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What are the strategies of Reverse auction?
Reverse auctions are real-time price competitions between pre-qualified suppliers to win a customer's business. These auctions occur over the Internet using specialized software. Bidders, who could be either distributors or suppliers to distributors, submit progressively lower priced bids during the scheduled auction time.
Unlike a traditional auction in which prices are bid higher, the winner of a reverse auction is the company that submits the lowest bid. Reverse Auction are not just limited to commodity products. |
Distribution executives should recognize the diversity of products currently being sourced successfully using reverse auctions Reverse auctions magnifies the fundamental tension within all buyer-supplier relationships. The distributor's revenue is ultimately the customer's cost.
All else being equal, price reductions to the buyer translate into lower profit margins for a distributor. Unsurprisingly, our research interviews revealed intense disdain for reverse auctions by wholesale distribution executives. Many distributors do not become aware of changes in purchasing behavior until their customers have reached the sourcing and contracting stage. Anticipating strategic sourcing practices by your customers will be crucial early warnings of reverse auctions, vendor reductions or national account contract programs.
This can also help with the development of strategies to counter these initiatives. Reverse auctions put large volumes up for grabs, making it tempting to offer major price concessions without truly thinking through the implications for the customer. Accurate knowledge can give distributors the power to predict when a reverse auction will be unsuccessful. Reverse auctions undermine relationships with distribution suppliers. Research has shown that distributors who participate in a reverse auction feel exploited by the process and trust the buyer much less after the process is complete.
Suppliers perceive reverse auctions to be a tool used solely to pressure incumbent suppliers to lower price. One study found that incumbent suppliers kept the business following a Reverse Auction, but at a lower price. Price reductions may not be sustainable over time because suppliers may underbid to keep or get the business. A distributor who wins a reverse auction may be unable to support the business profitably without reducing service levels, as was the case for the service center mentioned above.
As customers shop for the lowest price and highest-value provider, products will become increasingly commodities while customer service will become the true differentiator. But not all customers will want the same level of service with the same price sensitivity. Distributors have an opportunity to become suppliers of customized and differentiated relationships that provide products with related services instead of merely delivering acceptable goods. Distributors can leverage existing relationships, build on traditional competencies, offer new value and get compensated appropriately for the value provided. Distributors must act now to reinvent their supplier relationships.
Online auctions will force distributors to cut back on sales people and request more drop shipments to customers, undercutting the fundamental distribution role desired by manufacturers. If distributors do not take the lead, manufacturers will simply take more and more business direct. The converting industry has been devastated with price decreases, so one of best weapons to maintain profitability is to know customers' economics. Spend time consolidating vast amounts of information on only best customers, and then turn economic and customer data into specific pricing strategies and sales contract negotiations.
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