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  • 6.2.2-E-COMMERCE AND SUPPLY CHAIN MANAGEMENT-REVERSE AUCTIONS

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  • Reverse auctions

     
     
    Reverse auctions are used by large individual companies or groups of companies to procure bulk requirements from pre-approved suppliers who are invited to submit offers for a specific requirement. They differ from Internet auctions in that reverse auctions are meant to achieve the lowest possible price and so are organized by the purchaser. Traditional auctions on the other hand are meant to achieve the highest possible price and so they are nearly always organized by or on behalf of the seller. Put differently, reverse auctions are not a marketing tool… They are organized by individual buyers, open only to previously accredited suppliers and the results are not publicized.

    Reverse auctions are a direct result of two factors: the concentration of buying power in established mainstream markets, and the stagnation of consumption in those markets coupled with the supply surplus of recent years. If consumer prices cannot be increased, and if sales are even falling, where can savings then be made to maintain the profit stream? If items as office supplies, motor spares, standard household products and the like can be procured centrally, thus ‘bulking’ quantity and so generating bigger orders = more negotiating power, why not also coffee? Especially coffee whose quality has been ‘standardized’ , thus also making it suitable for e-procurement.

    But, like traditional auctions, also reverse auctions must achieve critical mass – there must be sufficient active participants to ensure a competitive market. It is easier to achieve this critical mass in times of over-supply or weak trading conditions than when the economy is booming and supplies are tight or even short. And participating suppliers must be certain that the lowest offer indeed obtains the business, i.e. a low differential for only part of the required coffee tonnage is not used to goad others into matching it.

    Probably, the future of reverse auctions is directly linked to the outlook for the mainstream coffee industry as a whole – should a supply deficit ever return or coffee prices rise very strongly as was the case in late 2010 and early 2011 then only time will tell whether such systems can survive.