Despite the frequent misquoting of the work of Dr. Bob Emiliani, which is regularly used to slam reverse auctions, reverse auctions are not evil, and, used on the right category at the right time, they can provide a company with double digit savings.
However, despite the claims that appear to be made in this recent ChainLink Research article on broadening the scope of reverse auctions, they are not salvation either. While it’s true that some companies have proven that e-auctions can generate double-digit savings year after year, this doesn’t mean that your company will see double-digit savings, and, as pointed out in a brief history of optimization, sometimes reverse auctions result in cost increases, which can be significant.
Not only does the comprehensive auction have to be conducted properly to be successful, but the following has to be true if the company is going to see meaningful savings:
- There must be enough serious competition in the market.
There should be three or more suppliers who can meet the company’s need at an acceptable quality level and who are willing to actively (and aggressively) compete for the business.
- There must be true savings potential.
The company must collect index and benchmark data and determine with reasonable certainty that it’s current price is significantly higher than the (expected) average market price.
- The company must be ready and able to commit to the winner.
If not, this will damage the company’s reputation and drive away those suppliers who could (potentially) work with the company to find ways to decrease cost.
If these basic criteria are not met, you will not see (significant) savings, and the auction will likely be a waste of time at best.