“What can I reverse auction” is a typical question that we hear nearly everyday from our clients. This article will define and explain the Top 10 criteria that we look at to make a decision as to whether or not an item or service is a good reverse auction candidate. We have found all of these topics to be very important and they will provide a guideline to help you along the sometimes bumpy reverse auction road. While these points are not rules written in stone, they are based on research and our experience in helping reverse auction clients.
Here is eDynaQuote’s Top 10 List:
1) “The dollar amount should be sufficient to generate the interest of potential suppliers.” The sufficient dollar amount will be relative to the market, but larger dollar volumes will generate a lot of interest from many suppliers. And the more interested suppliers you have in a reverse auction the better.
2) “You should have at least two qualified suppliers.” Have a documented supplier qualification requirement process in order for the vendors to know that their competition is legitimate and to validate your selection process. Qualifying your vendors is extremely important since you need to have your competition on a level playing field, and you do not want sub-par products or services.
3) “Write clear and complete purchase specifications.” You should know exactly what you want, how much you want and when you want it or your suppliers will not be able to bid apples to apples. A reverse auction is not an RFP where some details can be left to figure out later. You should be able to clearly specify your purchase before you choose to run a reverse auction.
4) “Define and document award criteria.” Since most commercial purchases are based on factors other than lowest price, you should define, document and make available to the suppliers your award criteria. You should be able to accurately tell your vendors exactly what they need to do in order to win your business.
5) “Supplier change-over risk is low.” Look for areas where the cost to change suppliers is low. Keep in mind that costs are not just a hard dollar figure for the product or service you want to reverse auction. Think of all the other costs involved such as training, compatibility issues and what the learning curve looks like.
6) “Have a good forecast of the quantities and dollar volume.” Be sure to aggregate accurate data on how much you currently spend. You should be able to clearly document what and how much you are buying so you can provide those details as historical data to potential suppliers. You could be short-changing yourself and not getting as big a volume discount as you could be.
7) “Only include similar items in the same bid package.” While you can have many similar line items in a reverse auction, you do not want unrelated items in the same lot or bucket. Keep dissimilar items separate to avoid confusion. This will also allow suppliers to focus on their core competencies, and not disqualify them from bidding if they do not provide one item in the lot you are reverse auctioning.
8) “Keep reverse auctions below ten line items.” You want to keep the bidding simple, so do not over-complicate it by adding too many line items to the reverse auction. You can say “see attached spreadsheet” and include many similar items for them to bid on in one overall line item. Once you get too many line items, the suppliers will lose their focus and not be as competitive.
9) “Clearly define an alternate submission process.” If alternates, substitutes or options are allowable, you will need to clearly define what the submission process is and make those alternates available for all suppliers to bid on. You still want an apple to apple comparison when using reverse auctions, so be as clear as possible as to what you will or will not accept as an alternate. You do not want to leave a potential supplier in the dark about what alternates you are willing to accept, or you run the risk of not having a successful reverse auction.
10) “Are there compressible margins for the suppliers to compete on?” Stay away from using reverse auctions on items that have a market traded price such as oil and natural gas. You can reverse auction the distribution of these items though. The idea here is to reverse auction items that have prices set by the decisions of people and company pricing policies, and to avoid reverse auctioning items that have a freely traded market price.
Doug Luthringer is a Client Development Manager at eDynaQuote (http://www.eDynaQuote.com) with over two years of strategy, implementation and training experience in online reverse auctions and over six years with online forward auctions such as eBay. Doug has also been invited to be a guest speaker to talk about how to properly use reverse auctions to small and medium size business, as well as university students.