Are the temptations of online reverse auctions appropriate for your business?

Abstract

PurposeThe purpose of the paper is to explore the benefits of online reverse auctions for both buyers and suppliers in contrast to the negative implications for procurement process. This paper also aims to provide a framework for managers determining if participation in online reverse auctions is appropriate for their business.Design/methodology/approachInformation was gathered from numerous sources including surveys from both buyers and suppliers in a multitude of industries in order to create a comprehensive analysis of benefits and shortcomings of online reverse auctions. Additional research could be pursued by conducting a detailed cost analysis of buyers who have adopted online reverse auctions. A thorough analysis of unit cost and total cost changes amongst various industries could provide benchmark data for companies contemplating entering the reverse auction arena.FindingsThe research analysis finds a strong temptation for buyers to participate in online reverse auctions: price reductions. However, buyers should approach online reverse auctions with caution as total cost savings can be misleading and participation may result in damaged relationships with suppliers. This can be seen in the results portrayed in the buyer and supplier industry survey which shows that buyers are more keen to participate in online reverse auctions in order to gain advantage of the lower prices and global potential of suppliers, whereas some buyers are keen on making a strong relationship with existing suppliers through direct contact.Research limitations/implicationsBuyers' determination to use online reverse auctions relies on product specifications, supplier relationships, the current supply and demand environment, indirect costs, and several other factors which will vary for each product and for each buyer. Therefore, an all‐encompassing decision model cannot be presented to accommodate each scenario. However it can be seen that the industrial survey to the buyers and the suppliers has been an effective tool in bridging the gap between the decision model and the factors that vary between each buyer.Practical implicationsThis paper provides managers a framework for determining if online reverse auctions are appropriate for their business. In practice, additional company specific information can be applied to the decision making model.Originality/valueThis paper includes a comprehensive decision framework specifically for buyers as well as an abbreviated decision model for suppliers.