Two Stepping the Reverse Auction

One of the reasons that reverse auctions have gotten a bad label in some quarters is because many companies have come to rely on them almost exclusively as their only negotiation tool. I can't tell you how rich I'd be if I had a buck for every time a procurement exec has told me "if we have three suppliers, my team is running an auction". But both this label and this approach do not do the power -- or the appropriateness -- of reverse auctions or online competitive negotiations justice.

Indeed, reverse auctions can generate huge, implementable savings when companies deploy them properly (but certainly not exclusively). That's why I like what a short piece over at Supply Chain Digest has to say. The article talks about how some organizations are "two stepping" the reverse auction model. As such, "In this approach, an on-line auction is still used, but not with the promise of contract award at the end of the process. Rather, some number of the lowest bidders is then engaged for a more formal negotiation process, where the buying organization can gain more information about cost and better assess the more complex attributes.”

I’ve known many companies -- and consultants -- to deploy this approach over the years. Now, a two-step process will never generate the level of savings that a reverse auction will when the lowest bidder will always be awarded the business -- as stated in the RFQ -- but I've personally been a part of teams which have used this approach to help yield significant savings in complex sourcing categories where a combination of competition and collaboration makes the most sense. Put another way, sometimes it's best to put away the solo hammer, because companies can often generate the best total cost savings by using both the carrot and the stick together.

- Jason Busch