Is Your Supply Chain Business Operation a Good Fit for Online Reverse Auctions?

This industry note explores the benefits of online reverse auctions for both buyers and suppliers in contrast to the negative implications for procurement process. Information was gathered from numerous sources to create a comprehensive analysis of benefits and shortcomings of online reverse auctions. The argument presented shows a strong temptation for buyers to participate in online reverse auctions: price reductions. However, buyers should approach online reverse auctions with caution as total cost savings can be misleading and participation may result in damaged relationships with suppliers. Buyers' determination to use online reverse auctions relies on product specifications, supplier relationships, the current supply and demand environment, indirect costs, and several other factors that will vary for each product and for each buyer. Therefore, an all‐encompassing decision model cannot be presented to accommodate each scenario. However, a generic framework is proposed for managers determining if participation in online reverse auctions is appropriate for their business. In practice, additional company specific information can be applied to the decision making model. It may be noted, the research reported in professional literature on online reverse auctions does not offer a process for managers to follow when evaluating whether to implement online reverse auctions. This note includes a generic decision framework specifically for buyers as well as an abbreviated decision model for suppliers.