When purchasing office supplies it is often difficult to obtain from all suppliers the price for every single item to be bought by your organization. The analysis of such lists of items is often a heavy task for buyers. Reverse auctions relieve buyers and suppliers from these constraints and allow a quick comparison of suppliers' proposals even if those include several dozens of products.
Let's consider a company purchasing office supplies. The buyer in charge of the commodity identified that the company would need 100 products for which the level of quality does not matter. To select a supplier, the buyer needs to know how much the 100 items will cost. He will compare the price submitted by each supplier and select the one with the lowest price. Reverse auctions can help in such a situation for two reasons:
- Get the price for each single item: suppliers will electronically submit their prices for each product and they will be able to modify these prices during the auction to improve their proposals. This task will be easily done through the upload of a 100 line table.
- Identify the best offer: reverse auctions bring dynamism to the RFP. Suppliers will submit their proposals and each supplier will be informed about the price to beat to win the contract. The information given on the price submitted by the leading supplier will tell other suppliers how much effort they must do to beat the leader. Prices will do nothing but drop.
At the end of the auction the buyer knows which supplier offers the lowest price for all items the company is about to purchase. Doing the same job without using reverse auctions would have been much more time-consuming and would have been much more difficult.
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Reverse auctions are not only a way to drive prices down. It is also possible to use them to save time by running a single auction to select two different suppliers. Let's imagine a company launching a RFP to find office papers suppliers for its two sites. The product is the same for both sites but the quantities consumed are not the same. The production site represents only 30% of purchased office paper. Most of the office paper is purchased by headquarters (reprography, invoices etc.) If we assume that the two sites are quite distant from each other, it is not sure that the same supplier will be able to submit the same price to supply both sites. Even though, it will be possible to handle both negotiations at the same time thanks to electronic reverse auctions.
Two lots will be created by the buyer. Suppliers will be requested to submit proposals for both lots. The results for each lot are independent: the supplier submitting the lowest price for a given lot wins the contract for this lot. A single supplier can win both lots if he submitted the lowest prices on both lots.
In addition to saving time for the buyer, this kind of reverse auction is also profitable for suppliers for two reasons: - One supplier can get two lots at the same time by using their returns on scale. The quantity offered in both lots can be more valuable for suppliers than if both lots had been purchased with two RFPs.
- A supplier can think he is competitive for one lot and it may come up that one of his competitors submits a better proposal. This supplier is given a chance to bid for another lot and maybe win it. Auctioning two lots at the same time allows suppliers to rapidly check their position among competitors and react accordingly.
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Let's consider again purchasing office paper. It is possible to handle an extra level of complexity thanks to standard reverse auctions. Reverse auctions can help buyers purchase two different kinds of paper for the company two sites. Standard reverse auctions also give buyers the opportunity to launch RFPs with several lots containing several items.
Lots are constituted by the different kinds of paper and suppliers are invited to submit offers for each site to be supplied and each kind of paper.
Lot 1: type x paper - Supplying site A: price
- Supplying site B: price
Lot 2: type y paper - Supplying site A: price
- Supplying site B: price
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