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Optimization Based Procurement for Transportation Services (Caplice and Sheffi, 2003)

Optimization Based Procurement for Transportation Services (Caplice and Sheffi, 2003). Steps of transportation procurement Bid preparation Bid execution Bid analysis and assignment Cost of carriers Line-haul cost Connection to follow-on loads (dwell + deadhaul) Connection cost uncertainty

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Optimization Based Procurement for Transportation Services (Caplice and Sheffi, 2003)

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  1. Optimization Based Procurement for Transportation Services(Caplice and Sheffi, 2003)

  2. Steps of transportation procurement • Bid preparation • Bid execution • Bid analysis and assignment • Cost of carriers • Line-haul cost • Connection to follow-on loads (dwell + deadhaul) • Connection cost uncertainty • Carriers should be concerned more with economies of scope than economies of scale

  3. Problems with traditional bidding system • Interdependency of lanes is ignores – cost hedging • Cannot consider other factors; e.g., requirements such as minimum volume for preferred carriers. Implications • Shippers 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.

  4. Results • Less uncertainty for carriers • Lower bid prices by carriers • Lower transportation cost for shippers • Both shippers and carriers benefit • SCM cost reduced • Potential Savings • Table 1

  5. The optimization model can also incorporate: • Min/Max carriers • Favoring incumbents • Back up carriers • Threshold volume • Performance factors

  6. 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?

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