Reverse auctions: How much total supply chain cost savings are there? – A business simulation model

This paper provides a decision modelling framework for managers to determine if participation in online reverse auctions will result in cost savings for their procurement function. The research written on this topic does not offer analytical business decision model for managers to follow when evaluating whether to implement online reverse auctions specifically from buyers' perspectives. Buyers' determination to use online reverse auctions typically depends on such factors as: number of suppliers, product specifications, direct costs (caused by delays and timing, data integrity, award decision) and indirect costs (due to customer dissatisfaction, logistics, nonrecurring expenses) which will vary for each product and for each buyer. The proposed simulation model described in this paper considers these factors as inputs to conduct numerical experiments in order to present a more explicit business case of cost savings generated from reverse auctions for decision makers. In practice, additional company-specific information can be applied to the decision-making simulation model.