Despite the move in recent years towards supplier partnerships, buying firms need at times to make use of competitive procurement strategies for certain purchases. This study examines the impact of reverse auctions on buyer–supplier relationships through six case studies, analysing primarily the supplier perspective through participant interviews. The authors identify that there are potential benefits for both parties in a reverse auction, which can offer tendering and transactional cost advantages. For buyers, it offers a competitive procurement process. The effect on relationships will depend on the extent to which buyers employ the auction as a price weapon, or whether it is used primarily as a process improvement tool.
Increasingly within practitioner circles, the Internet is being recognised as the mechanism which will have the greatest impact on how companies operate in the next decade. Growth of Internet business through fast access to the World Wide Web has been exponential in the last few years, led by the USA, with Europe and the Asia Pacific region following close behind (Boston Consulting, 2000; Forrester, 2000a). Despite some recent, initial casualties in the ‘dot com’ economy, both Business to Consumer (B2C) and Business to Business (B2B) sectors continue to grow, with established industries and market sectors adopting new web-based channels to market. However, it is in the B2B sector that e-commerce has the greatest potential for growth and impact on company performance, through the opportunities it presents for: faster entry into new markets, expansion of global business models, lower transaction costs, and improved supply chain management (Kalakota and Robinson, 1999; Chopra and Van Mieghem, 2000).
Within the B2B sector, many firms have recognised the opportunity to focus on cost reduction opportunities, in particular through the use of electronic procurement (eProcurement) mechanisms. The first eProcurement tools launched were designed to facilitate online search, requisition and ordering, through applications providing access for buyers to suppliers’ electronic catalogues. These applications had little initial impact on supplier relationships as they were set up in co-operation with an established supplier base who provided an electronic product catalogue linked to a price list. The eProcurement model forecast to have greater impact has been the electronic exchange or marketplace (Kaplan and Sawhney, 2000; Yankee Group, 2000). The early eMarketplaces established were either horizontals, such as mro.com offering one-stop shopping for commercial buyers across many industries through access to a wide variety of products, or verticals such as plasticsnet.com, with a specific industry offering designed to attract buyers and sellers from within the same sector. A further mechanism which has grown in use alongside these eMarketplaces has been the online reverse auction.
Online reverse auctions (ORAs) are exactly the way they sound: traditional auctions in Reverse (Smart and Harrison, 2002). Instead of a seller offering a product for sale to the highest bidder, a buyer offers a tender or contract for the supply of specific goods or services. Suppliers compete for the right to the contract by bidding reducing prices, until a final price—the lowest—brings the auction to an end. Reverse auctions are hosted by many eMarketplaces as a means to enhance the site's product offering. Auction software companies have appeared, such as Freemarkets, Moai Technologies and eBreviate, using examples of substantial price reductions achieved in recent auctions, to tempt industrial buyers. Forrester has predicted that the online B2B auction market would reach $52 billion in 2002 ( Forrester Research, 2000b). This has produced a raft of media articles suggesting that huge cost savings are available if companies merely move their tenders into the auction model. Similar speculation has suggested that partnerships and long-term supplier relationships are a thing of the past and that buyers must move to a more aggressive price negotiation model in order to compete.
This paper describes research that was commissioned by a major consulting firm into ORAs carried out in six case examples. It was possible to interview both buyer and seller parties to the auctions, and hence to develop conclusions about the role of ORAs in buyer–supplier relationships.
