A reverse auction is a type of auction An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder. In economic theory, an auction may refer to any mechanism or set of trading rules for exchange in which the roles of buyers and sellers are reversed. In an ordinary auction (also known as a forward auction), buyers compete to obtain a good or service, and the price typically increases over time. In a reverse auction, sellers compete to obtain business, and prices typically decrease over time.
In business, the term most commonly refers for a specific type of auction process (also called procurement auction, e-auction, sourcing event, e-sourcing or eRA) used in industrial business-to-business procurement.
In consumer auctions, the term is often used to refer to sales process that share some characteristics with auctions, but are not necessarily auctions.
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Introduction
This article focuses on the "e-procurement" definition of the term, as this is the most commonly found application of reverse auctions and the term "Reverse Auction" has become synonymous for most people with this type of auction.
Reverse auction is a strategy used by many purchasing and supply management organizations for spend management Spend management is the way in which companies control and optimize the money they spend. It involves cutting operating and other costs associated with doing business. These costs typically show up as "operating costs" or SG&A costs, but can also be found in other areas and in other members of the supply chain, as part of strategic sourcing Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. In a production environment, it is often considered one component of supply chain management. Strategic sourcing techniques are also applied to non traditional area such as services or capital and overall supply management activities.
In a typical auction, the seller puts an item up for sale. Multiple buyers bid for the item, and one or more of the highest bidders buy the goods at a price determined at the conclusion of the bidding.
In a reverse auction, a buyer contracts with a market maker to help make the necessary preparations to conduct the reverse auction. This includes: finding new suppliers, training new and incumbent suppliers, organizing the auction, managing the auction event, and providing auction data to buyers to facilitate decision making.
The market maker, on behalf of the buyer, issues a request for quotation (RFQ) to purchase a particular item or group of items (called a "lot"). At the designated day and time, several suppliers, typically 5-20, log on to the auction site and will input several quotes over a 30-90 minute period. These quotes reflect the prices at which they are willing to supply the requested good or service.
Quoting performed in real-time via the Internet results in dynamic bidding. This helps achieve rapid downward price pressure that is not normally attainable using traditional static 3-quote paper-based bidding processes.
The prices that buyers obtain in the reverse auction reflect the narrow market which it created at the moment in time when the auction is held. Thus, it is possible that better value - i.e. lower prices, as well as better quality, delivery performance, technical capabilities, etc. - could be obtained from suppliers not engaged in the bidding or by other means such as collaborative cost management and joint process improvement.
The buyer may award contracts to the supplier who bid the lowest price. Or, a buyer could award contracts to suppliers who bid higher prices depending upon the buyer's specific needs with regards to quality, lead-time, capacity, or other value-adding capabilities. However, buyers frequently award contracts to incumbent (i.e. current) suppliers, even if prices are higher than the lowest bids, because the switching costs to move work to a new supplier are higher than the potential savings that can be realized. This outcome, while very attractive to buyers, is often strongly criticized by both new and incumbent suppliers.
The use of Optimization In mathematics and computer science, optimization, or mathematical programming, refers to choosing the best element from some set of available alternatives software has become popular since about 2002 to help buyers determine which supplier to source the work to. It includes relevant buyer and seller business data, including constraints.
Reverse auctions are used to fill both large and small value contracts for public and private commercial organizations. In addition to items traditionally thought of as commodities, reverse auctions are also used to source buyer-designed goods and services, and has even been used to source reverse auction providers. The first time this occurred was in August 2001, by America West Airlines (now US Airways US Airways, Inc., an operating unit of US Airways Group, is the fifth largest airline in the United States) using FreeMarkets software and won by MaterialNet.
The majority of purchasing spend subject to reverse auctions over the years has been in the category of buyer-designed goods, followed by services, and then commodity items. Today, an average of 5% of total corporate spending is sourced using reverse auctions. This figure was higher in past years, indicating that the goods and services to which reverse auctions can be successfully applied is limited.[1]
History
Reverse auctions gained popularity in the late 1990s as a result of the emergence of Internet-based online auction tools. Pioneer of online reverse auctions, FreeMarkets, was founded in 1995 by former McKinsey consultant and General Electric The General Electric Company, or GE , is an American multinational conglomerate corporation incorporated in the State of New York. In 2010, Forbes ranked GE as the world's second largest company, based on a formula that compared the total sales, profits, assets, and market value of several multinational companies. The company has 304,000 employees executive Glen Meakem Glen Meakem is a venture capitalist and American conservative radio host after he failed to find internal backing for the idea of a reverse auction division at GE The General Electric Company, or GE , is an American multinational conglomerate corporation incorporated in the State of New York. In 2010, Forbes ranked GE as the world's second largest company, based on a formula that compared the total sales, profits, assets, and market value of several multinational companies. The company has 304,000 employees. Meakem hired McKinsey McKinsey & Company is a global management consulting firm that focuses on solving issues of concern to senior management. McKinsey serves as an adviser to the world’s leading businesses, governments, and institutions. It is widely recognized as a leader and one of the most prestigious firms in the management consulting industry. It has been colleague Sam Kinney who developed much of the intellectual property behind FreeMarkets. Headquartered in Pittsburgh Pittsburgh , Pennsylvania, located in the United States, is the second-largest city in the state and is the county seat of Allegheny County. Its population was 334,563 at the 2000 census; by 2009, it was estimated to have fallen to 311,647. The population of the seven-county metropolitan area was 2,354,957 in 2009. Downtown Pittsburgh retains, PA, FreeMarkets built teams of "market makers" and "commodity managers" to manage the process of running the online tender process and set up market operations to manage auctions on a global basis.
The company's growth was aided greatly by the hype of the dot-com boom era. FreeMarkets customers included BP BP plc is a global energy company headquartered in London, United Kingdom. It is the third largest energy company and the fourth largest company in the world. The name "BP" derives from the initials of one of the company's former legal names, British Petroleum. A multinational oil company , BP is the United Kingdom's largest corporation, plc, United Technologies, Visteon Visteon is one of the world's largest suppliers of automotive parts. The company formed in 1997 and spun off from the Ford Motor Company in 2000. In 2005, Visteon moved to new headquarters in Van Buren Township, Michigan. Visteon is to the Ford Motor Company as Delphi is to General Motors and Denso is to Toyota, H.J. Heinz H. J. Heinz Company , commonly known as Heinz and famous for its "57 Varieties" slogan and its ketchup, is an American food company with world headquarters in Pittsburgh, Pennsylvania, Phelps Dodge Phelps Dodge Corporation was an American mining company founded in 1834 by Anson Greene Phelps and William E. Dodge. On March 19, 2007, it was acquired by Freeport-McMoRan and now operates under the name Freeport-McMoRan Copper & Gold Inc, Exxon Mobil The Exxon Mobil Corporation, or ExxonMobil, is an American multinational oil and gas corporation. It is a direct descendant of John D. Rockefeller's Standard Oil company, and was formed on November 30, 1999, by the merger of Exxon and Mobil. Its headquarters are located in Irving, Texas, and Royal Dutch Shell Royal Dutch Shell plc, commonly known simply as Shell, is a multinational petroleum company of Dutch and British origins. One of the six "supermajors" , Shell was listed as the world's eighth largest corporation for 2010 by Forbes. The company's headquarters are in The Hague, Netherlands, with its registered office at the Shell Centre in, to name a few. Dozens of competing start-up reverse auction service providers and established companies such as General Motors General Motors Company, also known as GM, is a United States-based automaker with headquarters in Detroit, Michigan. GM manufactures cars and trucks in 34 countries, recently employed 244,500 people around the world, and sells and services vehicles in some 140 countries. By sales, GM ranked as the largest US automaker and the world's second (an early FreeMarkets customer) and SAP SAP AG is a German software development and consulting corporation, which provides enterprise software applications and support to businesses of all sizes globally. Headquartered in Walldorf, Germany, with regional offices around the world, SAP is the largest software enterprise in Europe and the fourth largest software enterprise in the world as, rushed to join the reverse auction marketspace.
Although FreeMarkets survived the winding down of the dot-com boom, by the early 2000s it was apparent that its business model was really like an old-economy consulting firm with some sophisticated proprietary software. Online reverse auctions started to become mainstream and the prices that FreeMarkets had commanded for its services dropped significantly. This led to a consolidation of the reverse auction service marketplace. In January 2004, Ariba Ariba is a software and information technology services company located in Sunnyvale, California announced that it purchased FreeMarkets for $493 million.[2]
Fortune magazine published an article in March 2000 describing the early days of reverse auctions.[3]
In the past few years mobile reverse auction have evolved. Unlike business-to-business Business-to-business describes commerce transactions between businesses, such as between a manufacturer and a wholesaler, or between a wholesaler and a retailer. Contrasting terms are business-to-consumer (B2C) and business-to-government (B2G) (B2B) reverse auctions, mobile reverse auctions are business-to-consumer An example of a B2C transaction would be a person buying a pair of shoes from a retailer. The transactions that led to the shoes being available for purchase, that is the purchase of the leather, laces, rubber, etc. as well as the sale of the shoe from the shoemaker to the retailer would be considered transactions (B2C) and allow consumers to bid on products for pennies. The lowest unique bid wins.
Very recently business-to-consumer An example of a B2C transaction would be a person buying a pair of shoes from a retailer. The transactions that led to the shoes being available for purchase, that is the purchase of the leather, laces, rubber, etc. as well as the sale of the shoe from the shoemaker to the retailer would be considered transactions (B2C) auctions with a twist have started to evolve - they are more similar to the original business-to-business Business-to-business describes commerce transactions between businesses, such as between a manufacturer and a wholesaler, or between a wholesaler and a retailer. Contrasting terms are business-to-consumer (B2C) and business-to-government (B2G) (B2B) auctions than mobile reverse auctions in that they offer consumers the option of placing a specification before retailers or resellers and allowing them to publicly bid for their business.
In Congressional testimony on the 2008 proposed legislative package to use federal funds to buy toxic assets from troubled financial firms, Federal Reserve chairman Ben Bernanke proposed that a reverse auction could be used to price the assets.
Issues and Opportunities
Buyers, sellers, and market makers should adhere to auction rules and industry codes of conduct for the use of reverse auctions, if they exist. Problems arise when one or more parties fail to conform to auction rules. This can range from simple cries of "foul" to litigation.
Buyers should not assume that reverse auctions will, in every case, deliver savings - either on a unit price or total cost basis. Reverse auction savings can range from negative (i.e. it costs the buyer money) to neutral (i.e. no savings) to positive savings (average gross of 10-20%, but net savings is typically half or less).
A true representation of savings can not be achieved if unit price-focused purchasing metrics such as "purchase price variance," "purchase order variance," or "material price variance" are used. Instead, total cost savings must be calculated, inclusive of direct and indirect losses associated with using reverse actions, implementing reverse auction results, subsequent procurement activity, and related activities such as customer returns, defective goods or services, warranty expense, litigation, etc.
Suppliers are advised to determine if a value proposition exists for them that would warrant their participation.
Some have characterized reverse auctions as a technologically-assisted form of zero-sum power-based bargaining, or as "going in reverse" with respect to developing buyer-seller relationships, collaboration, and purchasing process improvement. Reverse auctions have also been criticized as "bid shopping" - when a buyer uses a supplier's bid to obtain lower prices from other suppliers.
Suppliers seeking to avoid reverse auctions can create unique intellectual property, expand the value propositions for its customers by creating new products and services, or seek to extend or improve collaborative activities with their customers.
Reverse auctions used in industrial business-to-business procurement and spend management activities remain controversial, both within buying organizations, among suppliers, and among the academics who study them. As such, buyers considering the use of reverse auctions should carefully evaluate all available information, both favorable and unfavorable, to ensure that informed business decisions are made.
Current State
Reverse auctions (also becoming known as service auctions) are undergoing a resurgence at present (9/2008), as evidenced by a number of service auction sites for freelancers that are doing a significant volume of business both in number of projects and amount of money spent. There are narrow scope sites, such as those specializing in programming, technical writing and other professional, desk-based work or in home improvement and construction work.[citation needed]
Keys to success as a supplier in reverse auctions are: (a) Thorough preparation – it's essential to know your costs, your suppliers, and your market to the greatest extent possible – tiny details can make the difference between winning and losing, and between being profitable or not; (b) Reverse auctions should be largely kept to the supply of commodity products rather than proprietary ones; and (c) Having a strong, competent bidder leading your effort at the time of the auction, with clear guidelines on when to bid and when to fold is essential.[4]
See also
- Tendering Procurement is the acquisition of appropriate goods and/or services at the best possible total cost of ownership to meet the needs of the purchaser in terms of quality and quantity, time, and location. Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing exposure to
- Request for Quotation A request for quotation is a standard business process whose purpose is to invite suppliers into a bidding process to bid on specific products or services
- Request For Tender As a consequence of the scale and complexity of the tender process the majority of RFT’s are published by government sector agencies at the local, state and federal levels. Companies in the infrastructure and utilities sectors may also periodically publish RFT’s
- Request For Information A request for information is a standard business process whose purpose is to collect written information about the capabilities of various suppliers. Normally it follows a format that can be used for comparative purposes
- Request For Proposal A request for proposal is an early stage in a procurement process, issuing an invitation for suppliers, often through a bidding process, to submit a proposal on a specific commodity or service. The RFP process brings structure to the procurement decision and allows the risks and benefits to be identified clearly upfront
- Optimization (mathematics) In mathematics and computer science, optimization, or mathematical programming, refers to choosing the best element from some set of available alternatives
- Operations research Operational research, also known as operations research, is an interdisciplinary branch of applied mathematics and formal science that uses advanced analytical methods such as mathematical modeling, statistical analysis, and mathematical optimization to arrive at optimal or near-optimal solutions to complex decision-making problems. It is often
References
- ^ Beall, S., Carter, C., Carter, P., Germer, T., Hendrick, T., Jap, S., Kaufmann, L., Maciejewski, D., Monczka, R., and Peterson, K., (2003), “The Role of Reverse Auctions in Strategic Sourcing, CAPS Research Report,” CAPS Research, Tempe, AZ
- ^ Ariba to buy FreeMarkets for $493 million | Tech News on ZDNet
- ^ Going, Going, Gone! The B2B Tool That Really Is Changing The World WEB AUCTIONS ARE REVOLUTIONIZING THE $5 TRILLION MARKET FOR INDUSTRIAL PARTS. IN THE PROCESS THEY'RE WIRING THE RUST BELT FOR GOOD. - March 20, 2000
- ^ Chafkin, Max (2007-05-01). "How to Compete in a Reverse Auction". Inc.. http://www.inc.com/magazine/20070501/salesmarketing-pricing.html.
Further reading
- Bounds G., "Toyota Supplier Development", in Cases in Quality, G. Bounds, Editor, R.D. Irwin Co., Chicago, IL, 1996, pp. 3–25
- Bounds G., Shaw, A., and Gillard, J., "Partnering the Honda Way", in Cases in Quality, G. Bounds, Editor, R.D. Irwin Co., Chicago, IL, 1996, pp. 26–56
- Dyer, J. and Nobeoka, K., "Creating and Managing a High-Performance Knowledge Sharing Network: The Toyota Case," Strategic Management Journal, Vol. 21, 2000, pp. 345–367
- Liker, J. and Choi, T., “Building Deep Supplier Relationships,” Harvard Business Review, Vol. 82, No. 12, December 2004, pp. 104–113
- Womack, J., Jones, D., and Roos, D., The Machine that Changed the World, Rawson Associates, New York, NY, 1990, Chapter 6
- Jap, Sandy D. (2007), The Impact of Online Reverse Auction Design on Buyer-Supplier Relationships, Journal of Marketing, 71(1), 146-50
External links
- Comprehensive reverse auction research from the School of Technology at Central Connecticut State University
- A reverse auction analysis between 2001 and 2008
- Reverse auctions explained simply and graphically
Categories: Supply chain management Categories: Management | Production and manufacturing | Auctioneering Categories: Auctions and trading | Business models | Game theory | Auction theory Categories: Market structure and pricing | Auctioneering
Himalayan Times
Ooltobolee is a ' reverse bidding' weekly auction where one can place bids through SMS during stipulated bidding time. The subscribers of NTC, ...
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hu, 22 Jul 2010 21:18:54 GM
To exercise the full reach of Boocoo's local promotion, the site will offer a Request for Quote (RFQ) for a . reverse auction. . With this, Marsella said, local homeowners can put their house up for auction to have work done on it. ...
Q. Recently I bought a copy of The Winner Stands Alone by Paulo Ceolho from Bombay Airport. This copy of the book is bound in reverse, i.e. when you open the cover page, you see the last and subsequent pages in reverse. So this is collectible item for the interested person. How much would I get if I were to auction this book and where should I do that?
Asked by shalini - Thu May 14 10:45:24 2009 - - 2 Answers - 1 Comments
A. that must be a pirated copy..bind it reverse then..paulo coelho is a great writer
Answered by tell please - Sun May 17 06:54:01 2009
