Expert favors ROAs over reverse auctions
By Alan Earls -- Purchasing, 3/12/2009 2:00:00 AM
While some chemical firms have embraced reverse auctions (see "Reverse auctions provide good chemistry for Shell "), there are certainly those who question their value. David Field, managing director of Ascendant Consulting in Ridgefield, Conn., advocates moving to reverse options auctions (ROAs). According to Field, with a traditional reverse auction the buyer gains very limited market intelligence—usually just a spread of prices—whereas the ROA process delivers rich information about potential vendors, an optimized price, and better risk management.
The basic concept of an ROA, he notes, is to expand the trading space so that buyers are not only getting the best price, but also getting to manage all the risk inside a contract. "With traditional reverse auctions, the focus is laser-beam-narrowly focused on price. With ROAs, you can factor in far more things and also begin to learn what factors are available and at what price from your suppliers."
"Any time you are buying something, you are always trying to manage risk along a number of parameters and this process can help," he adds.
Although ROAs are still done offline, Fields predicts that they will move online in the future. What's more, he notes, ROAs can benefit industries, including chemicals that have learned the lessons of the past when they dropped prices just to keep their operations running at capacity. That led to ruinous price wars. Now, says Fields, "game theory will apply and companies will look for ways to pare capacity in the hope that their competitors will follow suit," he says.
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