Commentary: Reconsider the Role of Reverse Auctions

How do you get a distributor agitated? Bring up the subject of reverse auctions. There are few topics in distribution that generate such a negative response. Nearly everyone who has participated or been displaced by one has a horror story of the resulting breakdown in contract performance. Some were ironed out and distributors lost business to the price battle; some displaced distributors came to the rescue months later and had the opportunity to say, “I told you so.”

Satisfying as that may be on occasion, reverse auctions quickly became a lightning rod in the late 1990s for short-circuiting channel relationships. Distributors got squeezed in the middle of a price negotiation where their added-value capabilities were stripped out of the equation. For some it was a frightening wake-up call about how much of their added-value was bundled into the product costs. Customers took certain services for granted, and rejected outright the value of others that did not impact the bottom line.

Those negatives were compounded by suppliers that suddenly were faced with yet another channel management issue. In one case for the ages, we heard about a distributor into the production facilities of a primary supplier facing the Catch-22 of trying to get special discounts for a reverse auction being conducted by that supplier. Confused? So were all the participants in that one.

In spite of the strong negatives, including some expensive and painful learning curves, we found that a segment of customers, typically large ones, continue to develop reverse auctions as a tool instead of a weapon. Distributors may not like it, and as we found, many are electing not to participate today. But customers clearly are achieving some goals with them, whether used as weapon or tool. Worth watching.

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