Reverse auctions: how much total supply chain cost savings are there? – A conceptual overview

With companies spending trillions of dollars annually, accounting for the majority of revenues, it is easy to understand why companies are constantly seeking ways to cut costs in procurement. It is widely believed in the financial arena that the revenue to cost ratio is about 3 to 1; for instance, increasing revenue by $300 has about the same effect as cutting costs by $100. Online reverse auctions emerged in the mid to late 1990s as a method of achieving cost savings in procurement. A reverse auction is a bidding event sponsored by a buyer. The paper provides a background and motivation for the reverse auctions concept. It examines the reverse auctions process consisting of pre-auction, auction and post-auction activities and their role in procurement. A brief summarisation of the evolution of ‘e-auction technology’ is presented. Current professional literature is reviewed that highlights views of opponents on reverse auctions, ethical issues to consider and appropriate market conditions required that enable implementation of reverse auctions.