A reverse auction is an online bidding process in which suppliers can repeatedly bid their prices lower in order to win a purchase contract. This approach can result in substantial price reductions for the buyer. Depending on the type of reverse auction system used, the following information will be available to all bidders:
Actual bid prices that have been submitted; or
The relative rankings of the bidders, based on their prices submitted
Bids will continue until no one is willing to bid any lower, or until a predetermined expiration time is reached.
Reverse auctions are usually confined to situations in which the items needed are fully commoditized, with no differentiating features by supplier, and with industry-standard specifications.
A reasonable concern posed by suppliers is that reverse auctions excessively focus on price. When a supplier prefers to compete on other factors than price (such as fast order turnaround), it is at a disadvantage in a reverse auction. Also, the use of reverse auctions sends the message that there will be no attempt by a company to build relations with a specific supplier – it just wants the best price.