Ingeniería industrial

Transportation Procurement in the Digital Age

Yossi Sheffi
ESD.260; 15.770; 1.260 December, 2006

Outline
Procurement Transportation procurement Economies of scope Multi-attribute procurement Forecasting transportation requirements The transportation procurement and management process

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© Yossi Sheffi, MIT

Procurement: The Killer B2B App.
Main idea: consolidate the buying powerWithin a unit/location (plant, office, etc.) Within a corporation Within an industry Increase reach Get to foreign suppliers Consolidate the gathering of information (capabilities, LOS, quality, etc.)

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© Yossi Sheffi, MIT

Procurement: The Killer B2B App.
Central point of control: Manage spending and acquisitions efficiently Negotiate centrally (economies of scale) Let everybody buysmartly, independently but with accountability So: save time and money

Automate the process
Allow multiple rounds Pressure suppliers with transparency of prices

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Procurement Software & Services
First applications: indirect material (not critical, would not shut a plant, does not require significant expertise) Direct (productive) material: handled by ERP originallyand only now by specialized software Software companies: Ariba, CommerceOne, Netscape, i2, Cominenet… Consulting services: FreeMarkets, ICG commerce… Consortia: Covisint, Transora, e2open, WWRE …
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Transportation Procurement Is Different
Controlling economics: economies of scope, not only scale The are many dimensions to transportation services Forecastingtransportation is difficult Complex administration

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Transportation Operations
Consolidated operations Bus/rail transit LTL Rail Airlines Ocean carriers Package delivery Direct operations Taxi TL Unit trains Charter Tramp services Courier

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Economies of Scope
Transportation product: a lane Costs: direct & connection Lane cost dependencies =>economies of scope The issue: shippers evaluate each lane bid by itself while carriers are trying to build a network

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Current Practice
Information exchange: Shippers give aggregated volume estimates (by lane, origin, region, system), based on last year. Carriers submit lane rates (per mile or per move). Assignment mechanism: Lane-by-lane analysis. Low bid wins. Spreadsheetanalysis.
Fig.1 A Simple Network with Four Lanes
B

A C

Lane A→B B→C C→A C→B

$ $ $ $

Carriers A B 500 $ 525 500 $ 475 500 $ 525 475 $ 500
© Yossi Sheffi, MIT

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Current Practice
Information exchange: Shippers give aggregated volume estimates (by lane, origin, region, system), based on last year. Carriers submit lane rates (per mile or per move). Assignment mechanism:Lane-by-lane analysis. Low bid wins. Spreadsheet analysis.
Fig.1 A Simple Network with Four Lanes
B

A C

Lane A→B B→C C→A C→B

$ $ $ $

Carriers A B 500 $ 525 500 $ 475 500 $ 525 475 $ 500
© Yossi Sheffi, MIT

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Current Practice
Information exchange: Shippers give aggregated volume estimates (by lane, origin, region, system), based on last year. Carriers submit lane rates (per mile orper move). Assignment mechanism: Lane-by-lane analysis. Low bid wins. Spreadsheet analysis.
Fig.1 A Simple Network with Four Lanes
B

A C

Lane A→B B→C C→A C→B

$ $ $ $

Carriers A B 500 $ 525 500 $ 475 500 $ 525 475 $ 500
© Yossi Sheffi, MIT

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Combinatorial Bidding
Fig.2 A Network Example with Nine Bid Packages
The Network: Possible Packages: #1 B A B B #2 C A C B #4 C #7 A A#3 C B C A B #6 C A B #9 C #5 A B C B #8 C

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© Yossi Sheffi, MIT

B

Packaged Bids
Carrier I #1 A→B B→C C→A C→B 1 1 1 1 #2 #3 #4 #5 1 1 1 1 1 1 #6 #7 1 1 #8 #9 1 1 1 #1 1 1 1 #2 #3

A C

Carrier II #4 #5 1 1 1 1 1 1 1 #6 #7 1 1 #8 #9 1 1 1

Bid

500 500 500 475 975 950 975 900 1325 525 525 475 525 1000 925 925 900 1375

$1325 + $475 = $1800
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