Glaxo SmithKline reduces prices through reverse auctions

Healthcare company GlaxoSmithKline (GSK) started using online reverse auctions in 2000 to drive down the price of its supplies. For example, it bought supplies of a basic solvent for a price 15 per cent lower than the day's spot price in the commodity market, and Queree (2000) reported that on other purchases of highly specified solvents and chemicals, SmithKline Beecham (prior to formation of GSK) regularly beat its own historic pricing by between 7 and 25 per cent. She says:

FreeMarkets, the company that manages the SmithKline Beecham auctions, quotes examples of savings achieved by other clients in these virtual marketplaces: 42 per cent on orders for printed circuit boards, 41 per cent on labels, 24 per cent on commercial machinings and so on.

The reverse auction process starts with a particularly detailed Request for Proposals (RFP) from which suppliers ask to take part, and then selected suppliers are invited to take part in the auction. Once the bidding starts, the participants see every bid, but not the names of the bidders. In the final stages of the auction, each last bid extends the bidding time by one more minute. One auction scheduled for 2 hours ran for 4 hours and 20 minutes and attracted more than 700 bids!

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