 Definition Reverse Auction. Description.
A Reverse Auction is the auction
business model in which the
role of the buyer and the seller are inverted, mainly with the objective to
drive purchasing prices downward. It is a strategy used by many purchasing and supply management departments.
In a reverse auction, a (mostly powerful) buyer issues a Request
for Quotation (RFQ) for particular items or services. Multiple suppliers quote
the price at which they are willing to supply the requested items or service, typically using specialized software or through an online marketplace. The sellers offer bids on the items, competing to offer the lowest price that meets all of the specifications of the bid. As the auction progresses, the price decreases as sellers compete to offer lower bids than their competitors.
Unlike a regular auction, prices in a reverse auction decrease as the bidding
process is going on.
The quoting is often performed via the internet, resulting
in a real-time bidding process. This results in a downward pressure on prices
to levels that are normally not achieved using a regular static 3-quote
paper-based purchasing process.
The contract is often - but not always - awarded to the supplier
that provided the lowest price: quality, lead-time, capacity, and other value-adding
capabilities can also play a role.
Critics of the model say the model is often
a zero sum game, especially for
suppliers.
Also called: Buyer-Driven Auction.
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