There is, perhaps, a useful time and a place for reverse auctions, the purchasing strategy that uses an open online bidding process to drive the price of specified goods down to the lowest possible level. Studies show that they make most sense when businesses (including those in retailing or warehouse/distribution) are buying easily definable items such as maintenance supplies or front office PCs, or when manufacturers are buying commodity raw materials (plastic, chemicals, steel).
Material handling equipment is another matter. I believe reverse auctions are detrimental to our business relationships long-term and, in many cases, not good for the buyer/end-user.
For starters, pricing typically becomes a nightmare. We’re dealing with an engineered, custom-applied product, so the concern regarding “apples to apples” within the bidding process is legitimate. Specifications that are provided aren’t always exact, or comparable. An irrational focus on price only leads to unfair pressure that results in non-existent margins. When it comes to a vendor’s most critical, long-standing customers, there is the temptation to work below cost. This is not a strategy for sustainable business health.
For the auction-throwing buyer, it’s often far from smooth sailing after he’s gotten his lowest price. This is because smart, survival-savvy sellers may seek “wiggle room” within the contract and look to cut corners; no boon for quality initiatives, to be sure.
Buyers can also be left in the lurch. In one instance, a purchase order for plastic containers was issued to a rock-bottom bidder who hadn’t built in an allowance for the fluctuating cost of the plastic materials. He won the contract, but when materials costs went up, he was simply forced to cancel at the point when work was to begin. We assume the buyer’s project manager and related purchasing personnel had an “uplifting” couple of weeks trying to re-award the contract and get started. Is it worth the small additional cost savings to jeopardize an entire product production schedule?
Other shortcomings to reverse online auctions are the use of unilateral terms and conditions for dissimilar products and buying situations, inadequate RFQs with inaccurate quantities, and lack of needed preparation time for vendors to prepare thorough quotations.
The most disheartening aspect may be the destruction of a productive, idea-sharing relationship between end-user and vendor. Reverse auctions tend to foster adversarial relationships. There will be time-wasting conversations (and worse yet, paperwork) for every little thing.
An even more disturbing aspect is this: Some buyers allow marginally qualified vendors into the process just to drive the price down so they can demand it from the qualified vendor (including the incumbent), whom they really want to work with. Again, it’s just not an “apples to apples” comparison in terms of total cost and value received.
We must work hard to keep our material handling products from becoming a commodity. Value-added technology and service will help us overcome the success and shallow short-term benefit of reverse online auctions. Dedication and innovation are indeed the price of admission to today’s manufacturing and distribution world of business, but giving away our product shouldn’t be part of the equation.
|Meet the Author
C. David Weaver is vice president of sales & engineering at SpaceRak, Division of EWCO, in Marysville, Michigan.