How does an e-auction work if the winning bid is below cost price?

Posted on Sep 11 2012 - 2:00pm by Peter Millikin


Many commercial organisations opt to use the reverse auction process to drive down supply costs. Often the number of suppliers entering this type of process is limited to a handful of companies.

During the period of the reverse auction supply companies bid on a basket of goods and are sometimes able to see the rank of their bid compared with other bids submitted. The rankings do not reveal the amounts of money bid.  The reverse auction normally runs for a period of 45 minutes to an hour and suppliers can keep resubmitting their pricing with the ultimate goal of coming out on top.

The two suppliers who submit the lowest bids are normally invited in for final discussions before the contract is awarded.

Is the e-auction really the best option to purchase office products?

Unfortunately the reverse auction doesn’t seem to take into consideration service, sustainability or environmental objectives and appears to be merely price driven.

Suppliers might bid below cost to win a contract but how do they make a profit and maintain service levels? One is left to wonder whether they replace original products for own brand products and play about with the core and non-core items in the contract. The own brand products have a much higher profit than original brands, giving the margins needed to make a profit.

What happens if stationery products are replaced with cheaper generic brands?

Although suppliers are legally bound by the contract what are their customers to do if they are told the contract cannot be fulfilled and the supplier offers to replace branded products with their own generic brands? They could change suppliers, but this would cause too much disruption. Sadly, they are likely to settle for generic products which are not were not in the agreement, but which offer the supplier the margins needed to make a profit. In many cases customers don’t even notice the brands have been changed.

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Read about the Author

Peter has received many accreditation’s including many from the Times Online. As founder of You Could Save (2005) and What Stationers (2007) Peter regularly helps consumers and national organisation ‘save money’. He believes that the only successful way to bring people together online is to provide an open marketplace where people can all work together in a friendly, unbiased environment. You can contact Peter Millikin either through his Google+ account or via his websites.

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