RTM: What about the losers?  I mean how do you handle it if one of the losers is a strategic supplier?

SJ: Well, if the product is unique and comes from a strategically important supplier then don’t hold an auction!  But if it is an indirect product, not used directly in manufacturing such as office supplies, PCs or paper towels, then reverse auctions really come into their own. In companies where buyers have good relationships with suppliers they will tell them why their bid failed and look at the problems.

RTM: I gather that you have a mathematical modelling tool, Bidanalyzer, which you believe can accurately forecast not only the final bids, but also the optimal bids from established suppliers.  How does that work?

SJ:  We are still testing it, but the early trials have been successful.  We take the first few bids and we can accurately forecast what the final bid will be, no matter which industry and no matter what size the contract.  On four trials so far we have achieved 97% to 98% accuracy. We can also model the optimum bids from each supplier.

RTM: Can you explain what you mean by that?

SJ: Yes, we can use the model to come up with the price from each supplier which should provide them with a reasonable, but not extortionate profit.  This is extremely important for the buyer.  BidAnalyzer enables buyers to identify which suppliers might have held back in the bidding process and stopped bidding prematurely.  And it also identifies the suppliers that may have bid too much and might experience a "winner’s curse."  You probably don’t want a good supplier to put in a bid on which it will definitely lose money.

The optimum prices and the forecast can all be made from the initial bids placed in the auctions.

RTM: Given that reverse auctions have now been around for 3-4 years has the behaviour of suppliers and buyers changed?

SJ: My sense is that both sides are getting smarter.  Suppliers are making fewer mistakes and buyers are clearer about their expectations and intentions from these auctions.

For a detailed report on reverse auctions, view The Role of Reverse Auctions in Strategic Sourcing from Center for Advanced Purchasing.  This free 88 page report can be found at CAPSresearch.org.