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Open Access Publications from the University of California

Strategic Freight Transportation Contract Procurement

  • Author(s): Nandiraju, Srinivas
  • et al.

Auction based market clearing mechanisms are widely accepted for conducting business-to-business transactions. This dissertation focuses on the development of auction mechanism decision tools for freight transportation contract procurement. The dissertation categorizes the problems in freight procurement auctions arising in both sport markets and long term markets. Spot markets are widely employed over the Internet using standard classic auctions. For long-term markets, large shippers (typically manufacturing companies or retailers) have begun to use combinatorial auctions to procure services from trucking companies and logistics services providers. Combinatorial auctions involve very difficult optimization problems both for shippers and carriers. In the US truckload market few carriers have the technical sophistication to develop bids for combinatorial auctions. To address the problem we look at a different auction scheme termed a unit auction, where the shipper can exploit the economies of scope in the network and give the carriers the chance to bid on pre-defined packages similar to 'lotting' in supply chain procurement.

The problems in developing contract allocations, called the winner determination problem, are computationally complex and large-scale. Hence the development of good heuristics is of utmost importance. Shippers have non-price business constraints, which must be included in the winner determination problems to closely match shipper business objectives. We develop winner determination problem formulations incorporating the non-price business constraints and develop Lagrangian based optimization methods and greedy approximation algorithms for both unit auctions and combinatorial auctions. Extensive empirical results are provided to test the performance of the heuristics against a standard integer-programming solver.

Bidding in auctions from the carrier's perspective is complicated as it involves taking into account the competitive behavior of other carriers and a carrier's difficult network optimization problems. We develop bidding strategies for carriers in spot markets using concepts from economic auction theory. For long-term market bidding, we study the effects of demand uncertainty, competitive behavior, carrier network synergies and strategic pricing, and shipper's winner determination problems on carrier bidding using optimization-based simulation analysis.

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