Combinatorial and Quantity-Discount Procurement Auctions Benefit Mars, Incorporated and Its Suppliers

Abstract

Simple auctions neglect the complex business constraints required by strategic sourcing. The Mars-IBM team created a procurement auction Web site 〈www.number1traders.com〉 that enables buyers to incorporate complex bid structures (such as bundled all-or-nothing bids and quantity-discounted bids) and business constraints into strategic-sourcing auctions. Outcomes in such auctions must lead to win-win solutions to sustain long-term relationships between procurer and suppliers. These factors are as important or more important than price. The Mars procurement auction Web site supports several alternatives to simple auctions that help match its needs as procurer and the capabilities of suppliers by incorporating optimal bid selection subject to constraints based on business rules in a dynamic environment. The ability to consider geographic, volume, and quality factors helps both parties. Feedback from participant suppliers has highlighted the benefits of time efficiency, transparency, and fairness. Although they reflect just one side of the benefits ledger, the monetary benefits to Mars (a $14 billion company) and to its suppliers are significant.

On Winners and Losers in Procurement Auctions

“…Several multiattribute auctions are discussed in literature. Hohner, Rich et al [17] discuss an electronic private exchange established by Mars Inc., in which volume discount bidding and multi-attribute bidding were used most often.…”

Compact bidding languages and supplier selection for markets with economies of scale and scope

“…Davenport and Kalagnanam (2000) were among the first authors to focus on auctions with incremental volume discount bids. An application thereof has been described in Hohner et al (2003). Their bidding language requires suppliers to specify continuous supply curves for each item.…”

Models for Iterative Multiattribute Procurement Auctions

“…We consider the goal of market efficiency to be well suited for the design of stable long-term markets that will form the basis for repeated trade. We expect that efficient markets will come to dominate the electronic market landscape based on our experience with procurement auctions (Hohner et al 2003). In long-term contract negotiations, the number of suppliers that a company interacts with is very small (typically of the order of 5 to 10), and inefficient allocations across this pool leads suppliers to question the credibility of the buyer to be fair.…”

“…In long-term contract negotiations, the number of suppliers that a company interacts with is very small (typically of the order of 5 to 10), and inefficient allocations across this pool leads suppliers to question the credibility of the buyer to be fair. Even in business-to-business settings this emerges as one of the most important requirements, as reported in the deployments with a large chocolate manufacturer (Hohner et al 2003). Buyer-optimal auctions are perhaps more appropriate for a one-shot procurement problem, and in a setting in which the buyer has considerable market power.…”

“…We find PI to be a compelling model for a class of multiattribute problems in procurement. One common setting is in the context of the procurement of commodity items such as sugar, for which an expressive market already exists (Hohner et al 2003). In such contexts suppliers usually place bids with the market price as a base price, and with an add-on price for each additional attribute, such as the degree of refinement provided, the location to be delivered to, delivery dates, etc.…”