Cooper Business School

However, a reverse auction is very stress-win or lose. “Prices could fall quickly, and it’s a scary situation,” said Michael Roberts, who runs the Kid-riffic, a St. Louis based toy distributor. Roberts first encountered the reverse auction five years ago when the former company, a manufacturer of private label and distributor of items such as a drum set and toy walkie-talkies, losing $ 3 million in sales through reverse auctions in a matter of months — despite having a long term customer relationships. “They have been competing directly against our factories,” said Roberts, who sold the company to rival China shortly after the disaster. “Reverse Auctions are great for shoppers, but I had to use my imagination to see how they’re great for suppliers,” he said.

Squaring off against a low-cost competitors are only part of the problem. Despite the fact that the offer is generally ranked on the basis of price, reverse auctions are not binding for the buyer. The company will occasionally go to the second or third lowest bid based on qualitative factors such as reliability, customer service, and the cost of switching from incumbent supplier. “In some cases, the purchaser gives wrong information or incomplete about what they want,” said Robert Handfield, a professor at North Carolina State University who studies the management of the supply chain. “What do they have to be a moving target.”

Since bidders do not always understand what they should do to win a share of the business, and they are prohibited from asking buyers all but basic technical questions during the actual auction, the company may find themselves making snap decisions on contract terms, pricing, and packaging. When the seller is trying to meet a quota or a business owner is trying to achieve sales targets set by the investor, the company may make an offer later regret an impulsive. “People get emotional,” said Handfield. “You see other people’s offering over and You lose a sense of perspective.”

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