Auctions have been around for centuries. A practical application of auctions in procurement today is commonly called a reverse auction, where the buyer offers its products or services to a group of sellers who then bid on them. In this current format, a reverse auction relies heavily on electronic commerce. Both the buyer and sellers are connected electronically—a high-end application is the use of real-time bidding software that acts as an electronic auction house. Other applications use electronic billboards and websites, but all applications require both the buyer and seller to invest in a consistent and shared electronic technology.
Unless there is extensive prequalification of the suppliers and their capabilities, these electronic auctions have two limitations:
- First, the product or service that is offered by the buyer must be readily understood, definable, and referenced. In most cases, it is limited to products and services that can be defined by an external standard—for example, underwriters, generic specifications, or a commodity standard. These products or services are often called "catalog-able"—that is, a reference can be made to some generally acceptable catalog. Products or services that have specifications that are complex, collaborative, jointly developed, quality or performance based, or that are subcomponents that are contained within a critical higher assembly are often too difficult to be bid on electronically in an auction process.
- Second, price is usually the sole or primary determinant of the winning bidder. Issues of quality, capability, sustainability, and long-term supplier relationships are difficult to be considered in the selection process.
In a September 2002 meeting of over 130 executive members of the Drug, Chemical, and Allied Trades (DCAT) group and the Institute for Supply Management (ISM) Pharmaceutical Forum that included direct suppliers to the ISM Pharmaceutical companies, the topic of auctions was discussed. A senior executive described his recent experiences with reverse auctions.
- Experience 1—The buyer used the auction to get a new price from the existing supplier and ignored the lowest bid from a new supplier.
- Experience 2—The buyer did not understand the usage and the support rendered by the existing supplier. While the buyer got a lower price from a new supplier, the buyer’s company now uses 400 percent more of the material.
- Experience 3—The buyer provided incomplete specifications and refused to respond to bidders’ requests for clarification.
Clearly, the experiences cited above violated the spirit of fair bidding.
At the same symposium, the CPOs from major companies agreed that reverse auctions can be a valuable tool; note that it is a tool—not a solution. It must be used properly and ethically. It can provide valuable market information and is an effective way to identify new suppliers. However, the group concluded only select items are appropriate for e-auctions. The issue of confidentiality of both the buyers’ and existing supplier’s intellectual property should be protected. Awarding a contract solely to the low-cost bidder can compromise long-term relationships with suppliers and does not adequately address issues of service and quality.
Auctions can be an effective part of the procurement professional’s toolbox, but the rules of procurement professionalism and integrity, dedication to quality, and supply consistency and sustainability cannot be suspended by using e-auctions or reverse auction techniques.
What have been your experiences—positive and negative—with e-auctions or reverse auctions?