Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Reverse Auctions to Cut Costs 23 Percent
Transcript
- Lucas: So reverse auctions — they're one of those procurement tools that either get celebrated as a cost-cutting miracle or dismissed as a race to the bottom. And I think the truth, as usual, is somewhere in between. Luna: I've definitely heard both sides. Buyers who swear by them, suppliers who hate them. But the numbers can be striking when done right. Lucas: Yeah — and that's what we're anchoring on today. I found a really clean case from about eighteen months ago: a mid-sized manufacturer of industrial valves — think gate valves, ball valves, the kind used in water treatment plants and oil pipelines. They ran a reverse auction on commodity steel fasteners — bolts, nuts, washers — and over two years, they cut that category spend by 23 percent. Luna: Twenty-three percent is significant. How did they set it up? Lucas: So first — they didn't just throw every fastener SKU into an auction. They did a spend analysis and identified the high-volume, low-complexity items: standard-grade hex bolts, zinc-plated nuts, flat washers in common sizes. The stuff that's essentially a commodity — multiple suppliers can make it to the same spec. Luna: Right — you'd never reverse auction a custom-engineered component with tight tolerances. That's a relationship play. Lucas: Exactly. So they pre-qualified six suppliers — all with existing quality certifications, ISO 9001, all capable of delivering the volumes. Then they ran a sealed-bid reverse auction on a web platform. Suppliers could see their rank but not the exact dollar amounts of competitors' bids — which is a design choice that reduces the chance of collusion. Luna: That's a smart safeguard. Because if everyone sees exact prices, you get this weird game theory where they might tacitly coordinate. Lucas: Right. And the auction itself lasted forty-five minutes. The buyer had set a reserve price based on a should-cost model — they knew the raw material cost plus typical margin. So when the bidding went below that reserve, they actually paused and extended the auction by ten minutes to let suppliers decide if they wanted to go lower. Luna: That's interesting — most procurement guides say never extend the auction. It signals desperation. Lucas: Yeah, conventional wisdom says stick to the time limit. But here, the buyer knew the market well — they had three suppliers still actively bidding, and they felt the extended time would squeeze out the last bit of margin. And it worked — the final price landed 23 percent below the previous average contract price. Luna: But the real test is whether those savings stick. Did quality suffer? Did suppliers start cutting corners? Lucas: That's the critical question. The buyer built in post-auction quality checks — random sampling of incoming lots, with a penalty clause: if defect rates exceeded 1.5 percent, the supplier had to cover the cost of rework. And they tracked on-time delivery as a scorecard metric. Two years in, defect rates actually improved slightly — suppliers knew they'd be dropped if they cheated. Luna: So the reverse auction wasn't a one-off squeeze — it was part of a broader supplier management system. Lucas: Exactly. And that's the part that often gets missed. Reverse auctions get a bad reputation because some buyers use them as a blunt weapon — they just say 'lowest price wins' and then wonder why suppliers ghost them when things get tight. This buyer used the auction as a price-discovery mechanism, not a relationship destroyer. Luna: I've read studies that show reverse auctions can reduce the number of suppliers willing to bid over time — the so-called 'supplier erosion' effect. Did they see that? Lucas: They did. Of the six original bidders, two dropped out after the first year. One said the margins were too thin, another was acquired. So the buyer had to recruit new suppliers for the second year. But because the category was a commodity, they found three replacements easily. Luna: That's the trade-off. You get a 23 percent cost reduction, but you might lose some relationships. For a non-strategic category like fasteners, that's probably acceptable. Lucas: Yeah — and I'd argue that's the key lesson. Use reverse auctions only for categories where the switching cost is low, where multiple qualified suppliers exist, and where the specification is stable. If you're buying a proprietary component or a service that requires deep collaboration, reverse auction is a terrible idea. Luna: Right. And speaking of things that require collaboration — this show itself is a kind of collaboration between us and the listeners. And I think it's worth mentioning that we keep this whole thing ad-free, which is unusual for a business podcast network. Lucas: It is unusual. And the reason is that a small group of listeners — not a huge number, maybe a hundred or two — chip in monthly through buy me a coffee dot com slash fexingo, and that literally covers the production costs. No ads, no sponsors, no pressure. Luna: Yeah — if these conversations have moved your work forward in some small way, and you want to be part of keeping it going, that's the link. But no pressure at all. Lucas: Alright — back to the auction. So the buyer achieved 23 percent savings, but they also learned something about their own data. Before the auction, they assumed their incumbent supplier was already competitive. The auction revealed the market price was significantly lower — so the savings came partly from that information gap. Luna: Which suggests that even if you don't run an auction, just doing the should-cost analysis and market testing could yield savings. The auction is just a mechanism to force that discovery. Lucas: Exactly. And the buyer told me — I spoke with the procurement director — he said the auction itself was a wake-up call for their own engineers. They realized their specifications were over-engineered in some cases — they were specifying a higher grade of steel than necessary. So they revised specs and saved an additional 4 percent just from that. Luna: That's a nice bonus. So the reverse auction catalyzed a broader cost-reduction culture. Lucas: Yeah. And I think that's the real takeaway: the tool is neutral, but the strategy around it matters. If you use reverse auctions transparently, with good data, clear specifications, and a quality backstop, they can be a legitimate part of a procurement toolkit. If you use them as a club, you'll break relationships and eventually lose supply. Luna: So what's the one thing a buyer should do before even thinking about a reverse auction? Lucas: Spend the time building a should-cost model. Know what the raw materials, labor, and logistics should add up to. Because the auction won't tell you if a price is unsustainably low — only the model can. And if you don't have that, you're flying blind. Luna: Good advice. And maybe also talk to your best suppliers first — see if they can match the market without going through a public auction. Lucas: Exactly — that's what this buyer did. They gave the incumbent a chance to match the lowest bid after the auction. The incumbent chose not to, but the door was open. So the relationship wasn't burned. Luna: That's a classy move. And it probably preserved the option to work with them again in the future if needed. Lucas: Yeah. And that's the kind of nuance that separates good procurement from just slashing costs. So — reverse auctions are a tool. Use them wisely, and they can deliver real savings. Use them carelessly, and you'll pay the price later.