The business world is dynamic and ever-evolving. Various tasks and utilities keep the business buzzing and ongoing at all times. As more and more business functions become dependent upon procurement and supply chain management, the emergence of a reverse auction system has transformed the scenario, bringing cost efficiency and savings for the concern. In traditional auctions, the buyers end up bidding the prices. However, in the reverse method of auction, it is the sellers who offer lower prices and save significantly for the organizations. The mechanism, benefits, challenges and best practices for this reverse methodology must be understood well before operating in an open market.
Before we proceed, let us first understand what this reverse method to opt for an auction is. It can be explained as a procurement process which operates on the system of reversing the process of quoting prices. Multiple suppliers compete to offer the lowest bids and gain buyers for a particular product or service. Typically starting with requirements and specifications, the auction is ruled by the buyer, who predetermines his needs. Then the suppliers submit their bids partaking in the auction to secure buyers and gain. All through the process the suppliers or sellers can exercise their liberty to change their stance and adjust their offer based on the current lower bids. As the auction concludes, the supplier with the lowest bid and best offers gets the contract awarded in his name.
Let us delve into the challenges and the advantages of using this reverse system of operating in the auction market:
- Cost savings: One of the most significant benefits of using a system of reverse quoting is a reduction in costs. Since this method fosters a sense of competition among the suppliers, there is substantial savings in cost for the buyers. As the suppliers bid to get the attention of the buyer and win the bid, it leads to a competitive spirit along with the removal of any unnecessary costs attached to the product or service. There is no overcharging like the traditional methods and the buyer gets the benefit of this new method of procurement of products.
- Increased transparency: With the process of auctioning in reverse order, there is more transparency and no hidden costs. As the proceedings happen live in front of all the participants there is no chance of insider bidding or unfair means. There is openness and competitive bidding for fairness and transparency in pricing leading to better deals. Thus this method of auction promotes clarity and equal opportunity to all the bidders in an open and fair market.
- Efficiency: The reverse method leads to saving considerable time in terms of time spent with suppliers in cracking a deal. As the buyers and sellers negotiate to strike a deal, the process is quickened reducing the time taken for analysis of bids and making decisions.
- Supplier diversity: The delivery process gets streamlined with an increased interest in participating and offering bids by a broader range of suppliers. This gives opportunities to small and medium-level players to try their luck which they hesitate to do in traditional procurement methods. This competitive environment encourages healthy participation from all sectors and levels.
- Benchmarking: With clarity in benchmarking prices, the buyers understand the complexity of market rate changes and alterations. They are thus able to make informed decisions and save a lot of time and money. By processing the real-time data, there is openness in market rates and the buyers can take advantage of the change in rates and bids due to the competitive spirit.
- Overcoming supplier reluctance: When traditional methods of bidding and selling were followed, the sellers dominated the market. This led to sellers with more influence running the market conditions as per their preference and choice. However, with a reverse method in place, more and more sellers are overcoming their hesitation to quote a price as per their limits and convenience to secure sales. Though there are concerns over the profitability and overall margins in sales, the sellers have a choice of bidding based on the support they can garner. As they gain knowledge and insights into this system of auctioning products and services, these concerns can be addressed and alleviated.
- Offering complex products: There were inhibitions about certain products and services which are complex in nature or are customized as per the choice of the buyer. But these factors can be taken into note while quoting prices and bidding. This brings in awareness about the actual cost of the products or services and does not let inflation take over. There is no unwanted hype about any product.
- Use of technology: The use of modern and latest technology for bidding and setting prices seems unfamiliar to the market. However, with awareness campaigns and experience, both the buyers and suppliers gain confidence as this leads to fair and fixed bidding and pricing of the products. It can thus help to maximize the profits due to a reduction in processing costs. It also leads to the avoidance of any unfair means such as rigging in the offering of bids. As the processes and procedures are preplanned and set, there is no need for monitoring or implementing any strict rules.
Conclusion:
A contract based on a reverse system of auction and bidding needs preparation for setting the parameters – duration and minimum bid increments, and any other relevant criteria and conveyed to the potential sellers in advance. After the launch of the auction, the suppliers participate to win bids and adjust their offers to win the bidding process. As the contracts are awarded, the two parties fulfil the post-auction formalities and finalize the terms of the agreement such as delivery schedules, payment terms, etc. It is thus a powerful tool which adds to the procurement arsenal. It offers significant, advantages in terms of savings in cost, transparency, and efficiency. The process of reverse auction helps to leverage the approach of careful planning and implementation thereby enhancing the procurement processes without compromising on the quality of the products and services.
