NEW APPROACHES TO ONLINE PROCUREMENT

The dramatic growth of the Internet and the rise of online commerce are providing new hope for changing many costly, time consuming, and inefficient procurement processes. In recent years, many major industries have begun using Internet technologies to improve negotiation tactics and re-engineer procurement processes in ways that reduce the cost of doing business. A key Internet technology used to improve negotiations is the electronic reverse auction. This paper outlines the potential of reverse auctions for procurement negotiations, evaluates the current use of reverse auctions by major companies, and reviews the advantages and disadvantages of reverse auctions. The paper concludes with some specific recommendations about when to use and when not to use reverse auctions in procurement negotiations. PROCUREMENT ARRANGEMENTS Buyers and sellers can develop a variety of different procurement arrangements (Heide, 1994). At one end of this spectrum of procurement arrangements is the transactional model in which buyers and sellers create contracts for specific transactions. The procurement negotiation process is focused on specific transactions. Each party to the transaction views the transaction negotiation of price and other terms in a win-lose framework At the other end of the spectrum, buyers foster collaborative procurement arrangements in which the buyer and suppliers focus on identifying mutual benefits. By sharing knowledge and and creating implicit understandings in an environment of trust, buyers and sellers negotiate procurement activities and processes. These collaborative processes often involve more than one product or service and can develop into relationships that last for many years. Indeed, in strategic sourcing relationships, the parties make significant mutual financial investments and often search for business opportunities that they can exploit as partners. Most purchasing relationships fall between these two extremes. For example, some transactional relationships involve long-term contracts that are reviewed every few years. In these cases, buyers can develop considerable experience with suppliers over the term of the relationship. The degree of the continuing relationship between buyers and suppliers can be an important factor in determining whether or not the use of reverse auctions is advisable.