Dive Brief:

• The use of reverse auctions, in which potential suppliers attempt to underbid each other to win a contract, are on the rise, according to a report from Scout RFP, a digital sourcing and reverse auctions solutions platform, emailed to Supply Chain Dive. A Purchasing’s 2003 Annual Benchmark E-Sourcing Survey, referenced in the document, showed 15% of respondents reported using reverse auctions. Today, that figure has grown to well over 50%. Reverse auctions have become particularly popular among Millennial and GenX procurement professionals, according to Scout's survey of 100 procurement officers. 95% of procurement leaders age 30 to 44 use reverse auctions for a variety of reasons, namely cost savings, reduced negotiation times and price testing the market.
• The report also cites a study published by the Institute for Supply Management which says firms that use reverse auctions receive 20-30 times more bids compared to traditional RFP methods and experience average price reductions between 12% and 24%.
• An additional factor in the reverse auction's popularity increase is the rise in third-party tech platforms that allow companies to set up and run them in a matter of minutes as opposed to over multiple days or even weeks. "A reverse auction takes about 10 to 15 minutes to set up and about 20 minutes to manage," Brish Bhan Vaidya, global sourcing leader at Uber, told Supply Chain Dive. "[Previously] negotiations could take one or two weeks to complete."

Dive Insight:

"In the 1990s and 2000s, reverse auctions fell out of favor," Jean Johnson, senior director of Global Procurement at LogMeIn, said in the Scout report. "Many suppliers artificially overcut their prices to compete in the auction process. Today, reverse auctions are worthy of a second look. Modern reverse auction platforms provide an enriched auction approach that improves both the procurement and supplier experience."

This "enrichment" comes in the form of supplier visibility, collaboration and qualification tools that can come with these new platforms, offering companies more insight into suppliers than just their bid amount.

According to Deloitte's Global Chief Procurement Officer Survey for 2018, 78% of procurement leaders said their number one priority was to reduce costs. While the reverse auction can have the benefit of locking in lower prices upfront, the time saved can also be crucial.

"By expediting the negotiation process, category managers are freed up to focus on strategic sourcing and analysis. The entire bidding process can be concluded in under an hour," the Scout report said.

Reverse auctions have been particularly powerful for Uber, especially for price testing the market. "Being a young organization, most of the buys that we are doing, especially for the first time, we are not aware of what is the benchmark price for a service or a particular product," Vaidya said. "Because if you start talking to the suppliers, they will all give you different prices ... So I started using the reverse auction for that."

He said because of Uber's short procurement cycle times, usually less than a month, he has used the tactic of running multiple reverse auctions simultaneously to tackle multiple sourcing priorities at once.

Vaidya said this has helped Uber identify and cultivate strong relationships with suppliers around the world, particularly in Asia, where it can be more difficult to schedule in-person supplier qualification and negotiations with limited partners on the ground.

While reverse auctions are increasing in popularity among some demographics, in Scout's global survey of 100 procurement professionals, 62% said they are "only good for certain scenarios." The report notes auctions work best in a buyer's market where suppliers will be naturally more willing to sell their services and compete. The report says firms should make sure they have "clearly defined specifications that don’t vary much between suppliers, such as certain commodities and simple services," as that will help weed out supplier bids that don't meet specifications. 

While cloud platforms and integration with other supply chain management software has made reverse auctions easier to run, firms can run into trouble if they choose suppliers based on the lowest bid alone. The report advises companies to use the auction as a step in the price testing and supplier qualification processes, remembering that the cheapest supplier can come at a cost to overall quality.