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ARCUS e-Auctions cost reductions


...and your best price is?

Simplistically, the question '...and your best price is?' represents the primary function of e-Negotiations or reverse auctions. It is a tactical price negotiation tool - with benefits.

Sometimes called a Reverse Auction, e-Auction or a Buyers Auction, e-Negotiations have one critical difference. We all understand auctions as a negotiation method that identifies the leading bid as the winner at its conclusion. This is known as a "live award". Whilst e-Negotiations use the same principles and tools, there is no live award.

e-Negotiations enable prospective suppliers to compete live, through the Internet. During e-Negotiations, which typically last less than an hour, prices decline as suppliers continuously improve their offers in an effort to reach the leading position.

e-Negotiations in no way diminish the importance or role of a contracts' qualitative criteria (see 'Quality' section on left hand menu). Nor do they change your processes. You still have to go out to tender, you still have to evaluate the qualitative criteria and produce a shortlist. The shortlist of prequalified suppliers then becomes the list of invited bidders to the e-Negotiations.

Procurement thuggery

The suggestion that e-Negotiations are not just a rude and callous way to beat suppliers into submission and possible bankruptcy is often met with a healthy dose of scepticism. This is not an uncommon point of view and some early reverse auctions received justifiable notoriety through their indiscriminate use and live awards. As a result a lot has been learned over the past 10 years and today the reality of professionally managed e-Negotiations is very different.

Certainly cost reduction is the glistening prize that attracts initial attention. With touted savings averaging between 10% and 20% better than that achievable by mere mortals alone, and individual e-Negotiations achieving 30, 40 and 50%, who cares about anything else? Fortunately, most procurement professionals care about a lot more including value for money, quality, supplier relationships and contract success. e-Negotiations coexist very comfortably in this environment.

Over the past 5 years, the use of e-Negotiations and reverse auctions in North America and Europe has sky rocketed in both the private and public sectors to the extent that it is now widely accepted as a standard procurement tool. CAPS Researchreports that 56%* of medium to large US organisations use the technique regularly.

* Reprinted with permission from the publishers, Institute for Supply Management and W. P. Carey School of Business at Arizona State University.

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