Japanese and Dutch reverse auctions have been around for centuries in theory but have been used quite rarely. However, in the last years they have gained popularity.

But first of all – what are these auction types?

Reverse auctions in general are defined as auctions, where the seller places an offer, not the buyer. At Dutch reverse auctions the price starts unreasonably low and starts rising in defined steps – the first seller who decides to bid gets the purchase order. At a Japanese reverse auction, the price starts high and then drops – all sellers decide in each step if they stay inside the bidding circle or drop out. The last seller remaining the order.

An auction is usually carried out after a regular tender or “RFQ” (Request For Quotation) process. In this process, both partners clarify the requirements and the seller checks if he has the capacity for providing the requested product. When the tender process is skipped, chances are high that there will be misunderstandings afterwards.

The Benefits

The benefits for the buyer of Dutch and Japanese auction types are obvious: They put further pressure on the sellers and therefore reduce the price. The highest pressure is experienced during a Dutch auction, because in contrast to the Japanese auction, sellers are kept in uncertainty as the bidding process has no “history”: None of the parties, not the sellers nor the buyers, know what is happening until the first sellers places a bid. During the Japanese Auction, the sellers know that other sellers are still in the game and – depending on the auction’s settings – also how many sellers. The motivation for such auctions is that buyers have the feeling that the placed bids are too high and signals the sellers that there are others sellers in the bidding circle.

The disadvantages

The main problem is the immense pressure on the sellers. As a result, they might place a bid at a too low price. These bids might cause problems in the medium-term future and is for sure contra productive for a healthy and sustainable buyer-supplier-relationship: The supplier is not able to supply at this price a second time or he might even become bankrupt during the project duration. In a market situation where supply and demand are out of balance, this scenario is most likely.

For buyer Dutch auctions have another disadvantage: as they does not get information if other sellers would have placed a bid at a similar price or if the price is way too low.

Conclusion

Japanese and Dutch reverse auctions are a good measure when the buyer wants to further decrease the selling price. However, especially in technical projects it is definitely recommended to carry out an auction after a regular tender so technical issues can be solved, and the buyer gets a good overview of the market.

On the other hand, reverse auctions always carry the disadvantages of applying too much pressure on the sellers. This can be poison for a healthy supplier management – so an auction is not always the best solution.

What is your opinion on Dutch or Japanese reverse auctions? Write us at pr@alenti.de or discuss with us on LinkedIn.