Introduction of Electronic Combinatorial Auction to a Food Manufacturer

Abstract

Food manufactures often face difficult purchasing decisions when multiple business constraints and several bidding options affect them. The objective of the buying organization is to ensure corn sweeteners are purchased so as to minimize the total operational cost. To do so, the purchasing department compared the conventional method of a sealed-bid auction to, first, a reverse auction with single-item bids and, then, to a reverse auction with bundled bids. The senior author—as director of corporate purchasing—researched, proposed and executed the combinatorial auction to source corn sweeteners for a large, processed-meat manufacturer who uses large quantities of four corn sweeteners at its eight processing plants located across the United States. Two buying techniques were — electronic reverse auctions and combinatorial reverse electronic auctions. First, we present the difficulties of using a reverse combinatorial auction and describe the method used to obtain the least cost combination of bids that satisfies buyer’s RFQ. Second, we show the progression of the bidding rounds and estimate the savings from this combinatorial auction as compared to what the company did with either a manual or a reverse single item auction. Finally, we address the diminishing marginal returns of repeated usage of CeRA, and describe how this food company advanced from the auction setting to a riskmanagement-based procurement process.