Combinatorial Auctions for Transportation Service Procurement: The Carrier Perspective

Abstract

The procurement of transportation services is an important task for shippers because of the need to control costs while providing high service levels. When shippers need to transport goods and materials, they seek transportation services from outside companies and typically issue a request for quotes from a group of carriers. The shippers then assign contracts on the basis of negotiated service charges. This process is similar to a simple sealed-bid auction in which each bidder submits a sealed bid for a single item. In the past, when shippers needed to procure transportation services for a set of distinctive delivery routes (called lanes), they would obtain quotes for each lane individually and repeat the simple auction process for each lane. Alternatively, they might negotiate for bundles of lanes with a single carrier at a time. However, in the last several years, software has been developed to enable shippers to make all lanes available for bidding simultaneously and to enable carriers to simultaneously bid on combinations of individual lanes. This method of awarding contracts, conventionally called a combinatorial auction, has resulted in significant cost savings for shippers. This research examines the benefits of combinatorial auctions primarily from the carrier's perspective. On the basis of a simple simulation model, preliminary findings suggest that carrier benefits can also be significant.