A Model of Relational Governance in Reverse Auctions

By Pearcy, Dawn; Giunipero, Larry et al. | Journal of Supply Chain Management, Winter 2007 | Go to article overview

A Model of Relational Governance in Reverse Auctions


Pearcy, Dawn, Giunipero, Larry, Wilson, Andrew, Journal of Supply Chain Management


INTRODUCTION

Increasingly, firms rely upon electronic procurement tools, including reverse auctions, in an attempt to improve business outcomes. For the purpose of this research, a reverse auction is defined as a buyer-initiated bidding event utilizing electronic software that permits price or rank visibility to sellers. The process is conducted in a secure, online environment within a specified time frame with the goal of obtaining a rational market price for the commodity or service being procured. The reverse auction has been touted as a means of reducing the time associated with the supplier selection and award process (Smeltzer and Carr 2003; Carbone 2005). The major benefit of the time savings associated with reverse auction use is purported to be the ability of the purchasing/supply management professional to devote more effort toward strategic sourcing activities (e.g., Carbone 2005). Some of these activities include making in/outsourcing decisions, strategic cost management, benchmarking and supplier development (Carr and Smeltzer 1997; Monczka, Trent and Morgan 2000). In addition, it is commonly held that the use of reverse auctions results in price reductions (Hannon 2005; Teague 2005).

Despite the proposed benefits associated with reverse auction technology, managers and academicians alike have expressed concern regarding how its use impacts, and is impacted by, buyer-supplier relationships (e.g., Bartholomew 2001; Bartholomew 2002; Emiliani and Stec 2004, 2005; Daly and Nath 2005). Some fear the use of reverse auctions conveys to suppliers that the buying firm is simply looking to extract price reductions without regard to existing or future business relationships, thereby breeding mistrust and lack of cooperation (Henke 2000; Hannon 2003).

As with any emerging technology, the body of academic literature on reverse auctions is growing, but is still incomplete. Some examples of previous research on reverse auctions include the investigation of multiattribute auctions (Talluri and Ragatz 2004), risks associated with its use (Smeltzer and Carr 2003), conditions favoring its use (Smeltzer and Carr 2003; Kaufmann and Carter 2004), adopters versus nonadopters (Hartley, Lane and Hong 2004) and suppliers' satisfaction with the process (Hong and Hartley 2001) to name a few. While strides have been made in understanding the process, a gap in the literature exists with respect to empirical evidence on reverse auctions and buyer-supplier relationships, the resulting purchase price and its impact on the productivity of the purchasing professional as a result of the purported time savings.

The current study empirically investigates the relationship between the relative strategic importance of the existing buyer-supplier relationship and relational contract governance when firms use reverse auction technology. In addition, this research investigates the relationship between reverse auction use and three outcomes--purchase price, supplier cooperation and the ability of the purchasing/supply management professional to engage in value-added/strategic activities as a result of time savings.

This research is of conceptual importance because it examines the relative strategic importance of the existing buyer-supplier relationship as a critical antecedent to the development of the governance structure in the context of reverse auction use. Previous academic research has focused on the factors that impact the type of governance structure developed with suppliers in "traditional" face-to-face settings (e.g., asset specificity, purchase type, competitive environment, etc.). Clearly, it is important to understand the potential determinants of the governance structure even if the firm employs electronic methods of supplier selection. Much of what has been written about the relationship between reverse auction use and governance structure in the supply management literature is descriptive or relies on case studies (e. …

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