WHITEPAPER

STRATEGIC SOURCING
THROUGH REVERSE AUCTIONS
Strategic Sourcing Through Reverse Auctions J une 2001
TABLE OF CONTENTS
UNDERSTANDING REVERSE AUCTIONS.................................................................................................1
HOW A REVERSE AUCTION WORKS...............................................................................................................1
THE BENEFITS OFFERED BY REVERSE AUCTIONS..............................................................................3
BUYER CONSIDERATIONS .............................................................................................................................4
GETTING STARTED WITH REVERSE AUCTIONS....................................................................................5
CHOOSING THE RIGHT AUCTION SOLUTION ...................................................................................................5
CHOOSING THE RIGHT AUCTION PARTNER ....................................................................................................6
IN CONCLUSION..........................................................................................................................................7
ABOUT PURCHASEPRO.............................................................................................................................8

Strategic Sourcing Through Reverse Auctions 1 J une 2001
s a buyer, wouldnt you like to get the best
deal possible when you purchase products
and services, have suppliers compete for
your business, and discover the optimum terms the
market is willing to offer? Thanks to reverse
auctions, your purchasing organization can control
costs, gain efficiencies and maximize the total value
received from purchases.
At every company, the purchasing function is central
to controlling costs and extracting value. With
corporate spending exceeding $20 trillion annually,
representing about 80 percent of revenues, its easy to
understand why purchasing organizations have
tremendous influence over the cost of doing business
and, ultimately, profit levels. If a purchasing
organization can secure even modestly better deals
in price alone or total value the savings go straight
to the bottom line. Industry experts figure that even a
5 to 10 percent savings in purchasing costs increases
profit margins by 28 to 50 percent.
The concept of trying to get great deals on purchases
is not new for purchasing organizations. For years,
they have sought ways to source products and
services more strategically. But their efforts have met
with mixed success, as cumbersome, time-consuming
and largely manual sourcing processes have held
them back. With few tools to help them discover new
sources of supply and no easy way to encourage
competitive bidding among potential suppliers,
purchasing organizations have struggled to take their
strategic sourcing efforts to the next level.
Thankfully, times are changing. New tools and
technologies can help you modernize the sourcing
process and make it more competitive. One of the
most accessible and affordable solutions, offering
some of the most dramatic returns, is the reverse
auction.
Reverse auctions are bidding events sponsored by a
buyer. The buyer identifies a pool of qualified
suppliers, shares information about its product or
service needs, and hosts an auction where suppliers
make dynamic bids to win the business. Using an
auction platform, buyers and suppliers connect,
exchange information, negotiate and participate in
auctions, all in real time.
Whats more, reverse auctions are within the reach of
every buying organization thanks to a variety of cost-
effective, hosted auction solutions that are intuitive,
easy to implement and require no technical expertise.
Moreover, they produce phenomenal returns
averaging up to 17 percent savings on the cost of
goods purchased. Thats why Forrester Research
expects more than $52 billion in goods and services to
be sold through business-to-business auctions by 2002.
This report makes the case for incorporating reverse
auctions into your sourcing strategy. It gives an
overview of a reverse auction, highlights the benefits
you can expect to receive by using reverse auctions,
discusses important buyer considerations, and closes
with guidelines for choosing auction solutions and
partners.
UNDERSTANDING REVERSE
AUCTIONS
Everyone is familiar with the auction concept.
Sothebys and Christies are well-known establish-
ments that auction luxury items to well-heeled
buyers. eBay is a successful example of an online,
consumer-oriented auction site.
Auctions are timed bidding events. One party puts
something of value up for bid and other parties
compete, in a fixed window of time, for the right to
buy the auctioned item. Each bidder tries to edge out
the others with an offer sufficiently attractive to win,
yet calculated to cost the bidder the least.
There are several types of auctions. The best known
is the forward auction where a seller puts up goods or
services for sale. Flip the roles of the participants and
you have a reverse auction, where the buyer initiates
the auction, publicizing its desire to buy specific
goods or services from a community of suppliers.
Whereas in a forward auction, bid prices go up over
time, in a reverse auction bids get progressively
lower, allowing buyers to discover of a commoditys
true market elasticity, empowering them to make
more informed and strategic buying decisions.
How a Reverse Auction Works
A reverse auction starts with a buyer seeking to
purchase products or services from a group of
suppliers. But before the auction gets under way, the
buyer must decide which suppliers to invite to the
auction and inform them in detail of the products or
services it wishes to buy. The buyer must also choose
the attributes of the auction itself the mechanics as
A
Strategic Sourcing Through Reverse Auctions 2 J une 2001
Progress of Bids Over Time
Forward and Reverse Auctions
Bids in a Reverse Auction
Bids in a Forward Auction
8:00 8:30 9:00 9:30 10:00 10:30 11:00
100
90
80
70
60
50
40
30
20
10
0
P
R
I
C
E
TIME
to how the auction will be run and circulate these
rules to the bidders. These rules may address any of
the following:
Privacy
The identity of the buyer and/or suppliers may be
kept secret.
Sealed/unsealed bids
Bid contents may or may not be published for all
to see. If bids are sealed, bidders learn only the
relative rank of their bid.
Time windows
Start and end times are established, with buyers
often reserving the right to extend the window in
competitive bidding situations.
Starting bid
Buyers usually establish a starting bid, which is
the base for opening bids.
Bid formats
Bids are submitted in a set format to enable
quick evaluation and comparison.
Notification
The time period for evaluating bids after the
auction closes and the method of notifying the
winner may vary.
The day of the auction, participants connect to the
event via the Internet. The auction is made secure
with authorization features such as user IDs and
passwords. During the event, all parties monitor the
proceedings with real-time graphical access.
PurchasePro e-Source Auction Process

Strategic Sourcing Through Reverse Auctions 3 J une 2001
The auction starts with suppliers submitting opening
bids. The auction platform evaluates each bid using a
pre-determined mathematical formula and, in open
bidding situations, shows the relative position of each
bid. Although many auctions have one-dimensional
bids bids that focus on price alone they may
also support multi-dimensional and multi-criteria bids
that cover a variety of objective and subjective
factors. For example, a buyer may want a supplier
with a track record of on-time delivery or the
financial stability to perform over a long-term
contract. According to a Purchasing Magazine
article, the four most important criteria to purchasing
managers when sourcing goods and services are
quality, price, delivery and lead-time requirements.
To evaluate complex bids accurately, the auction
platform relies on a weighted mathematical formula.
Formulas must be applied in real time during the
auction so that suppliers receive immediate feedback
on the rank of their bid and can formulate their next
bid strategy.
After a round of bids are evaluated, successive
rounds of bidding follow, with suppliers either
submitting more competitive bids or dropping out of
the contest. As the auction proceeds, bidding drops to
progressively lower levels as suppliers compete with
each other to win the business. The auction usually
remains open until one supplier outbids the others by
quoting a price that is so low, or offering a set of
terms so valuable, that no other supplier is willing to
compete. The auction terminates at its pre-set time,
unless extended by the buyer, and the winner is
notified. The buyer and winning supplier then
finalize any terms and conditions and ink the deal.
THE BENEFITS OFFERED BY
REVERSE AUCTIONS
For a nominal investment, every company can
benefit from using reverse auctions. The most
tangible benefits come from reducing the cost and
enhancing the value of purchased goods and
services. Secondary benefits come from automating
parts of the sourcing process and increasing the
efficiency of the purchasing organization. Making
reverse auctions even more attractive are the hosted
solutions offered by service providers such as
PurchasePro. These solutions allow companies to
sponsor auctions for a reasonable cost, with little
set-up effort and no maintenance or support
burdens. By keeping the cost of entry low,
PurchasePro keeps its customers ROI high.
Quality
Price
Delivery
Lead-times
Financial Stability
Manufacturing Capability
Technical / Design Service
Geographic Location
EDI / e-Commerce Capability
Source: Purchasing Magazine, J une 1999
Sourcing Criteria
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Customer Services / Support
Strategic Sourcing Through Reverse Auctions 4 J une 2001
Here are some of the benefits you can expect to
receive by using reverse auctions.
Reduced Costs
Using an auction format putting business out
to bid and allowing suppliers to compete against
each other allows a company to discover and
obtain the most favorable market prices.
Automating the sourcing process reduces
administrative overhead and the cost of finding
and securing products and services.
Aggregating and directing corporate purchasing
through auctions gives a company greater
leverage with suppliers and a stronger position
for negotiating favorable financial contract
terms, including unit price, delivery charges,
insurance and other types of fees.
Maximized Value
Auction formats elicit the best offers from
suppliers, maximizing the overall value received
by buyers where value is measured by all
contract terms not just financial ones
including quality, lead times, location and
customer service.
Auctions allow buyers to discover new and
optimal sources of supply beyond their existing
supplier base.
Auction analysis and decision-making tools help
buyers evaluate competing bids based on
weighted criteria that include both hard (price)
and soft (quality) attributes to discern the most
value-maximizing offer.
Increased Efficiency
Auctions streamline the sourcing process, greatly
decreasing the time it takes to accomplish a single
sourcing cycle and freeing staff for other work.
Automating the sourcing process by eliminating
manual processes and paperwork reduces the
opportunity for human errors, inaccuracies and
reworks.
Sophisticated analysis and decision-making tools
allow buyers to evaluate and compare competing
bids in multiple dimensions and based on
multiple criteria more quickly, easily and
effectively.
Buyer Considerations
For a buyer, conducting a reverse auction is not
complex, especially if an experienced auction
provider lends a hand. Integrating reverse auctions
into a well-conceived and comprehensive sourcing
strategy is the real challenge. Most organizations are
already performing many of the tasks involved in a
reverse auction, but are using manual rather than
automated techniques and achieving only a fraction
of the results. Adopting reverse auctions gives
companies an opportunity to add best practices to
their sourcing process, making it more formal,
consistent and repeatable. When approaching reverse
auctions, important buyer considerations include the
following:
Type of spend
Buyers can use reverse auctions to purchase both
direct and indirect materials. The type of item
sourced directly affects the effort spent
qualifying suppliers and preparing requests for
quotes (RFQs). For vital products or services,
buyers must investigate and weigh subjective
factors such as supplier reliability, dependability
and financial stability. Complicated or
specialized products require complex and
lengthy RFQs. In contrast, sourcing ordinary,
widely available goods usually takes less
preparatory time.
Supplier identification and recruitment
Buyers can spend a significant amount of time
identifying and screening eligible suppliers to
participate in the auction. The pool may include
the buyers existing vendors but invariably will
include others to encourage competitive bidding.
Buyers screen suppliers using multiple criteria,
such as financial stability, location and product
quality, and decide how to weigh these criteria
when evaluating bids. Buyers typically research
and screen suppliers using requests for
information (RFIs) and surveys.
Developing RFQs
Buyers convey their product or service needs in
detail to suppliers to enable them to formulate
accurate and responsive bids. These specifications
are contained within RFQs, comprehensive
documents that precisely define the product or
service desired and any required criteria or
performance attributes. Developing an RFQ may
Strategic Sourcing Through Reverse Auctions 5 J une 2001
require substantial intra-company coordination,
and companies are likely to need collaboration
tools (often supplied by the auction provider) to
facilitate RFQ development. Buyers should also
hold extensive question-and-answer periods with
suppliers to clarify any information.
Incorporating auction metrics into sourcing
strategy
Auctions yield valuable insight into how the
market evaluates, prices and packages products
and services. Buyers can use this information to
fine tune their sourcing strategies and package
and time their purchases in ways that will elicit
favorable terms from suppliers. For example,
timing an auction at the end of a quarter may
induce suppliers trying to meet quotas to offer
better deals. In the same way, if product reject
rates are high, a buyer may need to give more
weight to product quality in future auctions.
GETTING STARTED WITH
REVERSE AUCTIONS
Getting started with reverse auctions is easy thanks to
hosted, yet customizable, auction platforms like the
PurchasePro e-Source solution. Depending on the
breadth and depth of contacts the service provider has
with the supplier community, a buyer might have
instant access to a global marketplace of suppliers
simply by signing on with the right provider.
If you join forces with a competent service provider,
preparing for and running a reverse auction is
straightforward. Researching and qualifying suppliers
and preparing RFQs take time, but these are tasks
that you already perform. Automating them will
alleviate much of your burden. Service providers
offer tools and templates to automate these tasks and
may also provide consulting assistance for many
facets of the sourcing cycle.
Choosing the Right Auction Solution
Reverse auction platforms have a full range of
features. Security features to ensure authorized access
and data integrity and privacy are common. Other
features, such as collaboration tools, RFQ templates
and bid evaluation formulas vary among solutions.
Nevertheless, every auction platform must have
attributes that encourage usage, make it easy for
suppliers to participate, and permit auctions, bids and
other events to complete successfully. Key
characteristics for success include the following:
Easy to use
Buyers can concentrate on honing their sourcing
strategies rather than mastering platform and
technology details.
Intuitive
Buyers and suppliers can quickly come up to
speed and realize benefits.
Flexible
The tool accommodates a variety of auction
formats and bidding situations.
Minimal set-up required
IT resources are not needed, and buyers and
sellers need no technical training.
Interaction with other commercial forums
Buyers have access to a broader choice of
suppliers as desired.
Cost-effective
The price justifies the investment in a reverse
auction solution.
Choice between full-serve or self-serve
Decide whether you will administer the solution
in-house or use the vendor services.
Besides these general characteristics, auction
platforms must have features that allow buyers and
suppliers to perform all of the tasks involved in a
typical sourcing/reverse auction cycle. Look for an
auction platform that offers the following minimum
set of capabilities:
Research and qualify suppliers
Locate eligible suppliers through yellow pages
and listings, screen product/service offerings,
issue and review RFIs and perform surveys.
Administer the auction
Determine the rules and mechanics of the auction,
create groups of supplier participants, notify
suppliers and interact with the auction host.
Strategic Sourcing Through Reverse Auctions 6 J une 2001
Create and distribute RFQs
Develop comprehensive RFQ documents
(optionally from templates), including
attachments, and collaborate with employees and
external partners.
Conduct the auction
Run an auction, monitor and evaluate bids,
terminate or extend the auction and notify the
winning bidder.
Support complex bidding
Support bids along multiple dimensions and
criteria, whether objective or subjective, and
transform bid information into adjusted
evaluation prices using customizable
mathematical algorithms, including net present
value calculations, weighted average calculations
and currency conversions.
Perform post-auction negotiations
Negotiate and finalize terms with the winning
bidder.
Make purchases
Generate purchase orders and send them
electronically to winning suppliers with a robust,
integrated e-procurement solution. While the
strategic sourcing tool drives down and locks in
the best price and terms, the e-procurement tool
ensures these are contract compliant and
accessible to appropriate buyers within the
enterprise.
Manage settlement and logistics
Coordinate and finalize shipping and logistics
terms and manage payment and collection.
Report and track
Track and analyze the performance of auctions
and suppliers through decision-making and
analysis tools.
Choosing the Right Auction Partner
The party that provides and powers the auction
platform will have great influence over your success
in using it. It is important to consider the qualities of
the service provider as part of your research. As more
auction providers and sourcing partners emerge, it is
critical to perform your own diligence to assess the
viability of your partner and its solution. Essential
characteristics for an auction provider include the
following:
Proven track record
A partner with a history of prosperous
engagements and satisfied customers is likely to
repeat its successes and perform well in the
future.
Successful business model
A partner with a winning business model will be
financially successful and able to weather market
fluctuations.
Marketplace connections
Reverse auctions derive their greatest benefits
when bidding is competitive, which requires
participation by a number of suppliers. A partner
that sponsors other forums, such as global
marketplaces or exchanges, can give buyers
access to a large, built-in pool of potential
bidders.
Supplier outreach
Recruiting and training suppliers to participate in
online events takes effort. Partners that already
sponsor online forums are adept at these tasks.
They can help buyers research and screen
suppliers and create RFIs and templates. In turn,
they can help train and support suppliers through
tutorials and practice auction sessions.
RFQ/RFI development
By leveraging the sourcing experience gained
from its client base, a partner can help jumpstart
buyers efforts at developing RFQs, RFIs and
other sourcing documentation through consulting
assistance and templates.
Full auction administration
Buyers should be free to focus on sourcing
strategies, not the details of running an auction.
Partners must be skilled at administering
auctions on behalf of buyers, developing and
circulating auction rules, educating participants
through Q&A sessions, operating and monitoring
the auction and dealing with any service and
support issues.
Strategic Sourcing Through Reverse Auctions 7 J une 2001
Broad value-added services
To extract the full benefits of their sourcing
solution, buyers should look for a partner that
offers a range of value-added services, from
wireless support to financial services, settlement,
logistics and more.
Superior customer service
Partners that provide responsive and proactive
customer service resolve issues quickly, disperse
needed information in a timely manner and
ensure the success of each participant in using
the auction platform.
IN CONCLUSION
As a buyer, how can you know for certain that you
are getting a good deal when purchasing products and
services? Theres only one way to have suppliers
compete for your business. Competition is the key to
unlocking favorable deals, discovering and
capitalizing on the best terms the market is willing to
offer. Competition is exactly what reverse auctions
provide.
Reverse auctions deserve a place in any well-
developed sourcing strategy. They allow companies
to minimize the cost of goods and services while
maximizing the value received. Now within the grasp
of every company, thanks to cost-effective, hosted
auction platforms, reverse auctions are producing
spectacular returns an average 17 percent cost
savings on purchases. Thats why companies like
Owens Corning, Lexmark, Lennox International,
Unisys and Arch Coal are using reverse auctions
today. Thats why you should be using them too.
Strategic Sourcing Through Reverse Auctions 8 J une 2001
ABOUT PURCHASEPRO
PurchasePro (NASDAQ: PPRO), a leader in
business-to-business e-commerce, operates the
PurchasePro Global Marketplace, encompassing
more than 155,000 businesses and powering
hundreds of private label marketplaces with its highly
scalable, browser-based e-commerce engine.
PurchasePros solutions enable businesses of all sizes
to easily buy and sell products and services, and
compete more effectively by enhancing sales
opportunities, reducing procurement costs and greatly
increasing employee productivity. PurchasePro
responds to the most common corporate needs with
the following products: e-Source for online auctions
and strategic sourcing, e-Procurement for corporate
procurement needs, v-Distributor for online
distributors, and e-MarketMaker for Internet market
makers.
PurchasePro has developed strategic sales and
marketing relationships with industry leaders
including America Online, Computer Associates,
Honeywell, Gateway, Hilton, Office Depot, and
Sprint. The company provides extensive support and
training programs. For information, call toll free at
(888) 830-4600 or in Las Vegas at (702) 316-7000 or
visit www.purchasepro.com.



PurchasePro, Inc.
7690 W. Cheyenne Ave.
Las Vegas, NV 89129
Tel: (888) 830-4600, 702.316.7000
FAX: 702.316.7001
www.purchasepro.com