Here are A check list to consider when evaluating a Reverse auction suitability.
An attractive deal: To make a contract really interesting for suppliers, the contract content (and therefore the auction) must have a certain importance for the market (relative size and value). If not, suppliers rather loose this contract to avoid risking the margins of other contracts than have this contract on a disproportional low margin.
Price flexibility: To have a good idea of what price improvements can be expected in an auction, it is important to know which part of the contract is really flexible for the bidders.
Enough participant: Two bidders is the minimum. However, in general it can be said that the more suppliers participate in an auction, the more dynamics is likely.
Representative supplier panel: A well organized auction is the best way to get the best current market price for the auctioned good or service. The market price will only be met when representable suppliers participate.
New suppliers: Especially in a market that is dominated by a group suppliers that know each other, there is a chance that this group splits all the available contracts amongst each other. Especially when an auction is organized, these suppliers can come to a prior mutual agreement. The best way to beat this risk is to invite new unknown suppliers to the auction.
Qualified bidders: To make all the offers (bids) completely comparable, it is crucial to qualify not only the goods or services but also the suppliers. This to incorporate certain risks related to doing business with them. Supplier weightings can be used to make different offers comparable.
Unambiguous product specifications: It needs no explanation that you can only compare bids in an auction when all suppliers are bidding on exactly the same goods / services in the same contract quantities. Supplier weightings can be used to make different offers comparable.
Comparable offers: It is not only vital to make suppliers comparable by pre-qualification and products by specification. It is also essential to make the whole offer comparable. Think about logistics, contract switching costs, guarantee, conditions etc. Supplier weightings can be used to make different offers comparable.
Awarding method Commitment: Only when a buyer states his commitment to the outcome of the auction, the suppliers will give their best during the event. The auction should always be the last chance for suppliers to improve their offer. Post auction negotiations will challenge the dynamics of any future events.
Limited initial bid level differences: This important criteria has a big influence on the dynamics and success of an auction. When the different opening prices of the participating suppliers are close to each other, it is more likely that prices will be forced down. On the basis of our experience we can say in general that no dynamics will occur when price differences are more than 20%.