The 20% solution?: a case study on the efficacy of reverse auctions

Abstract

In the late 1990’s, online B2B auctions were proliferating and were being adopted in a wide variety of circumstances. The reverse auction tool has evolved to take advantage of internet technology, and online auctions have been identified by many large organisations as a tool to achieve procurement savings. As companies adopt this technology, it is important for them to understand the implications of this type of procurement. This paper adopts a case study approach to identify the issues for both buyers and sellers using this type of B2B application. It describes the conduct of a reverse auction, from the preliminary steps all the way to the final awarding of the contract. The case study is viewed through the eyes of a supplier, undertaking a reverse auction for the first time. The main outcomes show that the auction vendor and buyer were major winners – with the supplier expending considerable time and effort to participate in the auction, only to realise that the auction places cost above all other factors in awarding the contract. The importance of cost over service delivery, customer support and buyer‐supplier relationship was the “bitter pill” the supplier had to swallow.

The Impact of Online Reverse Auction Design on Buyer–Supplier Relationships

“…Although price savings are also a process outcome, they are a good indicator of event dynamics because they capture the magnitude of price variation. Stein, Hawking, and Wyld's (2003) recent case study describes the reaction of an incumbent supplier in an event. The supplier conducted research to identify the existing contract value ($1.6 million) and identified a bottom-line position (a margin of 12%).…”

“…For example, Smeltzer and Carr (2003) conduct 41 depth interviews to identify the potential benefits and risks of online reverse auctions for buyers and suppliers. Mabert and Skeels (2002) and Stein, Hawking, and Wyld (2003) rely on an in-depth case study to accomplish this. Haruvy, Rao, and Unver (2005) examine the conditions under which the buyer or supplier benefits from online reverse auctions from an analytical perspective, finding that differentiated suppliers in price-based auctions are economically worse off than buyers and that this relationship reverses when auctions that incorporate nonprice features are used.…”

“…With regard to online reverse auctions, there are numerous studies that describe the online reverse auction process from preliminary steps to contract awards (see, e.g., Emiliani 2000; Mabert and Skeels 2002;Stein, Hawking, and Wyld 2003). Jap (2002) provides a conceptual overview of the differences between online reverse auctions in the marketplace and both physical auctions and those of the theoretical literature, as well as the conditions, structure, and evaluation of online reverse auctions.…”

Centralized construction contractor selection considering past performance of contractors: a case of India

“…The use of the criterion of the lowest bid to finally select a contractor has been criticized by many (e.g., Hatush and Skitmore 1998;Stein et al 2003;Al-Reshaid and Kartam 2005). According to them, a contractor, quoting a very low bid price and ultimately winning the auction, may find the quoted amount totally untenable.…”

Regulating B2B online reverse auctions through voluntary codes of conduct

“…Widespread use of this tool by buyers is of great concern among incumbent suppliers due to potential negative outcomes such as margin erosion and loss of sales volume to other suppliers (B2BRC, 2003;Berning & Flanagan, 2003;Emiliani, 2000;Emiliani & Stec, 2002a;Kobe, 2001;Leonard, 2004;MHEDA, 2003;Stein, Hawking, & Wyld, 2003;Tulder & Mol, 2002). Additional incumbent supplier concerns relate to whether or not buyers and the bmarket makersQ-companies that provide reverse auction servicesgive adequate consideration to other important factors such as quality, service, technology, or production capabilities (Bartholomew, 2001(Bartholomew, , 2002Brindley, 2000) or total costs (Emiliani & Stec, 2001, 2005b.…”