“With the global economy in recession, e-auctions have, once again, emerged as a favored tool for achieving immediate cost savings. Organizations that did not formerly use reverse auctions are now adopting them and many more are combining eRFx processes with reverse auctions to extract maximum value from deflationary markets … But, unlike the comparatively mild 2000-2002 economic slump – when reverse auctions first came into vogue – the recent recession was much deeper and put many suppliers into deep financial peril. While the short-term benefits are certainly attractive, use of e-sourcing and e-auction tools needs to be closely aligned with strategies for promoting long-term supply-chain health and competitiveness.” (www.purchasing.com, 2009) 

Considering the above statement, answer the following two questions: 

1. How should reverse auctions fit into an overall procurement strategy? (45% of marks) 
2. Discuss which factors influence the outcome of reverse auctions, particularly with respect to price reductions? (45% of marks)

In the globalised economy, supplier selection has become on the most important issues in decision making due to raw materials cost which constitutes the major portion of production cost as most of the organisations spend a substantial amount of their revenues on purchasing function. Selecting the correct supplier for purchasing is reported to significantly reduce the procurement costs and improves competitiveness which ultimately enhances performance across the supply chain.

Selecting the right supplier depends on considering various operational factors other than the price. Companies adopt numerous approaches for supplier selection, taking into account multiple criteria such as organisational objectives and stakeholder requirements. In general, the sourcing strategy comprises of a detailed plan comprising of the list of items to be purchased, from whom to purchase, the procurement process to be undertaken and scheduling a purchase. It also includes an assessment of historical spend, categorising spend, competition, demand, and selection criteria. 

This report details the growing concept of the reverse auction in an organisation’s procurement strategy. The use of reverse auction as a procurement tool depends on an individual sourcing manager’s strategic decision to acquire products or services by means of a reverse auction. Sourcing managers consider the pros and cons, opportunities and risks of the reverse auction to carry out a specific sourcing event. This is a “go/no-go” decision. This report further explores the factors that influence the outcome of the reverse auction such as cost savings, reduced cycle time, increased compliance, transparency, collaboration and participation and continuous feedback from participants.

Introduction

Procurement practices across organisations in both private and public sectors are evolving from operational purchasing to an integrated and coordinated sourcing strategy globally. One of the major motivators for the shift to global sourcing is the per-unit cost savings which have opened markets to more competition that pressurises local prices. A reverse auction is a growing instrument in procurement strategy as it offers significant benefits both operationally and administratively. This report discusses the concept and use of reverse auction as a part of the procurement strategy in the current business environment. The various benefits and challenges in using the reverse auction experienced by procurement professionals are discussed, and the key factors that influence the outcome of the reverse auction are determined using suitable examples.

Current Trends in Procurement Strategies 

According to the Deloitte Global CPO Survey 2016, there is a high demand for impactful procurement among the organisations to manage costs and to leverage the potential of the supply market as an organisational performance differentiator (Deloitte; Odgers Berndtson 2016). There is a growing need for shorter cycle times, a growing demand for richer market insights and the rising need for agile, transparent and efficient operations. As other business functions are increasingly engaging in digital technologies, the supply market-facing assets are also experiencing transformation (Robinson 2016). However, the traditional constraints such as availability of adequate manpower, knowledge and expert skills and policy-driven organisational processes are inhibitors of the procurement practices.

(Some parts of the solution has been blurred due to privacy protection policy)