Reverse auctions realise "few benefits" - study
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Online reverse auctions between buyers and suppliers of non-commodity goods, have failed to provide promised cost savings, according to a new study.
15 November 2002 Online business-to-business auctions are not providing cost savings for buyers or suppliers, according to a new study by the Center for Lean Business Management (CLBM), a US-based business consultancy.
In a study of aerospace industry suppliers engaged in online 'reverse auctions', the CLBM concluded that suppliers realise "few benefits, if any, from participating in online reverse auctions".
Reverse auctions pit suppliers against each other in online events that usually last about an hour. The suppliers involved bid for a buyer's contract by progressively reducing the price at which they will sell their product or service.
The reverse auction model is the core value proposition of auction and e-marketplace vendors or 'market makers', such as Moai Technologies and FreeMarkets. However, according to the CLBM study, "the claims made by the market makers regarding the benefits to suppliers are at best inaccurate and at worst false".
This is particularly the case for auctions of highly engineered products, rather than commodities - according to the report: "... buyers using this new tool will likely encounter unfavourable outcomes when applying the reverse auction tool to buyer-designed and specified engineered components."
For example, buyers may be able to drive the price of goods down through a reverse auction, but 70% of suppliers that took part in the study said that they actively seek opportunities to charge their customers higher prices for other goods and services.
Suppliers also report that they view online auctions as a "divisive purchasing tool that damages relationships with long-time customers," according to the CLBM.
Such negative views from suppliers could indeed be the biggest threat to the e-marketplace and auction technology model. As more suppliers drop out of online auctions due to bad experiences, buyers will no longer be able to achieve the savings expected from the technology as there will be a smaller pool of suppliers willing to sell through these channels, argues the CLBM.
According to the report, the only way to improve supplier involvement and acceptance of auction and e-marketplace technology will be to increase collaboration between buyers and suppliers, such as providing suppliers with detailed product design information and demand forecasts.
However, only 9% of the suppliers involved in the CLBM study were dedicated to using e-marketplace technologies to streamline their relationships with buyers and increase productivity and competitiveness.
