to be able to deliver a final product to a buyer. There are many different stops within that supply chain along the way, such as procurement and procurement management. Within the procurement of goods, there are many processes as well, such as sourcing and the role of reverse auctions in strategic sourcing.

You won’t use reverse auctions all the time; in fact, they won’t be your go-to unless you work in an industry that warrants them, such as certain government or military sectors. However, there are many times where the reverse auction process is warranted and can play a significant role in your strategic sourcing strategy.

Read on to learn more about what strategic sourcing is, what a reverse auction is, and how you can use one to your advantage.

The Role of Reverse Auctions in Strategic Sourcing: What Is Strategic Sourcing?

To get a finalized product to your customers, you have to source (buy) goods and services from your suppliers to manufacture. While procurement is part of the supply chain, sourcing is a part of procurement, and there are several steps within strategic sourcing itself. As you begin to source products, as a company, you want to plan (strategize) and ask several questions:

• What are we currently spending, and what is our current budget? (This is an evaluation of your current spending habits and budget)
• Who is offering what? (This takes a look at the current market)
• How much should it cost to provide what we need? (This is a total cost analysis or a “should cost” analysis)
• Do we have suitable suppliers? (This is where you take a look at your current supplier pool)
• What is our sourcing strategy? (This is where you decide how you will source what you need and decide if you will source locally, nationally, or internationally. )
• How will we negotiate with our suppliers? (This is where you decide on contract and payment terms)
• How will we implement our new supply structure? (This is where you essentially put your new strategic sourcing plan into action)
• Category management or continuous cycle (You will monitor and reassess your new strategy continually and ensure it is working in your favor)

If you were to use a reverse auction, that would be the answer to, “What is our sourcing strategy?,” because that is how you would be sourcing the good or service from your suppliers.

The Role of Reverse Auctions in Strategic Sourcing: Reverse Auction vs. Regular Auction

There are many ways that you can source goods and services from your suppliers. Many people are familiar with the role of regular auctions, in which a seller puts something up for sale, and buyers bid on the item. Buyers keep bidding until the timer expires, and the highest bid wins the auction. You can certainly source goods and services in this manner, but you can also source goods using a reverse auction, and the role of reverse auctions in strategic sourcing can be vital if they are conducted correctly.

In a reverse auction, you would instead give your suppliers notice that you are in the market for a good or service, and invite qualified suppliers to take part in the auction.

There is bidding in a reverse auction, but it is not the at-the-wire, competitive, cutthroat bidding process you may see in a standard auction.

Bids are often not binding, depending how you decide to run your auction, and suppliers can often see where they stand. They can usually change their bid based upon where they stand in rank. It’s suggested that you let suppliers see their rank as they compare to each other, but not their monetary bids. This is why the role of reverse auctions in strategic sourcing can be so important—suppliers may bid lower, not higher, which ends up >more in your favor. 

The Role of Reverse Auctions in Strategic Sourcing: When to Use and Reverse Auction Strategy

Before you embark on using a reverse auction, it’s imperative to have reverse auction software at your disposal that you’re familiar with using. It’s also wise to run a mock reverse auction before the start of one going live. It’s recommended that you ask your suppliers if they’d like to participate in a mock auction so that everyone feels comfortable if auctions are new to your suppliers.

Considering your strategy, always ensure that you have at least two qualified suppliers to run a reverse auction. You want to ensure you have adequate competition in your auction and you want to ensure that everyone participating in the auction is qualified to earn your business. You also might not want to auction certain strategic categories or strategic suppliers because of their importance to your brand or product.

Reverse auctions work best for:

• Raw materials
• Components
• Processed goods
• Capital equipment
• Categories where you have at least two qualified suppliers

They also work well for anything in which price can be negotiated, which is why the role of reverse auctions in strategic sourcing is much discussed.

To hear more about the role of reverse auctions in strategic sourcing, or to request a demo of reverse auction software, contact us today at EC Sourcing Group by dialing 973-936-9672 to make an appointment.