Optimization Based Transportation Procurement
This research initiative addresses how shippers (buyers) should procure transportation services from truckload (TL) motor carriers (suppliers). TL carriers operate over irregular routes moving directly from origin to destination without any intermediate stops. A significant portion of a TL carrier’s costs is due to the repositioning of empty vehicles (deadheading) from the destination of one load to the origin of the follow-on load. Connection costs are never known with certainty by the carrier due to the short dispatching lead times and overall spatial and temporal variability of shipper demand. The uncertainty in connection costs creates lane interdependencies for TL carrier operations, that is, the cost of serving a lane (origin-destination pair) is affected by the other lanes that a carrier is serving. Thus, TL carriers exhibit economies of scope.
Current practice and research has concentrated on applying generic procurement strategies, such as supplier reduction and certification programs, to TL transportation. While beneficial in many respects, these initiatives focus on achieving economies of scale for suppliers while ignoring economies of scope. This project introduced for the first time optimization based auctions for TL procurement. By modifying its contracting, bidding, and assignment processes, shippers can assist TL carriers in achieving the benefits of economies of scope. Reducing the carriers’ costs can, in turn, lower the shipper’s transportation costs.
This project made several contributions. First, the effect of economies of scope on shipper-carrier relationships were identified and analyzed. Second, a decision framework for designing TL carrier bids was developed, to include the use of combinatorial auctions and conditional or package bids. Conditional bids (where bundles of lanes are offered as an all or nothing package) were first introduced as a method of reducing carrier hedging due to connection uncertainty. Third, a methodology for identifying potential efficient aggregations of lanes was developed and applied to an actual shipper’s network. Finally, optimization models incorporating conditional bids and system restrictions are developed and used to assign carriers to lanes in a shipper’s network. These models were later used to develop systems that are now employed across the entire industry.
This initiative also examined procurement practices across Truckload (TL) transportation industry, including combinatorial auctions, private and public exchanges, and electronic catalogs. Combinatorial multi-attribute auctions are commonly used strategically to populate electronic catalogs, commonly called “routing guides,” with pricing, assignments, and priority logic. Private and public exchanges are used to complement the electronic catalogs in cases where the catalog fails. We identified weaknesses and shortcomings of the current state of practice and art. We continued this examination by exploring the failure of widespread adoption of specific ‘all or nothing’ package bids. Though a considerable amount has been written about the economics of truckload carrier’s operations and the benefits of combinatorial auctions to shippers, few have studied conditional bidding from a bidder’s (carrier’s) perspective. We examined why bidders do and don’t submit conditional bids in combinatorial auctions.
- Caplice, C. (2007), “Electronic Markets for Truckload Transportation”, Production and Operations Management, 16, No. 4, pp423-436.
- Caplice, C. and Y. Sheffi (2006), “Combinatorial Auctions for Truckload Transportation,” Chapter 21 in Combinatorial Auctions, ed. P. Cramton, Y. Shoham, and R. Steinberg, MIT Press.
- Caplice, C. and Y. Sheffi (2003), “Optimization Based Procurement for Transportation Services,” The Journal of Business Logistics, Vol. 24, No. 2, pp.109-128.
- Caplice, C (1996) An Optimization Based Bidding Process: A New Framework for Shipper-Carrier Relationships
- Plummer, C (2003) Bidder response to combinatorial auctions in truckload procurement, MIT SM Thesis.
Dr. Chris Caplice