Are Reverse Online Auctions the Way to Buy?

In March 2003, the B2B Research Center completed an analysis of reverse online auctions. Here’s an executive summary of the results.

B2B Research Center conducted this survey to gauge opinion on the growing use of reverse online auctions for the purchase of material handling systems, equipment and supplies. The survey sought to understand the motivations, challenges, experiences, and attitudes of buyers and sellers using and planning to use reverse auctions in their purchasing and selling practices.

Here are a few of the conclusions:

Approximately 22,400 material handling industry personnel received an e-mail invitation to complete the survey. 1,265 respondents participated for a 5.65% response rate. Of this number, 500 were buyers (39.5%) and 765 were sellers (60.5%). Both the original number of buyers, sellers, and overall respondents and the number of respondents who completed the survey were statistically significant sample size within reasonable levels of confidence.

The survey design was interactive, serving up questions based on previous responses. Data was recorded as each answer was completed and partial responses were included in the analysis. Missing values and data anomalies appeared to have no significant effect on the results. The amount of data collected gave almost all measures statistical significance within reasonable levels of confidence and sampling error.

A decision tree system meted up the questions to sellers and buyers based on whether they used, planned to use or did not use or plan to use reverse online auctions. Of all survey respondents, approximately 20% said they use auctions, 20% said they plan to use them, and 40% said they did not. Survey data indicated that more buyers than sellers were planning to use reverse auctions, suggesting continued buy-side pressure to implement this form of purchase.

Respondents who used or planned to use reverse auctions were asked to specify the goods and services they have or will be buying or selling with the auctions. Equipment (74.4%) was the number one selection for this question, outpacing parts (33.5%) and systems (32.7%) as the next two selections. Buyers who said they used auctions for parts (44.3%) compared to far fewer sellers (16.3%) who said they used auctions for parts. Sellers also selected support and engineering much less than buyers, while systems as a selection was about equal.

Respondents who said they used reverse auctions said on average that they started in 2001. Those planning to use them said on average their target year was 2004.

More than half (59.2%) of buyers and sellers who have used reverse auctions said they have only participated in 1 to 5 auctions. Ten percent (22 of 218) said they had participated in more than 25.

Buyers on average said the impact on their vendor relationships was surprisingly neither positive nor negative (-0.03 on a scale of –5 to +5). Sellers, on the other hand, said the impact on their relationships as vendors was a –2.41, an indication that the process seems to break down on the sell side rather than on the buy side.

Buyers and sellers were asked their motivations for using or planning to use reverse auctions. Buyers cited saving money as their number one selection with a 1.75 out of a perfect 1 of 5 motivations. Sellers cited the opportunity to gain new business (1.94) and being forced by customers (1.99) as their leading motivations out of a perfect 1 of 4 motivations.

Buyers and sellers who have used auctions were asked whether they have lost important vendors/bids. Buyers were again essentially neutral (0.04 on a scale of –1 to 1) but sellers said they had lost bid (0.75) in 127 of 149 cases.

Respondents who have used auctions were also asked about the challenges that auction present. Buyers were essentially neutral again on these issues on a scale of 1 not an issue and 9 a major issue, selecting de-motivation of their vendors (5.00) as their major issue. Sellers were more vociferous on average than the buyers, citing lower profit margins (6.85), devaluation of the relationship with the buyer (6.55), and educating purchasers on commodity versus unique product attributes (6.53) as their major issues. They also stressed maintaining service levels with eroded margins (6.29) and loss of business (6.24) as important issues.

Buyers and sellers who have used auctions were asked to evaluate their experiences with reverse online auctions. On the same 1 to 9 scale, buyers cited lowered cost of goods (6.37) and end-user savings (5.47) as their chief experiences. Sellers were again louder about their experiences, citing a focus on price over value as an 8.20 out of a perfect 9 and decreased profit margin as a 7.37.

Respondents who have used or plan to use auctions were asked about the perceived fairness of the process. Buyers said they were fair at a 0.33 of –1 for unfair and +1 for fair (0 no opinion). Sellers did not view them in the same way with a split between those sellers who have used them (-0.79) and those who plan to use them (+0.05). On average, sellers (use plus plan to use) voted the unfairness of the process at a –0.40.

As a follow-up to those who responded that the reverse online auction process was unfair, the question was asked whom the process favored, the buyer (+1) or the seller (-1). While only 21 of 141 (14.9%) buyers said the process was unfair, 14 of those 21 (66.7%) said the process favored the buyer. Sellers echoed this, indicating that it favored the buyer with a 0.77 compared to a perfect 1. Only 40 of 243 sellers (16.4%) said the process favored the seller; 83.6% said it favored the buyer. Of the 40 sellers who said the seller had the advantage, 31 had not used reverse auctions yet. Of the 111 sellers who have used auctions who answered this question, 101 thought it favored the buyer (91.0%).

Overall, the survey results indicated clear acrimony on the issue of reverse online auctions on behalf of material handling sellers, and a relatively neutral opinion of them by buyers.

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