RTM: Reverse auctions have really taken off.  Having started with the automakers and Boeing, they are now being used by Kraft, Nestle, Dell and Intel and are even being adopted by small and medium businesses.  What is the appeal?

SJ: Huge price savings!  Compared to the traditional process where a buyer goes round, gets quotes and then tries to bring suppliers down on price, they lead to price reductions as high as 40%, although more typically 15-20%.  That leaves the purchasing director looking like a hero!

But I would guess that 60%-80% of the time the buyer doesn’t even go with the lowest bid, so what finally hits the books is significantly less. There is also a big saving in time for the buyer.

RTM: Why does it have such a huge impact on price?

SJ: The suppliers can see that there is no bluffing.  They can see the real quotes put in by competitors – in real-time pressure!

RTM: All this must have had some impact on relationships between suppliers and buyers.

SJ:  Yes, it does.  Actually, I got involved in this area after betting a guy who runs reverse auctions that all this would affect relationships with suppliers!

RTM: I take it you won…

SJ: Oh yes.  We researched supplier attitude before and after the reverse auction. Full price visibility auctions left suppliers feeling vulnerable and forced to expose their pricing mechanism.
 
RTM: Did suppliers trust the process?

SJ: No. They often felt that buyers were putting in phantom bidders to cut the price.  As an insider, I knew that this was not true, but the mere perception caused them to be increasingly suspicious of the buyer.

But I found that reverse auctions were a pretty effective wake up call to complacent suppliers!  It makes some think hard about how they can differentiate and add value.

RTM: So are there rules which buyers should follow when they hold reverse auctions?

SJ: Yes. Build the trust back in. Make it very clear whether you will legally commit to award the contract as a result.  Often, suppliers fear that reverse auctions are simply a way of viewing prices.  Buyers should also state whether the the lowest bidder will win. 

Buyers should also be very clear that they are only going to allow qualified bidders into the auction.  In most industries, there are only 3 or 4 suppliers who are capable of delivering.  If bidders see a dozen competitors, they feel that the buyer has let  in Joe & Bill’s startup, just to reduce the price.