Reverse Auctions: A Tool With No Mechanic
Reverse auctions have turned the once-secretive, sealed-bid process for procuring goods and services into an open bidding war – which appears to be to the advantage of the buyer. Under this arrangement, the buyer contracts with a third party that issues a request for quotations from suppliers. At a predetermined day and time, suppliers log into an auction site and input price quotes, competing for the buyer’s business primarily on the basis of who will agree to the lowest price.
A reverse auction may seem like a perfect solution. The dynamic bidding gives the appearance of downward price pressure. It has cut costs for some commodities at many companies. In response many organizations have enacted corporate policies that favor, or even mandate, this e-procurement tactic.
However, when it comes to energy, a reverse auction without a strong strategy can backﬁre, often resulting in higher prices and contractual terms that are notin the buyer’s best interests. Reverse auctions have not proven as successful for energy because they cannot answer two primary questions essential for success: Is now the right time to go to market? How do I know that the lowest bid price is a good one?
While a reverse auction with a good strategy can yield acceptable results, buyers can get off track when they confuse the tool as “the strategy”. The claims by companies running the auctions seem compelling: more supplier competition, lower transaction costs and enhanced pricing transparency. However, in the energy sector, these claims cannot be substantiated. There are more effective means (including other methods of e-procurement) that ensure end-users get the best possible energy procurement outcome.
A reverse auction is simply one tool. You need a complete toolbox. More importantly, you need the most skilled mechanic utilizing everything in the the toolbox to achieve your goals of lowest cost, favorable contract terms and budget predictability for your energy spend. A reverse auction is a tactic, not a replacement for a robust energy strategy.
Before you go too far down the reverse auction road, take time to explore the ﬁve key reasons that this tactic is no replacement for a comprehensive energy procurement strategy.
- Yields to Weak Supplier Competition
- Navigating Curves Takes Expert Timing
- Low Price Visibility
- Narrowed Choices Ahead
- Nothing Replaces a Good Sense of Direction
This paper will provide information that can empower purchasing professionals to be more effective in their use of reverse auctions as appropriate and understand the associated limitations in the overall energy management plan.
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