Online Reverse Auctions: An Overview

Electronic commerce (e-commerce) is the fastest growing area in the U.S. economy with electronic procurement (e-procurement) being a major component, and online reverse auctions (ORAs) have emerged as a key e-procurement tool. Since the mid-1990s, ORAs have been gaining in popularity because of their potentially significant positive impact on the profitability of both the buyers and the sellers. Much has been written about the new purchasing paradigm and numerous stories have been reported recently. This paper is aimed at providing a critical review of ORAs by examining their historical developments, different forms, advantages, and disadvantages. In addition, 10 important factors to consider for successful implementation of ORAs are identified and discussed. INTRODUCTION In the early 1980s, the traditionally-held view of using multiple vendors to reduce supply risk was replaced with a trend toward single sourcing with one or more qualified backups; much emphasis was placed on developing long-term, close buyer-seller relationships (Leenders, Fearon, Flynn, & Johnson, 2002). With the emergence of ecommerce in the 1990s, however, the paradigm of consolidating the supplier base has been challenged with the prospect of exploiting Intemet technology to reach many sources of goods and services for the lowest possible cost. Electronic commerce (e-commerce) involves buying and selling between organizations and/or individuals on the Internet. Today, e-commerce is the fastest growing area in the economy with electronic procurement (eprocurement) being a major component. E-procurement provides a non-traditional approach to reducing the expenditures associated with supply management for both manufacturing and non-manufacturing firms. Its application promises to lower prices of products and provide for higher operational efficiency by automating the conventional labor-intensive approach to supply management. The dollar volume of materials purchased online was $75 billion in 2000 (Verespej, 2002). According to the latest ISM/Forrester report on technology in supply management, there has been a steady rise in the use of e-procurement since 2001. In particular, 85% of the 600 companies surveyed were making progress toward adopting the new tool (Bartels, Hudson, & Pohlmann, 2003). Table 1 presents some examples of cost savings achieved with e-procurement as reported by Verespej (2002). Additional success stories can be found in Anonymous (2002c), Beall et al. (2003), Kruger (2002), Lydiard-Wilson (2002]i, Rosen (2000), and Sanders (2003). Table 1: Cost savings/reductions from e-procurement. Scope Cost savings/reductions Industry Chemicals & adhesives 15% to 20% Corrugated paperboard Up to 32% Energy 5% Metals & machinery components 19% MRO items 40% Temporary labor 36%. Company John Deere Lucent Technologies Owens Coming Texas Instrument 3M $75 in administering a purchase order 60% 70% in transaction processing time 10% on annual corporate purchases S55 in processing a purchase order $80 in invoice processing and 30% in error rate