Reverse Auctions Are On The Rise Again … Is This A Good Thing?

CAPS Research just released a snapshot on the Use of Reverse Auctions which illustrated that more organizations are using reverse auctions and that their usage is on the rise at almost half of the companies currently using them. Specifically:

Are you currently using reverse auctions? Yes 50%
  No 50%
(Yes) Has the amount of spend through reverse auctions over the last two years …? Increased 46%
  Decreased 26%
  Stabilized 28%
(Yes) Do you plan to continue using reverse auctions? Yes 100%
  No 0%
(No) Have you previously used reverse auctions? Yes 46%
  No 54%
(No) Do you expect to start using reverse auctions within the next two years? Yes 29%
  No 71%

In short, 50% of companies are using reverse auctions, 15% more plan to start in the near future (29% of 50%), and close to 25% of companies (46% of 50%) are pushing more spend through reverse auctions than they used to. So, not only have reverse auctions received a passing grade (65% of companies are giving them the thumbs up), but they are being graded on a steadily rising curve. Believe it or not, this scares me.

While I will gladly admit that they have their place (especially for small or non-strategic commodity buys where the savings associated with another, more strategic, type of sourcing event would not outweigh the manpower, system, and opportunity costs to support the more strategic sourcing event), they are not the savings panacea that some vendors and consultants make them out to be. While it’s true that it’s rare not to see a landed cost reduction the first time you run a reverse auction if you run the event properly, it’s also a rarity to see repeated cost reductions on the same category in future reverse auctions (unless the production cost or market value of the commodity in question is falling at the time) because all a reverse auction does (when successful) is take fat out of the supplier’s margin. (And if you don’t pre-qualify your suppliers, it might also take quality out too!)

The fact of the matter is that real, sustainable, cost reduction comes from product and supply chain optimization and innovation. That’s why strategic sourcing decision optimization not only delivers a cost reduction of 12% above and beyond what a reverse auction delivers but also delivers cost reductions on repeated applications.

In other words, you should continue to use reverse auctions where they make sense, but only where they make sense. Otherwise, like many of the early adopters who had high hopes, you might be very disappointed.

And yes, for maximum benefit you should combine their application with decision optimization, which I’ll address on Monday with Part VII on The Role of Optimization in Strategic Sourcing.

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