By Roger Harris
November 2000 - Reverse auctions on the Internet can make corporate purchasing managers look like geniuses. By logging on to a favorite auction site, they can buy 100,000 widgets for thousands of dollars less than budget. But it's not just the big boys in Corporate America who profit from the B2B online marketplaces. Small to medium-size businesses can get into the act, too.
In a regular online auction, a seller puts a product online and solicits bids from buyers. In a reverse auction, an individual or company posts its need online and solicits bids from suppliers. The process requires a detailed explanation of the product or service requested, as well as a set date and time. Often the site hosting the auction will notify registered suppliers.
These auctions allow any company, no matter what size, to compete for business. For suppliers, it opens the opportunity to go after business with companies that otherwise wouldn't have considered them because they were unknown or too small. Low-volume buyers, on the other hand, can use online auctions to widen their search for competitively priced or hard-to-find items.
"It's a win-win situation," says Sheldon Malchicoff, founder of BidVantage, an online reverse auction site based in Camarillo, California. A significant number of the 1,300 suppliers registered with BidVantage are small to medium-size operations, Mr. Malchicoff says. The B2B site recently added new technology to make it practical for even the smallest companies to participate. BidVantage (www.bidvantage.com) limits its business to companies buying and selling computer parts.
Even buyers looking for only a handful of units can take advantage of online auctions. The Sorcity.com Web site (www.sorcity.com), for instance, recently posted notices for a buyer looking for one PBX phone system and another looking for 17 Pentium III computers.
One of the largest online reverse auction providers is Freemarkets Inc. in Pittsburgh, Pennsylvania. Most of Freemarkets' clients are Fortune 1000 companies, but the online auctioneer has in recent months successfully put together buying consortiums that included smaller companies. "What we've seen is tremendous growth in consortiums," says Shane Tulloch, vice-president of the Freemarkets technology group.
One of the most successful consortium auctions Freemarkets held this year was for a half-dozen companies that needed computer equipment. "We had all the big computer OEMs bidding," Mr. Tulloch recalls. "I think that will be a growing trend."
Although some critics say too much downward pressure on prices could drive suppliers to bankruptcy, online reverse auctions have recorded stunning growth in 2000. Freemarkets, for instance, expects to do more than $10 billion in business in 2000, up from about $3 billion last year. Even BidVantage, a relative newcomer to online reverse auctions, handles as much as $3 million in sales per day, Mr. Malchicoff says.
Silicon Graphics International, the well-known Silicon Valley maker of computers, used BidVantage earlier this year to save $20,000 on a purchase that had been budgeted for $100,000, says Linda Forbes, director of the company's remanufactured products group. SGI itself uses reverse auction sites to sell equipment that otherwise would be sold for scrap. "It's a great way to get rid of excess inventory and a great way to buy inventory that is no longer manufactured," she says.
The main advantage for a company to post its needs online is to realize cost savings, since competition among suppliers drives down the price. In addition, companies often save time. An auction accelerates the purchasing process, Mr. Malchicoff says, so that instead of taking weeks to identify suppliers, issue requests for quotes, and evaluate bids, a supplier gets a contract in a matter of hours.
Most online reverse auction sites work in a similar fashion, but they have their differences. Freemarkets, for instance, allows buyers to consider a supplier's track record or other factors, so it doesn't require buyers to accept the lowest bid. BidVantage, in contrast, allows suppliers to bid anonymously and requires that buyers accept the lowest price. Since some companies would balk at buying products from an unknown supplier, BidVantage guarantees the quality and delivery of products sold by its suppliers. It relies on the experience of its parent company, Data Exchange Corp., which has tested and repaired computer equipment for decades.
"The model seems to be proving out very well," says Mr. Malchicoff. He predicts "exponential growth in the coming months" for reverse auction hosts.
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