Business Horizons (2007) 50, 373384

www.elsevier.com/locate/bushor

Online reverse auctions: Common myths versus

evolving reality
Tobias Schoenherr a,, Vincent A. Mabert b
a

College of Business, Eastern Michigan University, 558 Gary Owen Building, 300 West Michigan Avenue, Ypsilanti,
MI 48197, USA
b
Kelley School of Business, Indiana University, 1309 East 10th Street, Bloomington, IN 47405-1701, USA

KEYWORDS
B2B online reverse
auctions;
Sourcing;
Supply management

Abstract Business-to-Business (B2B) online reverse auctions have become a popular

way to source products and services. However, due to their relative newness and
conflicting reports, several myths and misconceptions about them still exist. This
article investigates the truth behind five of the most common myths associated with
reverse auctions and, based on insights obtained from 30 case study companies,
provides prescriptive evidence and direction for supply managers regarding how not
to fall victim to these myths. As such, we present and offer useful guidance to achieve
the following realities: First, while a lower price is one objective in reverse auctions,
it is often not the most important, and can easily be complemented with non-price
attributes. Second, commodity items are usually easier candidates for reverse
auctions, but non-commodity items can also be bid successfully. Third, reverse
auctions can frequently hurt buyersupplier relationships; however, there are many
ways to prevent this from happening. Fourth, while first-time bidding events
generally result in higher savings, continued cost advantages are possible. And finally,
fifth, even though there is a decline in reverse auction usage, they are here for the
long-run.
2007 Kelley School of Business, Indiana University. All rights reserved.

1. Online reverse auctions: Friend or foe?

First introduced in the mid-1990s, Business-to-Business (B2B) online reverse auctions have become a
popular way to source products and services. Reverse
auctions are dynamic bidding events initiated by a
buying company sending out a request for quotation
(RFQ). Instead of a paper-based bid submission,
suppliers communicate their best offer via an online
Corresponding author.
E-mail addresses: tobias.schoenherr@emich.edu
(T. Schoenherr), mabert@indiana.edu (V.A. Mabert).

system. All interested suppliers are logged into the

system at the same time, and while they cannot see
the identity of their competitors, they are usually
able to see where their current quote stands in
relation to the other bids. Each supplier may submit
multiple bids over the course of the bidding event, in
order to underbid a new lowest quote (thus the term
reverse). This very competitive setting can result in
discovery of the true market price for items included
in the RFQ. Besides this direct price reduction, other
common benefits attributed to reverse auctions
include cycle-time savings for buyers and suppliers,
increased buyer reach, the creation of new markets,

0007-6813/$ - see front matter 2007 Kelley School of Business, Indiana University. All rights reserved.
doi:10.1016/j.bushor.2007.03.003

374
information transparency and price visibility, and
overall increased competitiveness and efficiency of
purchase negotiations (Mabert & Skeels, 2002; Beall
et al., 2003). Disadvantages of reverse auctions
include possible deterioration of trust and commitment to a long-term relationship, resistance from
internal users and suppliers, and more involved upfront preparation, data gathering, and analysis.
Opinions regarding B2B online reverse auctions,
subsequently referred to herein as reverse auctions,
have been mixed. While some buying firms categorically decline to use reverse auctions, based on
either philosophical or ethical principles, other
companies intend to move the majority of their
spend to this new purchasing tool. Similarly, while
some suppliers refuse to participate in these auction
events (even though this position may end a longterm business relationship), other vendors welcome
this new mechanism of introducing themselves to
potential new customers and proving their competitiveness. This division of viewpoints is also evidenced by reports in the popular press and academic
journals. For example, the majority of published
articles indicate the suitability and long-term sustainability of this sourcing tool (e.g., Hur, Hartley, &
Mabert, 2006); however, opponents suggest reverse
auctions promote unethical and retaliatory practices (e.g., Emiliani & Stec, 2005a). These differing
opinions can be attributed to the relative newness of
this sourcing approach, conflicting reports, and/or
the limited experience of companies. Consequently,
both positive and negative misconceptions about
reverse auctions exist, based on this dispute among
practitioners and academics alike. To illustrate, one
common myth suggests that reverse auctions can
only be used for standardized and commodity-type
products like copier paper and light bulbs. While this
may hold true in some instances, it is the way sourcing projects are approached that can make a difference, enabling the use of reverse auctions for
highly-customized and unique products. It is the
objective of this article to demystify, confirm, or
reject five of the most common beliefs about reverse auctions (summarized in Fig. 1) by analyzing
insights obtained from 30 exploratory case studies
(see Box 1). In addition, best practices are identified
regarding how not to become a victim of these
common myths.

2. Common myths versus evolving reality

2.1. Reverse auctions are only about the price
Reverse auctions have received the negative notion
that they are only about price, that they drive the
margin of suppliers toward zero, and that they

T. Schoenherr, V.A. Mabert

Figure 1
auctions.

Common myths associated with online reverse

overshadow other important performance characteristics (Hartley, Lane, & Hong, 2004). It has been
suggested that price be balanced with other
relevant aspects, and that the total cost of
ownership (TCO) be considered (Hur et al., 2006).
The TCO concept stresses that in addition to the
actual purchase price, other costs associated with the
procured items need to be considered, such as ordering, transportation, and receiving cost, usage and
storage cost, and, ultimately, recycling cost (Ellram &
Siferd, 1998). Therefore, the incorporation of multiple non-price attributes, like quality and risk, into the
auction process is recommended (Daly & Nath, 2005),
although this practice has been limited (Talluri &
Ragatz, 2004). In order to explore this notion further,
we analyzed the case study data to identify whether
reverse auctions are indeed only about price, or
whether buying companies also incorporate nonprice attributes into their decision making.
While a few interviewees indicated the belief that
reverse auctions are only about price, and thus only
suitable for select commodities that can be dealt
with in a very transactional fashion, most respondents disagreed with this notion. These individuals
indicated that while reverse auctions are an effective means for driving costs out of the purchasing
process and for discovering or validating the true
market price for a product and/or service (which can
be a reduction of up to 50%), achieving the lowest
price is not the only objective. Consider the
following sentiments of case study participants:
For me, a mere price reduction does not mean a
successful auction. A successful auction [entails] that
we have, besides some type of cost reduction, a good
vendor that can service our needs, quality of service,
and... [a] vendor [that] is willing to work with us in
order to have a relationship with us; for example, using
electronic capabilities to enhance our relationship.
In my opinion, buyers who only focus on price in
reverse auctions will likely not be successful with

Online reverse auctions: Common myths versus evolving reality

Box 1: How the case studies were conducted
The case studies were part of a larger project
investigating the use of bundling in reverse
auctions (Schoenherr, 2005). Although this
project did not focus on reverse auction myths
per se, the data collected provide useful insight
for the purpose of this paper. The case study
data were able to identify, confirm, or reject
myths related to reverse auctions.
The case studies were conducted following
a detailed case study protocol, including semistructured open-ended questions (Yin, 1994).
The sample consisted mostly of firms in the
manufacturing industry (16), but also included
consultancies (4), distributors and providers of
support services (4), petrochemical businesses (2), a retailer (1), an insurance provider
(1), a major financial institution (1), and an
online auction provider (1). Most often, interviews were conducted with purchasing directors, managers responsible for electronic
procurement or strategic purchasing, and procurement tool administrators. Interviews were
held either by phone or in person at the firm's
site, and lasted between 30 and 120 minutes.
Whenever possible, several employees from the
same company were interviewed. With the
permission of the interviewee, conversations
were tape-recorded and detailed transcripts
were prepared.
While the majority of the companies in the
sample actively used reverse auctions as a
way to procure products and/or services,
thirteen firms not using this procurement tool
were also included. Including these non-users
allowed us to identify reasons for not adopting reverse auctions, most of which confirmed
the dominant myths presented in this article.
This way, we assured that the myths, motivated in this article primarily by differing
viewpoints in published studies, still exist in
actuality and prevent companies from implementing reverse auctions. The average number of employees at the firms was 35,000,
with a minimum of 57 and a maximum of
123,000. Sales in 2002 ranged from $5.2
million to $213 billion, with an average of $25
billion for the set of firms.

this tool. You need to know market conditions (such

as competition, economic environment, business
models of suppliers and where they are having too

375

high margins, etc.) and recognize what is realistic

and achievable; i.e., have a benchmark. This can
help build an understanding of whether a cost
reduction can indeed be achieved or whether a cost
increase needs to be taken, in the case when market prices have gone up, for example.
The firms in our study ensured that non-price
aspects were not neglected by conducting extensive
pre-qualifications of the potential bidders, stressing
the importance of bid event preparation. Often,
achieving the lowest price was also not the main
objective. As such, many firms put a disclaimer in
their auction rules, stating that the lowest bid did
not guarantee receipt of business and that a multiattribute weighting system would be used. Other
firms gave their incumbents an advantage and did
not require them to be the lowest bidder to retain
the business. One firm allowed the incumbent bid to
be 20% higher than the lowest bid, and yet another
company decided they would switch only if the new
supplier had a better six-sigma value. If such provisions are given, the buyer should outline very
clearly and explicitly upfront how the business is to
be awarded, in order to provide transparency and
fairness, and to avoid incorrect expectations and
disappointments.
Other non-price related goals pursued with online bidding events include consolidation of the
supply base, changing of conditions under the new
contract (e.g., payment terms, closer integration),
and providing new vendors the chance to get into
the picture and prove themselves. As indicated by
case study respondents, reverse auctions can be
used as the first part of a two-step process:
We use reverse auctions to narrow down the field of
suppliers. We start out with, let's say, 20 in the
auction, and then pick the five most competitive
ones to conduct face-to-face post-bid negotiations.
It is a relief to get the price issues out of the way at
the beginning, to then be able to focus on what is
really important, such as quality, service, and
delivery terms, as well as the relationship, continuous improvement, integration, and other joint
activities. The auction keeps everyone honest, and
we have achieved many process efficiencies with it.
That non-price aspects (e.g., good buyersupplier relationship, quality of items, reliability of delivery) are not lost in a reverse auction setting was
illustrated by an extreme example recounted by one
of the firms included in our case study. This particular company had filed Chapter 11 bankruptcy
and, subsequently, many of their vendors did not
want to continue to do business with them. Despite
this development, the company continued to

376
conduct reverse auctions, and felt confident that
the suppliers they invited to the bidding events
would not leave them as well.
A related myth, that suppliers lose all their margins in reverse auctions, was also disconfirmed. As
recounted by one purchasing professional:
Many times, you hear the online bidding process is
way too competitive and there is no room for supplier
margin[however,] after the auction, conventional
negotiations started, and we were surprised how many
concessions the vendors were still willing to make.
Another popular notion is that reverse auctions
are more likely to result in receipt of poor-quality
products from the chosen candidate. Since reverse
auctions are perceived by most suppliers as being
only about price, they may not want to make real
investments (e.g., continuous quality improvements) in the relationship (Smeltzer & Carr, 2003);
additionally, they may also be less responsive to
correct any quality complaints. This speaks in favor
of commodity items because they are most often
products and/or services with standard quality, or
items for which quality requirements are very easily
fulfilled (see Section 2.2.). At the same time, this
can also result in lower perceived quality of the
sourced items by the buying company.
Generally, this notion was not confirmed in our
interviews, since the production and manufacturing
function usually plays a significant part in RFQ and
specification preparation, as well as in selection of
vendors participating in the auction. This involvement was also stressed when online bidding
events were held by corporate headquarters for
individual plants; the participation of these was
regarded as crucial. In addition, extensive pre-qualifications were conducted before suppliers were
invited to the event. Interestingly, one purchasing
professional commented that performing qualifications beforehand as part of a rigorous process can be
more efficient and fail-safe than offline procurement, in which quality assessments are sometimes
made only during or after negotiations have taken
place.

2.2. Reverse auctions are suitable only for

commodities
The debate regarding whether reverse auctions are
suitable only for commodities, or also for complex
and highly-engineered items, is still ongoing. While
Wagner and Schwab (2004) state that complex and
highly-engineered products can indeed be viable
candidates for a reverse auction, so far the actual
practice has focused primarily on simple items.
Moreover, the majority of reverse auction literature

T. Schoenherr, V.A. Mabert

recommends the use of this tool for commodity
purchasing (Tassabehji, Taylor, Beach, & Wood, 2006).
Parente, Venkataraman, Fizel, and Millet (2004) suggest product characteristics, like degree of customization, impact auction dynamics and the ultimate
outcome; as such, to attain success, the authors
recommend more standard products. Similarly, Garcia-Dastugue and Lambert (2003) propose that items
with low asset specificity or low product complexity
are most appropriate for online bidding events. In
addition, Jap (2002) suggests reverse auctions only
for products for which the purchase price constitutes
the largest value component, making it especially
valuable for commoditized products. According to
Smeltzer and Carr (2003), buyers also often fear
destroying existing suppliers' trust; therefore, this
makes procurement of non-commodity items via
reverse auctions too risky and uncertain a move.
The authors continue to state that while reverse
auctions are not suitable for all types of purchases,
there is a need to investigate this issue further,
specifically what type of commodities are appropriate. Similarly, Smart and Harrison (2003) call for research exploring which areas of procurement are
most amenable to reverse auctions. In response, we
analyzed the case study data to identify whether
reverse auctions are suitable only for commodities, or
whether complex and highly-customized items can
also be put up for bid.
The majority of companies represented in our
study confirmed the notion that the more commodity-like the product and/or service, the easier the
online auction process. Probing further into why
commodities seem to be better candidates for online
reverse auctions, it was often mentioned that the
number of suppliers willing and able to bid on the
business is likely to be higher, due to lower item
differentiation. In contrast, specialty items, perhaps featuring proprietary technology or components, may only be offered by a select few suppliers.
According to study data, the common threshold
value for the minimum number of competitive bidders in an auction was three (although more are
always desirable). Another reason commodities
were mentioned as preferable owes to price focus
being their primary driver; this makes them ideal
candidates for online bidding events. While still
regarded as important, other aspects, such as
quality and reliability, were considered secondary.
For these reasons, most interviewees indicated that
highly-engineered or one-of-a-kind items do not
tend to do well in auctions.
While some firms only put true commodities like
corrugated material and pallets up for bid, a
few companies indicated they were able to commoditize products and/or services that are not

Online reverse auctions: Common myths versus evolving reality

commodities in the traditional sense. The following
quotes provide a colorful illustration:
You can use reverse auctions with almost anything;
we have the philosophy, if you can see it, you can
bid it. If you truly understand the business model
and can create a competitive environment for your
potential suppliers, taking into consideration their
capabilities and capacities, then an online auction
is the tool to use. We have not run across anything
yet for which we have not been able to do a bid.
Maybe we will, but in every meeting I sit [through]
and [for] every commodity I think about, I see an
application; there is a way to do it. I find myself
sketching notes about how I may structure a market
basket, so it is doable; it is just a question of how
much opportunity you think there is in that particular market and how much time you are willing
to put into learning the business, to do an effective
job of preparing the RFQ. If you are not doing an
effective job of learning the business and preparing
a level playing field, then the tool is no good. It's
like[if] Istep up in Yankee Stadium, and face the
pitcher and get one swing. Well, if I have not practiced, what are my chances? I might hit a homerun;
I might get hit in the head.
Nothing is exempt from reverse auctions. We have
done events for direct material, such as electrical
and PC components, custom assembly, fasteners,
and metals; for indirect material, such as thirdparty logistics, hotel rooms, fleet vehicles, transportation, and freight; and for services, such as onsite third-party repairs and legal services.
We have auctioned everything from locomotives to
toilet paper. In fact, going forward, I think more
dramatic savings can be achieved when we put
more complex bid packages, including more sophisticated products, up for bid. Commodities served as
the low-hanging fruit to become acquainted with
reverse auctions, building the foundation to move
to more complex products and services.
Several factors can diminish the importance of
having a true commodity. This includes, for example, the attractiveness of the auctioned item. If a
specialty item is considered desirable by many
suppliers, it can indeed receive competitive bids.
Attractiveness can be heightened by market characteristics such as seasonality, general economic
conditions, supplier base, and industry environment. Furthermore, the ease of fulfilling the RFQ (in
terms of capability and capacity), the spend in the
RFQ, the buyer's reputation, and the supplydemand ratio can be influencing factors. In order to
make the auctioned item(s) as attractive as possible

377

to potential suppliers, a lot of market knowledge

usually needs to be collected up-front, and the
preparation for the bidding event is crucial. One
purchasing manager interviewed in our study mentioned an example of a transportation bid carried
out during the winter months. This bid received
much more competitive quotes than a similar bid
held during the summer, when carriers run at peak
capacities. Another sourcing professional indicated
that right after the tragedy of September 11, 2001,
it was relatively easy to generate a competitive
environment with online auctions, since the economy was experiencing a downswing and companies
were eager to drum up business.
Services can also be auctioned, but with greater
difficulty, as noted by two respondent comments:
It is much more difficult to commoditize a service
piece across different facilities. If you could agree on
a corporate service level, it would be much easier,
but this is very difficult to do. [For example, it] is
much easier to agree on a type of bearing; [in
contrast,] there is much more passion typically
associated with service providers. The other...[challenge] is getting the data: it is much more difficult to
obtain information from a service provider, with
which their cost structure can be identified.
The caveat to running reverse auctions for services
is that you have to spend a lot more time on the
preparatory work, so that everything is laid out very
clearly in the RFQ. We did that and presented it to
the bidders; we had eight interested suppliers, but
two days before the auction, there was only one
person who was staying in the game. I think...[those
suppliers who dropped out] were overwhelmed by
the too-detailed requirements outlined in the RFQ.
They said, we do not see any rigor here, there is
no place for us to do what we have always done.
We took it all away from them and they were not
happy.
If a firm cannot or does not want to expend the
time, effort, and resources necessary to auction
highly complex and difficult products and/or services, the help of third parties can be solicited. Such
facilitators, including third-party consultancies and
reverse auction providers like Ariba, can help prepare
the stage for a successful bid with the selected items.
Sourcing consultants like these often possess unique
market knowledge, including how to set up the event
in order to make it optimally competitive.

2.3. Reverse auctions damage the buyer

supplier relationship
Discussion regarding whether reverse auctions
damage buyersupplier relationships has been

378
fierce. On the one hand, opponents of reverse
auctions argue that most suppliers do not achieve
the method's often-postulated benefits, such as
reduced transaction costs and access to new
customers and markets (Emiliani & Stec, 2005a).
As such, suppliers are reluctant to participate, and
it is probably not worth any effort to make
reverse auctions more relational and long-term
oriented (Emiliani & Stec, 2005a, p. 170). More
than contend that reverse auctions offer no real
benefits, Tassabehji et al.'s (2006) study results
actually suggest negative repercussions of reverse
auctions, including supplier retaliation in the form
of secrecy regarding possible cost-saving developments and assigning the buyer a lower priority.
Furthermore, Hannon (2003) reports that existing
reliable suppliers can be alienated and that
commitment can be lost when using reverse
auctions.
On the other hand, proponents of this new bidding
tool suggest that it can, indeed, be used in a
collaborative manner, and within existing longterm relationships with suppliers (Smart & Harrison,
2003). Findings by Carter et al. (2004) indicate that
although suppliers primarily perceive reverse auctions as negative phenomena, two-thirds of buyers
feel reverse auctions have actually improved their
buyersupplier relationships, citing increased generation of trust and heightened transparency and
objectivity of the auction process as related
benefits. Daly and Nath (2005) even suggest
approaches for modifying the auction format to
foster long-term investments and relationships
between buyers and suppliers. Other researchers,
such as Hartley et al. (2004) and Hartley, Lane, and
Duplaga (2006), suggest that this area be marked for
further research. In order to do just that, we
analyzed the case study data to identify whether
reverse auctions do, indeed, damage the buyer
supplier relationship and, if so, if there are means by
which this may be avoided.
The companies participating in our research
were well aware that reverse auctions have the
potential to damage relationships they maintain
with their suppliers. In a few reported instances,
disgruntled suppliers complained openly and directly about the method; one vendor even went so
far as to ask a sourcing manager how he could sleep
at night, conducting reverse auctions. Interviewees
indicated, however, that this sort of behavior was
more common in the past, peaking when reverse
auctions were first introduced in the late 1990s.
Nowadays, as articles in the popular press increasingly document the benefits of online bidding
events, and as the focus of reverse auctions moves
further away from singular emphasis on price, sup-

T. Schoenherr, V.A. Mabert

pliers are becoming more familiar and comfortable
with this tool.
In order for suppliers to be as comfortable as
possible with online bidding events, and to simply
even engage in the process, they must be technologically enabled and have the necessary resources.
Currently, many online auction providers offer hosted
environments, which require only that suppliers have
a computer and Internet access to participate,
alleviating this barrier and potential concern. One
case study firm, which has been conducting reverse
auctions for many years, indicated that the only
suppliers still complaining are not really competitive.
In some instances, case study firms failed to give
further consideration to the impact a reverse auction would have on their long-term relationship with
the supplier, because this aspect was not seen as
important in that particular buying situation. Most
often, however, the relationship was regarded as
being of crucial importance; as such, special care
was taken to either preserve it (with the incumbent)
or to build a good foundation for it (with a potential
new supplier). In these instances, several strategies
(see Table 1) were followed to prevent reverse
auctions from having too detrimental an impact on
the relationship. The following comments highlight
the manner in which some buying companies have
gone out of their way to alleviate supplier concerns:
We had a vendor with whom we had a good relationship, but who was very nervous about the whole
online process. I spent an hour and a half on the
phone on a Friday night to talk with him, and walk
him again through the whole process. He knew that
he could talk with me, since we have...[a good]
relationship, and I showed him my commitment.
This had a major effect...[in causing] the supplier
to overcome his reluctance, and to participate
competitively in the reverse auction. He ended up
being the lowest bidder, and kept our business.
We wanted to ensure that all suppliers are comfortable with the online auction environment, so we
invited them to a supplier conference; [there], we
explained in detail what reverse auctions are, and
what benefits are in it for them. All potential
suppliers were invited and were given an opportunity to ask questions, to make suggestions for
the modification of the RFQ put up for bid in the
auction, and to become comfortable with the new
online setting, as well as with the particular business put up for bid....[Using] this approach, we
were able to address and eliminate all ambiguities
before the actual reverse auction, and also show
our suppliers that, by investing so much time in
this venture and soliciting their feedback, we are
indeed in this for the long haul.

Online reverse auctions: Common myths versus evolving reality

Table 1

379

Strategies for maintaining a good buyersupplier relationship

Strategy

Effect

Best practices

Train and educate suppliers

before the auction event

By the buying company: Provides assurance that

the buyer is seriously interested in maintaining a
good relationship; this commitment can convince
and assure suppliers of the long-term intentions
of the buyer

By the buying company: The addressing of all

supplier concerns and questions in an open and
confident manner, and the explicit explanation of
the objective rules and procedures governing the
bidding event and final award of the contract

By the reverse auction provider (if applicable):

Reduces suppliers' apprehensions toward reverse
auctions, and takes away the fear and
mysteriousness of this new online setting

By the reverse auction provider (if applicable):

Explanation of the technical features and
functionality of the online auction environment,
conduct of mock-or test-runs of the system with
suppliers

Ensure understanding before Avoids ambiguities or misunderstandings

the auction event

Ensure that all questions and concerns have been

addressed, related to both technical features and
auction mechanisms, as well as to product/
service specifications; ensure that all
requirements and rules are well understood

Use of an independent third

party to conduct the
auction event

Ensures the integrity of the online bidding event,

eases suppliers' fear that buyers may place
phantom bids to artificially drive the price
down

In addition to letting a third party conduct the

auction event, supplier concerns can also be
alleviated by the publication of rules and
procedures, as well as a commitment to ethical
conduct; however, the most effective way to
assure suppliers of the integrity of the bidding
event is to let an independent third party conduct
the auction event

Provide help and assistance

during the auction event/
constant communication

Makes suppliers more comfortable participating

and takes away the anonymity of the online
environment

Provision of a dedicated telephone hotline for

suppliers to call anytime during the auction event
with questions, problems in submitting a bid, or
concerns; this hotline should be staffed by several
employees, including the responsible buyer, IT
personnel, and a translator (in the case of a
worldwide auction event); provide an instant
messaging tool and an open discussion board to
field any questions or concerns; when
communicating, the buyer needs to pay
particular attention to not reveal more
information to one supplier than to others; when
a supplier asks a question that is relevant to the
whole group, the buying company should post it
on an open discussion board, without revealing
the identity of any supplier

Follow through with

published rules and
procedures

Ensures the integrity of the buyer, helps to not

alienate suppliers (which would be the case if
rules were not honored)

Adherence to given rules for awarding the

business, for example on which basis the business
is awarded (lowest bid vs. multi-attribute scoring
system, preference given to incumbents, etc.);
these rules need to be communicated explicitly
before the auction event

Obtain feedback

Helps to continuously improve the process

before, during, and after the auction, so as to
make the suppliers as comfortable as possible

Obtain feedback from bidders about their

experiences and perceptions of the bidding event,
problems encountered, and satisfaction; use this
insight to improve processes; can be used as
promotion material to encourage reluctant
suppliers to participate in future events; case
study interviewees indicated that suppliers' fears
often did not materialize when their feedback was
solicited after the auction (e.g., while the
incumbents were frequently very upset about the
move to this online setting beforehand, they often
ended up satisfactorily winning the business)

380

2.4. Over time, savings in repeat reverse

auctions will decrease
A frequent discussion point involves the issue of
continued savings in repeat auction events, for the
same item combination put up for bid. Whereas
some research (e.g., Mabert & Skeels, 2002) confirms that savings decrease over time, other arguments exist that prices will eventually increase due
to retaliatory pricing. This can occur when disgruntled suppliers, that did not like the move to reverse
auctions in the first place but who were forced to
participate and lower their prices, act opportunistically when the time arises. This could, for example, manifest in situations in which such suppliers
charge higher fees for spot buys or expedited orders
(Emiliani & Stec, 2005b). Still yet, many other researchers (e.g., Jap, 2002; Smeltzer & Carr, 2003;
Carter et al., 2004; Wagner & Schwab, 2004) have
put this question forward as an important aspect
requiring further exploration. Consulting our research data, we attempted to identify whether
savings in reverse auctions do decrease over time, or
whether considerable savings are still possible in
repeat bidding events.
Case study insight confirmed that while firsttime auction events can achieve significant savings, they will likely level out and plateau as more
bidding events are conducted for the same product
and/or service bundle. This is primarily attributed
to the expulsion of inefficiencies in the market
during first-time bidding events and the increasingly tighter margins, which do not realistically
allow further sustainable decreases in subsequent
auctions. For example, one firm reported 25%
savings across the board with reverse auctions in
the first year, followed by 20%, 17%, and 15% in
years two, three, and four, respectively. Another
company noted an experience with a freight bid;
while the package achieved savings of 11.8% two
years ago in the first-time auction, it realized a
savings of only 2% in the most recent event.
Similarly, a first-time auction for five-gallon
water jugs was able to reduce the unit-price from
$6.00 to $1.50, but six individual follow-up repeat
auctions did not result in any further price
reductions. One manager noted:
Certainly, the first auction for a commodity or a
service is the best one; you are taking out the extra
margin that is there...[and] find out what the market
price is. It is, therefore, especially also valuable for
new items, for which we may only have limited
knowledge...[regarding] price levels. The second
time around, there is less of a savings, somewhere
between three and four percent; but, it validates

T. Schoenherr, V.A. Mabert

that we are receiving the true market price from
suppliers. It is a great tool to keep everyone honest.
Some respondent companies were unable to confirm this development as they have yet to hold
second-round auctions for a particular item package, mostly because the initial events resulted in
multi-year contracts. Nevertheless, these firms anticipated that savings will decrease in the future.
Other companies indicated that they will no longer
use reverse auctions after the first-time bidding
event; having driven out inefficiencies that first
time was sufficient and subsequent auctions were
regarded as not being worth the effort, compared to
the potential gains. To ensure the benefits, longerterm contracts were requested with the first-time
auction event. These observations confirm the belief that, over time, savings in repeat reverse auctions will decrease.
As previously noted, the reverse auction tool by
itself may not lead to significant savings after the
first few events. The value of it as an efficient and
effective procurement process still remains, however, as suggested by two interviewees:
For repeat bidding events our savings are usually
smaller, but it depends on the commodity, the environment, whether new suppliers are participating, whether productivity gains have taken place in
the market, whether there have been technology
improvements and innovations, whether further
integration has occurred, how we combine items in
the bid package, how well we set up the RFQ, how
well we prepare for the auction event, whether
there is more capacity available, or whether we
are faced with a more favorable supply-to-demand
ratio. With reverse auctions, we can detect these
changes and find out what the current market price
is. We may get additional savings if some of these
changes have taken place; we may not.
When you take...[a bid package] out the second
time, your goal may be entirely different. The first
time you take it out,...[your goal] may be cost
savings. The second time, it might be the product
has changed, the demand is much higher, and the
supply is not there any more, so maybe we are
trying to avoid a huge price increase this way; it all
depends on what the goal is.
When consulted for our case study, an interesting
perspective was offered by one reverse auction
provider. While it was admitted that savings
achieved from second- or third-round bidding
events (for the same bid package) may not be as
dramatic as savings achieved via the first-time
event, it was noted that overall savings for clients

Online reverse auctions: Common myths versus evolving reality

are increasing across the board, from 16% in the past
to an average of 19% currently.

2.5. Reverse auctions are a passing fad

Opinions differ about the long-term sustainability of
reverse auctions. For example, Jap (2002) speculates that this purchasing tool will continue to
be used, even though excessive costs have been
squeezed out of the sourcing process. Findings by
Hur et al. (2006) also suggest that reverse auctions
are here to stay. Results from a recent Purchasing
Magazine survey, however, do not paint such a positive picture; compared to corresponding 2002 survey
results, the percentage of auction users is leveling
off and a larger percentage of respondents indicate
that they do not plan to use reverse auctions
(Hannon, 2003). To explore this issue further, we
evaluated the case study data to identify whether
reverse auctions are, in reality, a passing fad.
In sum, the general sentiment indicated that,
while reverse auctions are here for the long-run,
their overall usage will decline. This view was reflected in many of the comments made by study
participants, including the following:
Reverse auctions will be around, but like [with]
any tool, there is a certain amount of time [during
which] that tool is most effective. Now is that time,
and it is going to decline; how fastI do not know. I
just have the sense that it is not a long-term thing.
For certain items, the tool will remain valuable, it
will find its place; for example, for new items or as
an integrative part of...[the] procurement process.
Do I foresee online auctions disappearing? I do not
think so. I think it makes the vendors honest, and
they need to decide what their minimum margin is
going to be on their account. So in other words,
when we say to them, we want your best price,
this is not a clich anymore. For the first time in
history, we are getting there. We are not quite
there yet, though, since we are still getting concessions after the auction is over.
Other firms described the long-term sustainability of reverse auctions by their ability to narrow
down the number of potential suppliers. In these
instances, the bidding event is conducted among
several potential suppliers not to award the business
at the end of the auction, but rather to identify the
most price-competitive candidates. Once recognized, these vendors are then invited to engage in
further offline negotiations, enabling the buying
company to consider not only price, but also quality,
delivery, service, and other hard-to-quantify and
non-price aspects.

381

Case study firms mentioned situations in which

follow-up reverse auctions do not create additional
value. This can occur when all inefficiencies have
been taken out of the market by the sourcing tool,
and no further (or little) savings are expected with
repeat auctions. Very stable products with predictable and substantiated price changes, not subject to
many market mechanisms, fall into this category; for
instance, pens and pencils, when sourced individually and not in a complete office product
bundle, are illustrative examples. One firm described a bidding event in which custodial materials,
such as cleaning supplies, were auctioned. While
significant savings were achieved via the first bidding
event, the firm does not plan to conduct further
auctions, since not many additional advantages could
be expected. This decision was viewed as a cost
benefit tradeoff, as the administration of reverse
auctions can consume considerable resources that
often outweigh or negate potential savings.
Though not the rule, there are even instances in
which first-time reverse auctions do not lead to
significant gains. Most often, as mentioned by firms
in our study, this occurs due to poor preparation for
the bidding event, inappropriate composition of the
bid package, and/or lack of competition due to too
few participating suppliers. When these shortcomings are rectified in a reasonable manner (i.e., not
expending a disproportionate amount of resources),
reverse auctions can still be used; otherwise, a more
traditional sourcing process is suggested. As companies learn more and experiment with this new
purchasing tool, best practices will emerge that
provide guidance as to which situations and for
which products and/or services reverse auctions are
the most appropriate sourcing mechanism.

3. Implications for managers

The previous discussion focused on removing misconceptions and separating fantasy from fact. Next,
by analyzing the 30 cases included in our study, we
address the best practices and strategies which can
help purchasing managers get the most out of
reverse auctions. Table 2 summarizes the main
takeaways.

Reverse auctions do not have to be only about

price. While some firms may use reverse auctions
solely to drive prices down, more often, many
non-price attributes are taken into consideration, as well. This can be accomplished before
the auction event, by pre-qualifying all participating suppliers and ensuring their capabilities;
during the auction event, by assigning weights
based on a supplier's expected performance on

382

T. Schoenherr, V.A. Mabert

non-price aspects; and after the auction event,
via post-bid negotiations that focus on non-price
characteristics. In fact, reverse auctions are only
one small part of the overall procurement
process; most of the effort has to be expended
beforehand, in the preparation of the RFQ and its
specifications.

Reverse auctions can also be suitable for noncommodities. While reverse auctions are primarily conducted for commodities, non-commodity items are not excluded as suitable
candidates for these online bidding events.
Indeed, our case studies show that custom-

Table 2

manufactured items can, very effectively, be

put up for bid. Whether the auction is successful
or not depends on many different factors,
including market environment, item specification difficulty, clarity of the RFQ, competitiveness, and the buyer's bargaining power. All told,
these influencers leave the item type as a
secondary criterion. If the auction and the bid
package are set up correctly, having conducted
the necessary preparation and market research, the event will be competitive. One
point should be emphasized, however: reverse
auctions should not be confused with spot buys.
Online bidding events require much more

Implications for supply managers

Myth

Reality

Actions for not falling victim to the myth/Pillars for success

Reverse auctions are

While a lower price is one
only about the price objective in reverse auctions,
it is often not the most
important one, and can be
easily complemented with
non-price attributes

Ensure that non-price aspects are not neglected (by, for example,
extensive pre-qualifications of bidders); explain to bidders how nonprice attributes are taken into consideration (e.g., weighting the price
by non-price ratings for quality, service, delivery, financial strength,
switching costs, etc.); communicate that the lowest bidder may not
automatically win the business, but that other aspects are considered as
well (if applicable); ensure that suppliers still make some margin (for the
long-term sustainability of the relationship); provide incumbents some
advantage (if applicable)

Reverse auctions are

only suitable for
commodities

While commodities are usually

easier candidates for reverse
auctions, non-commodity items
can also be put up for bid
successfully

Make the RFQ order lot as attractive as possible to suppliers, for example
by taking advantage of current market characteristics (seasonality,
general economic conditions, supplier base, industry environment,
buyer's reputation, demandsupply ratio) or the structure of the order
lot (ease of fulfilling the bid package, spend of the RFQ); conduct
continuous market research and analysis to identify appropriate reverse
auction opportunities; develop detailed, specific, and exact
specifications of items in the bid package; if this effort cannot be
expended easily in-house, use a specialized third-party consultant

Reverse auctions
While reverse auctions can hurt
damage the buyer buyersupplier relationships,
supplier relationship there are many ways to prevent
that from happening

Provide education and training to suppliers (related to both technical and

procedural, as well as relational and human aspects of the online
environment); ensure that all questions and concerns have been
addressed before the auction event (so that there is no room for
ambiguities or misunderstandings); use an independent third party to
conduct the auction event; provide help and assistance during the
auction event; follow through with published rules and procedures for
awarding the business after the auction

Over time, savings in

repeat reverse
auctions will
decrease

While first-time bidding events

likely result in higher savings,
continued cost advantages
are possible

Continue to be creative in identifying cost saving opportunities, such as

exploring efficiencies resulting from productivity gains, technological
improvements, innovations, integration, different bundle package
compositions, increased preparation, changed market capacity, changed
supplydemand ratio, new available suppliers, etc.; reverse auctions
then serve as a valuable tool to efficiently detect these changes and
realize the savings

Reverse auctions
are a passing fad

While reverse auctions will

not be used as much as in the
past, they are here for the
long-run

Make reverse auctions part of an integrated and holistic procurement

process, in order to identify the true market price for new or existing
products without extensive market research, and to narrow down the
bidders to a set of price-competitive suppliers with whom then offline
negotiations can be continued, in which non-price attributes of the
contract are discussed

Online reverse auctions: Common myths versus evolving reality

dedication and attention, especially in the
stages leading up to the auction, including
research, training, and preparation.

Reverse auctions do not have to hurt the

buyersupplier relationship. While many have
argued that reverse auctions damage the
buyersupplier relationship, the veracity of
this contention depends on how the tool is
approached. Although relationships with suppliers, especially incumbents, can degenerate
and become more hostile when reverse auctions are introduced, this does not have to be
the case. Reverse auctions should be considered as just one small component in a long and
relationship-intensive procurement process.
Buying companies can provide encouragement
and assurance by employing a variety of strategies, including providing training and education
before the auction event, addressing all questions and concerns related to both the bidding
process and the content of the RFQ, using an
independent third party to conduct the auction, providing help and assistance during the
bidding event, strictly adhering to published
rules and procedures, and soliciting feedback
after the event. Moreover, it is imperative that
rules and conditions be clear and unambiguous,
be stated long before the auction event, and be
understood and adhered to by everyone.
Communication is key to achieving a winwin
situation. Buyers may even train their suppliers
to conduct reverse auctions themselves, further up in the supply chain; this was accomplished and noted by a few of our case study
firms. These strategies can also help companies
conduct reverse auctions with longstanding
incumbents, which were spared more in the
early years of online bidding.
Continued savings in reverse auctions. Oftentimes, inefficiencies exist in the market, and
these can be driven out by online bidding events.
As such, reverse auctions are a good means for
identifying the true competitive market price of
a bid package, which can lead to significant
savings compared to the historical pre-auction
price. Once these inefficiencies have been
expelled, savings via subsequent auctions are
not likely to be as significant, leveling off to a
plateau, all else being equal. A move to
regular negotiations upon contract renewal
can thus be a preferred alternative, in order to
avoid the costs and resources related to bid
event preparation. Several case study firms
behaved in such a manner. When significant

383

market changes have taken place (e.g., productivity gains, technology improvements and innovations, increased integration, changes in the
item package combination, different focus of the
bidding event, more available capacity, more
favorable supply-to-demand ratio, availability of
competitive new suppliers), however, then the
reverse auction tool can serve to drive out
inefficiencies once more and result in the
discovery of the real market price.

Reverse auctions are here for the long-run.

While the use of reverse auctions will probably
decline, due to the reasons cited in the prior
point (i.e., decrease of savings over time), it is
doubtful that they will disappear completely.
Rather, online bidding events will become yet
another sourcing tool in the toolbox of today's
proactive purchasing professional, to be used
when situationally appropriate. We are already
seeing this development. The hype surrounding
this purchasing method has largely leveled off,
and companies are beginning to identify situations and products/services that are most
amenable to reverse auctions.

4. A final word
Overall, opinions regarding reverse auctions have
been mixed. This article identified five of the most
common myths associated with this new sourcing
tool, and explored how these myths held up against
the insights and experiences of 30 case study companies. While examples can always be found to
confirm the myths, we have demystified successful
reverse auctions, and offered prescriptive evidence
and guidance regarding how not to fall victim to
these purported truths. The best practices for reverse auction implementation and use, identified
herein and summarized in Table 2, form pillars for
successful employment of the method.
One final word of caution is appropriate at this
point. Like the Latin legal phrases of caveat
emptor (let the buyer beware) and caveat venditor (let the seller beware), care must be exercised
when using reverse auctions. Only when applied as
part of an integrated and holistic sourcing process,
with the reverse auction event serving as the culmination of extensive preparation, research, data
gathering, and analysis, can online bidding events
remain a valuable tool. As summed up by one
manager who participated in the case study, If
you prepare, structure, and set up reverse auctions correctly, this new tool will continue to
add value to today's proactive purchasing
professionals.

384

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