There are many negotiation strategies that a buyer can use in order to obtain large discounts when purchasing goods or contracting services within a company, but the doubt always remains in the minds of supply professionals whether the effort made was enough to have the best price and on the other hand the satisfaction that, if the negotiation had not been made, the purchase price would be well above the final result.

There are some theories of strategic sourcing, which say that the true price of a purchase can only be obtained through a Reverse Auction. This modality refers to the dynamic bid carried out in a defined period of time, where bidders adjust their offer downwards with respect to that price variable that can be improved.

Recommendations for a Reverse Auction

We are going to detail some basic recommendations that can maximize the exercise of a reverse auction:

• No todas las categorías son idóneas para realizar una subasta inversa
• La mejor herramienta para realizar una revisión global acerca de la posibilidad de realizar subastas inversas en una categoría es la Matriz de Kraljic.

The first thing to rule out is whether it corresponds to the bottleneck quadrant (Low Impact – High Complexity) or also called Critical; Some characteristics of this quadrant are the shortage of suppliers, which restricts the margins of maneuver with respect to supply or service provision, and what is sought to the greatest extent is to reduce dependence on single suppliers.

Therefore, here we find the first characteristic of Reverse Auctions: good supply capacity of the market with a multiplicity of bidders.

Los cuadrantes para las subastas

The Routines quadrant (Low Impact – Low Complexity) has this initial characteristic of multiple providers; However, since the impact is smaller, the objective is mainly aimed at the speed and satisfaction of internal users rather than cost reduction. In this case, framework contracts or electronic catalogs may be a better strategy than executing reverse auctions; It is not totally excluded, but it is not the priority.

 The second characteristic of Reverse Auctions is to generate a significant cost reduction or at least know the real price to be able to adjust budgets if necessary.

In the strategic quadrant (High Impact – High Complexity) it also breaks with the first characteristic of multiplicity of suppliers and is therefore ruled out. In these categories, strategic alliances, early links, long-term value focus and vertical integration are sought.

Finally, the ideal quadrant to execute Reverse Auctions is that of leveraged or “commodities” (High Impact – Low Complexity), since they are the categories that represent the high percentage of profits for the company with many available suppliers. This facilitates the change of suppliers, standardized product or service quality, and there is also a power relationship between the buyer and the supplier due to the high value of the purchase and the different market alternatives.

Categorías para las subastas

If the category has not yet been identified, the ideal is to be able to verify recurring purchases and contracts of considerable amounts in the annual supply plan in order to subsequently carry out the analysis of the category. However, it is very common not to have detailed planning and at this point the tool to use is the purchase history . Although it is far from being the perfect input, it can provide clues about the identification of the categories to carry out the reverse auction.

Once the category has been identified, it is very important to understand the context and knowledge of all aspects of the market , in order to determine the best conditions to define the rules of the reverse auction.

The topic is quite extensive because it involves category management the subject of other blogs, but as basic recommendations at this point , the execution of RFx is an excellent tool to determine the rules of the reverse auction.

The reality of this type of auction is that to a large extent it is not very attractive to bidders, due to its very nature and because the result is a reduction in profit margins. In the RFP (Request for Prices) it is recommended to request clarifying in the context that this will lead to a reverse auction with the aim of being transparent and obtaining equal conditions for the participants.

Under normal conditions, the prices offered in this phase are quite high because the bidders try to set a base entry price much higher than the real prices. At this point it is very important to convene supply committees and be able to design a comfortable entry price that allows bidders to bid, but not so high that the budget is exceeded.

Establish rules

Within the rules there are two important parameters to define: the decrement rules and the extension of deadlines depending on the last bid. With respect to the decrement rules, each minimum step is defined, in terms of price, that the bidder can discount in each bid. It is very important to move with small percentages that encourage the bidder to bid more times, seeking to achieve first place in the auction.

The technological enabler must be robust enough to allow for online updates by bidders and allow for last-minute bid deadline extensions. There is a detail regarding the development of the reverse auction and that is to be able to show each bidder its position only if it is in the first places (at most the third) in order to degenerate the need to bid to enter the first places. .

After carrying out a reverse auction exercise and achieving the objectives by the organization, the satisfaction of the duty fulfilled on the part of the buyer is indescribable. It should be a prerequisite in the selection processes of buyers who have executed a reverse auction for each year of experience, this exercise gives a special degree of knowledge that allows knowing the true price of a category.