Question:
How should we respond when a current customer decides to move its purchasing of our product to a "reverse auction?"

Answer:
Reverse auctions are not, by themselves, a bad thing. However, they are often designed to create an unfair market that puts sellers of superior products at a disadvantage. This happens when the seller:

• Puts out an RFP spec that does not include all the quality and service aspects that the buyer is currently getting or expects from a supplier.
  
• Does not reveal who the other bidders are or the specifics of their bids, but only their prices. The buyer then expects the seller to compete blindly on price against offers of unknown value.

The way to handle such a bidding process is to think about all the conditions that would make winning business at a low price still worthwhile — e.g., long lead times for orders with "must take" provisions, truckload quantities, no special handling, provision from plant of supplier's choosing, etc. Then think about a price below which the work would not be worth having. That is the minimum bid price below which you will not go in the auction. Don't go below that! Remember: very few buyers, even those using reverse auctions, actually buy from the lowest priced bidder.

Submit a bid to deliver the lowest quality guarantee/ service level that you are comfortable delivering. If your company is the incumbent supplier, you probably will be declared the winner of the auction. (More than 80% of the time, the “winner” is the current supplier, but at a much lower price.) Having won the contract, the company should then reveal the service and shipping limitations under which the contract will be honored. When purchasing objects, point out that the specs did not preclude such conditions so you no doubt had to bid against other companies with similar product and service limitations. If the buyer would like to have a higher level of service, the charges for that level of service can be broken out. If product and service variation is important to the buyer, it usually kills this type of purchasing process. If it is not possible to unbundle enough to submit a winning bid, walk away. In at least half of the cases that companies do this, purchasing will come back and begin negotiating a deal, reveal the bids made by other companies, and give the current supplier a chance to evaluate them. The negotiation then becomes about how much of a premium the current supplier deserves. When walking away from the bid, it is worthwhile to express your willingness to openly and honestly review the bids and possibly make a final offer if the buyer is interested. Refuse, however, to blindly bid against products and services that you cannot evaluate.