Context
The most common application of reverse auctions is for E-procurement, a strategy used by purchasing and supply management organizations to reduce spending as part of strategic sourcing and other supply management activities.
In a typical auction the seller offers an item which they wish to sell. Potential buyers are then free to bid on the item until the time period expires. The buyer with the highest offer wins the right to purchase the item for the price determined at the end of the auction.
A reverse auction is different in that a single buyer offers a contract out for bidding (by either using specialized software or through an online marketplace). Multiple sellers are then able to offer bids on the contract. As the auction progresses, the price decreases as sellers compete to offer lower bids than their competitors whilst still meeting all of the specifications of the original contract. As the buyer is able to see all of the sellers' offers, and to choose any of them, a reverse auction is not a true auction.
Bidding performed in real-time via the Internet results in a dynamic, competitive process. This helps achieve rapid downward price pressure that is not normally attainable using traditional static paper-based bidding processes.
The buyer may award the contract to the seller who bid the lowest price. Or, a buyer may award contracts to suppliers who bid higher prices depending on the buyer's specific needs with regard to quality, lead-time, capacity, or other value-adding capabilities.
The use of Optimization software has become popular since 2002 to help buyers determine which supplier is likely to provide the best value in providing goods or services. The software includes relevant buyer and seller business data, including constraints.
Reverse auctions are used to fill both large and small value contracts for both public sector 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 they have even been used to source reverse auction providers. The first time this occurred was in August 2001, when America West Airlines (now US Airways) used FreeMarkets software and awarded the contract to MaterialNet.
In 2003, researchers claimed an average of 5% of total corporate spending was sourced using reverse auctions.
Read more about this topic: Reverse Auction
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