CPIM Practice Exam

What is the definition of a reverse auction?

1. An auction for used inventory

2. A public bidding process for buyers

3. An auction where suppliers underbid each other

4. A fixed price sale

The correct answer is: An auction where suppliers underbid each other

A reverse auction is characterized by a competitive bidding process where suppliers compete against one another to offer the lowest price for their goods or services. Unlike traditional auctions, where buyers bid higher amounts, the dynamics of a reverse auction shift in favor of the buyer, who sets the stage for suppliers to lower their bids in order to win the business. This format encourages suppliers to offer their most competitive pricing in a transparent and real-time environment, ultimately benefiting the buyer with reduced costs. In contrast, the other choices do not accurately represent the concept of a reverse auction. An auction for used inventory focuses on the sale of secondhand items rather than the competitive pricing aspect among suppliers. A public bidding process for buyers might imply a situation where multiple buyers are bidding, which is not how reverse auctions operate. A fixed price sale does not involve bidding at all, eliminating the competitive element inherent to reverse auctions.