What are the differences between forward and reverse auctions?

Answer 1

adapted from Wikipedia, the free encyclopedia

Reverse auction:

Reverse auction is a tool used by many purchasing and supply management organizations for spend management, as part of strategic sourcing and overall supply management activities. In a typical auction, the seller puts an item up for sale. Multiple buyers bid for the item and depending on the nature of the auction (English or Dutch), and one or more of the highest bidders buy the goods at a price determined at the conclusion of the bidding. In a reverse auction, a buyer contracts with a market maker to help make the necessary preparations to conduct the reverse auction. This includes: finding new suppliers, training new and incumbent suppliers, organizing the auction, managing the auction event, and providing auction data to buyers to facilitate decision making. The market maker, on behalf of the buyer, issues a request for quotation (RFQ) to purchase a particular item or group of items (called a "lot"). At the designated day and time, several suppliers, typically 5-20, log on to the auction site and will input several quotes over a 30-90 minute period. These quotes reflect the prices at which they are willing to supply the requested good or service. Quoting performed in real-time via the internet results in dynamic bidding. This helps achieve rapid downward price pressure that is not normally attainable using traditional static 3-quote paper-based bidding processes. The prices that buyers obtain in the reverse auction reflect the narrow market which it created at the moment in time when the auction is held. Thus, it is possible that better value - i.e. lower prices, as well as better quality, delivery performance, technical capabilities, etc. - could be obtained from suppliers not engaged in the bidding or by other means such as collaborative cost management and joint process improvement. The buyer may award contracts to the supplier who bid the lowest price. Or, a buyer could award contracts to suppliers who bid higher prices depending upon the buyer's specific needs with regards to quality, lead-time, capacity, or other value-adding capabilities. However, buyers frequently award contracts to incumbent (i.e. current) suppliers, even if prices are higher than the lowest bids, because the switching costs to move work to a new supplier are higher than the potential savings that can be realized. This outcome, while very attractive to buyers, is often strongly criticized by both new and incumbent suppliers. An example of this can be seen at a B2B site Printmehappy.com. The use of Optimization software has become popular since about 2002 to help buyers determine which supplier to source the work to. It includes relevant buyer and seller business data, including constraints. Reverse auctions are used to fill both large and small value contracts for public 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 has even been used to source reverse auction providers. The first time this occurred was in August of 2001, by America West Airlines (now US Airways) using FreeMarkets software. The majority of purchasing spend subject to reverse auctions over the years has been in the category of buyer-designed goods, followed by services, and then commodity items. Today, an average of 5% of total corporate spending is sourced using reverse auctions. This figure was higher in past years, indicating the goods and services to which reverse auctions can be successfully applied is limited [1]. Buyers, sellers, and market makers should adhere to auction rules and industry Codes of Conduct for the use of reverse auctions, if they exist. Problems arise when one or more parties fail to conform to auction rules. This can range from simple cries of "foul" to litigation. Buyers should not assume that reverse auctions will, in every case, deliver savings - either on a unit price or total cost basis. Reverse auction savings can range from negative (i.e. it costs the buyer money) to neutral (i.e. no savings) to positive savings (average gross of 10-20%, but net savings is typically half or less). A true representation of savings can not be achieved if unit price-focused purchasing metrics such as "purchase price variance," "purchase order variance," or "material price variance" are used. Instead, total cost savings must be calculated, inclusive of direct and indirect losses associated with using reverse actions, implementing reverse auction results, subsequent procurement activity, and related activities such as customer returns, defective goods or services, warranty expense, litigation, etc. Suppliers are advised to determine if a value proposition exists for them that would warrant their participation. Some have characterized reverse auctions as a technologically-assisted form of zero-sum power-based bargaining, or as "going in reverse" with respect to developing buyer-seller relationships, collaboration, and purchasing process improvement. Reverse auctions have also been criticized as "bid shopping" - when a buyer uses a supplier's bid to obtain lower prices from other suppliers. Suppliers seeking to avoid reverse auctions can create unique intellectual property, expand the value propositions for its customers by creating new products and services, or seek to extend or improve collaborative activities with their customers. Reverse auctions used in industrial business-to-business procurement and spend management activities remain controversial, both within buying organizations, among suppliers, and among the academics who study them. As such, buyers considering the use of reverse auctions should carefully evaluate all available information, both favorable and unfavorable, to ensure that informed business decisions are made. Forward auction are electronic auctions, which can be used by sellers to sell their items to many potential buyers. Sellers and buyers can be individuals, organizations etc. Items are commonly placed at a special site for auction (e.g. eBay.com). Buyers can continuously bid for the items they are interested in. Eventually the highest bidder wins the item. Two types of forward auctions are common. The first is a liquidate auction. Here buyers seek to obtain the lowest price for an item they are interested in. The second type is a marketing efficiency auction. Buyers wish to obtain a unique item. from www.is4profit.com

* Application service providers (ASPs), like auction4biz.net, offer platforms that allow you to run your own auctions, either as supported or stand alone services. * Sector-specific electronic marketplace, which usually include online auction functionality. Covisint (automobiles) and Exostar (aerospace) are two examples. * Many e-procurement modules from the major e-Commerce application vendors, like CommerceOne, Oracle and mySAP, allow users to run reverse auctions. * Specialist e-sourcing providers (Goodex, Freemarkets etc) offer software and service solutions for running reverse auctions. Registration requirements, fees and services vary considerably, but there is usually a transaction fee of at least 2% charged to sellers. Whether you buy, sell or simply observe, the information gained from monitoring shifts in supply and demand can be extremely useful.