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“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:
- How should reverse auctions fit into an overall procurement strategy? (45% of marks)
- Discuss which factors influence the outcome of reverse auctions, particularly with respect to price reductions? (45% of marks)
This study investigates how the electronic reverse auctions (E-RA) fits into a strategy of procurement and influential factors for the outcome of E-RAs in the context of price reduction.
2. Definition of Reverse Auction
With respect to the context of procurement, as stated by the Institute for Supply Management, reverse auctions are characterised by real-time e-auctions that are conducted online and happen between pre-qualified suppliers and single buyers. There is a competition between the suppliers to present their bids to buyers. They clearly define the quantity, delivery, quality and design specifications while presenting the bid. (Management, 2003, p. 4)
3. Fitting Reverse Auction into the Procurement Strategy
The reverse auction is generally employed in the following situations (Procurement Transformation Division, 2014):
- Negotiation of price in a general tender process
- Used for obtaining suppliers' quotes on a contract of common use or a panel well established
- In a two-stage process for filling tender, it is used in the second stage wherein other criteria value is already considered. The only consideration left is that of the price.
E-RAs fit into an organisation’s sourcing process as part of the sourcing strategy as well as negotiating and awarding business.
In research done by CAP’s, it was found that buying firms are growing rapidly and E-Ras are very strategically used in this appropriate area. The sourcing of goods and services is facilitated easily with characteristics such as:
- Standardisation is high
- Spending volume is sufficient.
- A good number of suppliers who are qualified can replicate them (here the buying company competitors are regarded as competitors)
- Switching costs are low.
The research, however, indicates the contrast. It shows that in cases where the relationships of the supplier are critical, they do not employ E-RA type sourcing. (CAPS Research, 2003)
The E-RA bidding is not applicable to all the products that an organisation buys. The services or items that are exempted from it are:
- The ones where the attributes are not clearly defined and which result in an ambiguous interpretation of the specifications by the suppliers
- The ones which are strategic items and are differentiated highly
- The one where the switching cost is so high that it becomes unacceptable to change the supplier
- The one where it is not profitable to hold an item because the cost becomes too high and the value or volume to too low
The question arises about the attributes that are important for service or goods that are biddable. Generally, they comprise (CAPS Research, 2003) :
- The items with crystal clear specifications in terms of conditions, terms and designs, and which can be easily be priced such that a supplier can charge when supplying to the buyer
- In cases where the chance of the market price is sufficiently lower than the current price and that increases the cost-effectiveness of the E-RA
- Acceptable cost of switching
- A marketplace where the competitive and qualified suppliers are an insufficient number
- One of the most important factors is the willingness of suppliers, who are qualified, to take part in the E-RA.
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