Optimization Based Procurement for

Transportation Services

(Caplice and Sheffi, 2003)

Steps of transportation procurementBid preparationBid executionBid analysis and assignmentCost of carriersLine-haul costConnection to follow-on loads (dwell +

deadhaul)Connection cost uncertaintyCarriers should be concerned more with

economies of scope than economies of scale

Problems with traditional bidding systemInterdependency of lanes is ignores – cost

hedgingCannot consider other factors; e.g., requirements

such as minimum volume for preferred carriers.

ImplicationsShippers should design the bid such that it

enhances carrier efficiencies and lower bid prices.

A Solution

Let carriers submit conditional bids (package bids) – Lanes can be overlapped

Shippers solve an optimization model to determine the assignments to carriers.

ResultsLess uncertainty for carriersLower bid prices by carriersLower transportation cost for shippersBoth shippers and carriers benefitSCM cost reduced

Potential SavingsTable 1

The optimization model can also incorporate:

Min/Max carriersFavoring incumbentsBack up carriersThreshold volumePerformance factors

Discussion Questions

When does it make sense to use optimization?

Who should create package bids?What performance factors should shippers

consider?Can bidding be used to collaborate across

shippers?Can bidding be used to collaborate across

carriers?