Mark Magstadt isn't shy when it comes to expressing his distaste for reverse auctions. As president of Lake City, Fla.-based Hub City Industrial Supply, Inc., he's been asked to participate in them numerous times, including the one that left his firm's early legwork cast aside while the potential customer put the order up for bid online.

'We brought them a product that was going to save them about $20,000 annually, and they thanked us by asking us to bid against their current vendor,' says Magstadt. 'It was just nasty.'

Unwilling to give in to the customer's demands, Magstadt says his two-location, 16-employee firm ignored repeated requests to 'come online and bid on the order,' and didn't even monitor its progress. 'We simply said, 'we're not participating,'' says Magstadt. 'Then we walked away.'

Magstadt says his decision was a matter of principle. Because distributors bring more to the table than just the lowest possible price, he sees no reason for them to have to compete solely on price in a buyer-initiated reverse auction environment, where the buyers invite bids from multiple sellers. Having strived for years to position themselves as providers of value-added services, distributors tend to view reverse auctions as nothing more than just another way to commoditize their products and services.

Unlike traditional auctions, the reverse auction finds prices decreasing as sellers compete for the buyer's business, with the lowest bid considered the winner. For price-conscious buyers, the scenario is favorable. In fact, a number of large corporations have turned to reverse auctions as an alternative to the more traditional RFQ or RFP process. There are variations on the system: in some reverse auctions, for example, the buyer may not be bound to accept the lowest bid, or may not be bound to accept any bids at all.

Though distributors like Hub City Industrial have taken a stand against reverse auctions, customers haven't swayed from asking suppliers to participate in them. In its 58th Annual Survey of Distributor Operations , INDUSTRIAL DISTRIBUTION found that 32 percent of those surveyed had participated in reverse auctions, up from 18 percent the prior year. The distributors who were most likely to participate had $20 million-plus in annual sales, and tended to bid in a reverse auction format once every six months.

'Although reverse auctions have been oversold, buyers will keep using auctions as a tool to pressure suppliers,' says Adam J. Fein, president of Philadelphia-based Pembroke Consulting. 'Reverse auctions are an ideal tool for buyers looking to exploit the current environment facing distributors.'

Fein says that because industrial distributors are locked in a market-share battle, price tends to be a key motivator in their customers' final supplier selection. Those same buyers perceive reverse auctions to be a much faster way to get to the final, best price from a group of suppliers, adds Fein, while today's regulatory environment also favors sourcing processes that reduce the influence of personal relationships.

'A downside for distributors is that shifting the focus of negotiations primarily to piece price limits a distributor's ability to market or communicate differentiated services or value,' says Fein. 'Reverse auctions put large volumes up for grabs, tempting distributors to offer major price concessions without truly thinking through the profit implications.'

Still, Fein says not all buyers are enthused by the thought of using reverse auctions. 'Some buyers are questioning if price reductions can be sustained over time because suppliers may underbid to keep or get the business,' he explains. 'In some situations, the distributor who won the reverse auction was unable to support the business profitably without reducing service levels.'

A persevering group that is unwilling to stand by as competitors steal their business, industrial distributors can win at the strategic sourcing game, even if it means participating in the occasional reverse auction. Fein says that in order to succeed, distributors should steer clear of the 'fulfillment mentality' and try not to oversell documented cost savings.

'For example, distributors have an untapped opportunity to bundle contractual compliance services with product supplies,' Fein says. 'By controlling fulfillment, distributors can support a customer's strategic sourcing efforts by helping to manage how and what is spent by individual buyers.'

Fein says distributors can counter auction sourcing initiatives with an independent understanding of their customer's, and their own company's, economics. 'Understanding your internal, de-averaged cost structure and each customer's profitability will be vital when responding to competitive sourcing environments,' says Fein.

Michael Rothkopf, a professor at Rutgers University in Piscataway, N.J., who has studied the auction process closely over the last few years, says distributors looking to make the most of reverse auctions must distinguish themselves and offer a level of quality (via a better product or service, for example) that their competitors can't match. Past that, Rothkopf says there's always room for negotiations on the bid itself, particularly when it comes to the specifications.

'Lobby with the buyers to get those specs to reflect the value that your distributorship offers,' says Rothkopf, who points to the auction's business rule as yet another place where distributors can gain an edge. For example, the fastener supplier who has been working with a customer for years—and who is suddenly being asked to participate in a reverse auction—could insist that it only bid against other qualified bidders. Another alternative on bids that require substantial pre-bidding preparation, he says, is to insist that there be a limited number of bidders and that they again be only fully qualified to bid.

Sean Devine, director of client services at Burlington, Mass.-based Emptoris, a provider of auction technology, says that while many suppliers assume reverse auctions create a win-lose scenario (with the buyer being the only real 'winner') for their firms, there are ways to benefit from this online selling mechanism. He says the lower cost of sales and shorter sales cycle (that requires no schmoozing or lengthy lunch appointments) are just two of the attractors for distributors.

'The reverse auction process also helps suppliers gain market intelligence,' says Devine. 'They know where their competitors are, how the market is behaving and even how many competitors there are (depending on the type of auction). It can be an opportunity to address more opportunities than they had in the past.'

It's going to take more than that to convince Magstadt to take part in a reverse auction though. He calls the process unfair to distributors and manufacturers, both of whom are forced to negotiate solely on price, or risk losing the order. And even the distributor that tries to negotiate, or better highlight strengths and value proposition, isn't guaranteed a win, says Magstadt, who points to his recent experience as proof.

'The clerk, who they probably pulled off of the floor one day, simply didn't understand the value proposition that we were offering,' says Magstadt. 'We tried to explain our view—and the value of building a relationship with a vendor—and they didn't buy into it.'

A national economic recovery has somewhat lessened price pressures, says Fein, but that doesn't mean industrial distribution executives should expect the reverse auction trend to slow down substantially. 'Looking forward,' he says, 'expect buyers to become increasingly sophisticated, and constantly question the value of wholesale distribution.'

When a part of that questioning includes the words 'we'd like you to participate in a reverse auction,' Stan Johnson hopes distributors will just say no. As vice president of national sales for Safeco, Inc., in Kingsport, Tenn., he says that request comes up every once in a while. 'It's becoming more common,' says Johnson, 'but if no distributor ever participated in them, they wouldn't exist.'

Johnson says that 100-employee Safeco participated in its first reverse auction about four years ago. Since then, he says the company has 'won some and lost some,' and notes that even the wins weren't very fruitful for the distributor. Johnson recalls one in particular that left both the customer and supplier back at the drawing board on a major contract, trying to figure out a better way to convey the bid specifications.

At issue was a unit of measure glitch. The customer assumed that the distributor was bidding on a case of 25, while the supplier gave a per-piece price. Three distributors bid on the order, and two out of three (Safeco included) bid on the piece price. Upon discovering the mistake, the buyer went with the higher bidder, who had bid on the per-case price.

It's those types of quagmires and time wasters that have left a bad taste in Johnson's mouth. 'At this point, we try not to participate in them unless it's for a major customer who decides to start using reverse auctions,' says Johnson, who cautions distributors to be wary. 'As distributors, if we continue to participate, we could ultimately drive ourselves out of business.'