There's this company you've been dealing with for years. They've been a pretty good customer, and you think that they'll stick around that way for some time. And then, one day, you get that e-mail message: "This is your invitation to a reverse auction," or something to that effect.

With your ear to the ground, you'll hear a lot of differing opinions on the pros and cons of reverse auctions, but more importantly, you'll hear that they are becoming more popular. More auctions, more often.

"We've done, within the last year, eight reverse auctions, but that adds to the more than 200 we've done over the last three or four years," says "Clayton Smith," a director with a national distributor who asked to not have himself or his company named.

While each reverse auction is different in its own little way, there is a general roadmap that they follow. A customer, let's call him "Q," decides he wants a request for proposal, and stipulates that distributors must participate in a reverse auction. "Q" sets an opening price, a time is set…and the auction is on!

Distributors who wish to obtain the business will either drop their prices, increase their discounts or the like to be considered. Auctions usually run within a time limit, anywhere from 30 to 75 minutes, unless the bidding is especially fierce, when they are extended.

"If a lower bid is received in the last five minutes or so, overtime kicks in," says Smith. "Auctions have been known to go for three to four-and-a-half hours long. A lot of action is done in those last two to three minutes, so they seem to be never ending."

As the auction progresses, the bidding distributors are seeing one of a few options. Some auction sites only show what the lowest bid is, and others show the entire auction in its progression, allowing bidders to see what the others are doing. Some require a certain dollar amount or percentage point reduction before even entering a new bid, and for most, only a lower bid can be offered.

For some bidders, "snuggling" is a course of action, which is when they enter a bid lower than one number, but still higher than the lowest bid. That way, if for some reason, the lowest bidder doesn't work out, "Q" will call them next.

Once the auction is closed, and the lowest bid has been accepted, the company that has fought so hard for "Q's" business receives e-mail or phone notification of their accomplishment, and the deal is set.

"Reverse auctions are efficient, but they all are structured to benefit only the customer, and do little more than pit distributor against distributor," says Carl Norris, owner and president of Rogers Industrial Supply in Fort Smith, Ark., and Rogers Bearings & Supply, in Searcy, Ark. Norris has participated in six auctions within the last three months, and also believes that the practice is becoming more prevalent.

"Our first exposure was with two different customers, in which one of them had four lots on the auction," he says.

"Lots" are groups of material put up for auction at once. A distributor may be bidding on one lot that contains several different products.

"We may not be able to bid on all the groups," says Smith. "If we can only identify nine of the 10 items in the lot, and can't get any more information on what that one item is, we'll give them a bid, specifically excluding whatever item number is in question."

According to INDUSTRIAL DISTRIBUTION's 58th Annual Survey of Distributor Operations, 32 percent of survey respondents have participated in reverse auctions, up significantly from the 18 percent in the 57th. Of those that participated, 20 percent have less than $5 million in sales, while 57 percent have more than $20 million. General line distributors are only slightly more likely to participate in reverse auctions (34 percent), than specialty distributors (31 percent).

As for how favorable their reverse auction experiences were, and despite the growth in the percentage of distributors participating in them, 18 percent of respondents said they were satisfied with the auction results. That's down 1 percent from last year's number. And relative to other distributors, the smallest—sales of less than $5 million—are most likely to have favorable experiences (28 percent). Only 20 percent of general line distributors who have participated found the experience favorable, while 16 percent of specialty distributors did.

Fifty-five percent of those who took part in reverse auctions said that none of their 2003 sales were generated through the channel. When factoring in the other 45 percent of auction participants who responded, only 1.8 percent of the average distributorship's 2003 sales can be attributed to the practice.

Among respondents who have participated, only 22 percent currently participate at least once a month. Frequency of participation is down from last year, with 1 percent in 2004 and 2 percent in 2003 once a day; 7 percent in 2004 and 5 percent in 2003 once a week; 14 percent in 2004 and 22 percent in 2003 once a month; 50 percent in 2004 and 36 percent in 2003 once every six months; and 28 percent in 2004 and 35 percent in 2003 once a year. Frequency is highest among the larger distributors.

According to a survey done by Purchasing magazine in 2003, purchasing professional respondents using e-auctions has leveled off from 2002, with 15 percent of them saying they used the technology (15 percent did in 2002, while only 6 percent did in 2000). However, 64 percent said they wouldn't use reverse auctions, up 13 percent from last year's number.

According to one purchasing professional at a healthcare firm, his organization plans to increase the use of e-auctions, but only gradually. "E-auctions only fit certain specific scenarios. We would conduct an e-auction for copy paper, but not for vials and syringes. E-auctions also tend to alienate existing reliable suppliers and do not foster commitment as either a customer or supplier," he states.

Most distributors who have participated in reverse auctions will tell you that their experiences have run the gamut of good and bad.

"There are wide variances in how companies set the auctions up," says Smith. "On the best end, the auction is like a free market, similar to eBay, where they show the set ceiling price, the progress throughout the auction, and more feedback for those participating."

The bad experiences, Smith notes, keep the bidders in the dark regarding the action, and generally do the opposite of the better auctions.

"I've been in industrial sales and marketing for 35 years, and this goes 100 percent against everything I've ever done in the industry," says Smith. "It takes away from the differences between the products and refines everything to price. If you ask a customer what is most important to them, price is rarely at the top of the list. But these auctions put price as the number one thing.

"If I were a manufacturer, I would want my product to be evaluated differently. Every product could be considered a commodity, but every product is different in its own right," he says.

While a good number of distributors have participated in reverse auctions, finding one that has had a truly beneficial experience from one is more difficult.

Says Norris, "As an owner, I don't like it. The customers drive the price down, and they get a lot less service. There are no value-added benefits at all. In the auctions we've won, the customer gets a very low price, and nothing else."

To be sure, auction reactions have been mixed.

In response to a call for opinions, one ID reader wrote in, "Reverse auctions have not been positive for us, in that we see each of them as being strictly lose-win. Lose for the distributor and win on low price for the end user. However, ultimately, it becomes a lose-lose, because the auction bid winner typically cannot afford to offer any other services to the account, and the production people have no one to help with problems. You simply cannot afford to 'commoditize' industrial items to the extent that there is no face-to-face interaction, or tailoring of specifications to meet individual criteria."

Of course, reverse auctions aren't going anywhere. And most distributors that have participated will continue to participate in the auctions.

"We'll continue to be a part of them for two reasons," says Norris. "It's business. Now, reverse auctions are a part of the business. Secondly, some of these customers are multi-facility companies, and that increases our geographic area.

"[Reverse auctions] are just going to get more prevalent. It's an easy way for a large user to drive down their prices on commodity items, and it's a quick way to get multiple quotes," he says.

For Smith, reverse auctions and their advising companies have established themselves as a business, and for that, distributors have to deal with them.

"Our aim is to get in front of the customer," states Smith. "As for service, we do as much as we can in the pricing stage, by including the other benefits in the initial price.

"We're all doing these things, but the reverse auction limits all that you can do. All the customer wants is the lower price."