Optimization‐based Procurement for Transportation Services

Abstract

Common carriage comprises over one-third of the $600 Billion annual trucking market in the United States (see American Trucking Association 2002). Since the deregulation of interstate trucking in 1980 and the intrastate movements in 1994, the predominate form of commercial relationship between shippers and common carriers has changed from a transactional to a contractual basis. These contracts typically hold for one to two years and sometimes longer. Shippers select which carriers to do business with on each lane (origin-destination pair) utilizing a competitive request-forproposal (RFP) process, which is, in fact, an auction. This paper takes a look at this RFP procurement process for transportation services. While bidding processes have been used to procure many products and services, transportation presents added complexities in terms of strong interdependencies (later referred to as economies of scope), large numbers of unique items, and inaccurate information. Truckload, ocean, air-cargo and most other transportation modes share these complex characteristics -especially interdependent costs. For the sake of brevity, this paper focuses on truckload (TL) transportation but the model can be, and has been, applied to other modes as well.The primary research question addressed in the extended research is: How should shippers procure TL motor carrier transportation services? This paper presents one approach that is both grounded in theory and appears to have worked well in practice.The generic transportation procurement process can be divided into three steps:• Bid Preparation -where the shipper determines what is to be bid out, what carriers to invite, how to present or package the business to be bid, and what opportunities exist for different types of shipper-carrier relationships. 1

A strategic approach to improve sustainability in transportation service procurement

“…The objective of minimizing the total cost involved in the transportation is considered by a number of researchers (Caplice and Sheffi, 2003;Caplice, 2007;Cohn et al, 2008;Srivastava et al, 2008;Yadati et al, 2007). The objective of maximizing the total saving is considered by Lim et al (2008).…”

“…Therefore, the total transportation cost is calculated by assuming a single load in each lane. Moreover, some papers formulate the models based on the known demand, which is an estimate based on the previous data (Caplice and Sheffi, 2003;Sheffi, 2004;Caplice, 2007;Chang, 2009;Yadati et al, 2007;Chen et al, 2009;Rekik and Mellouli, 2012). Very few authors (Ma et al, 2010;Remli and Rekik, 2013;Zhang et al, 2013) stochastic integer programming model for the CAP in combinatorial auctions to hedge the shipper's risk under shipment uncertainty.…”

“…The objective is to minimize the value of total cost of transportation for hauling loads in different lanes during the contract period. Bundle package representation is similar to that of Caplice and Sheffi (2003). Based on their current freight network configuration and existing businesses, carriers choose most appropriate lane bundles to join the bidding by solving a bid generation problem.…”

Carrier assignment models in transportation procurement

“…In the huge trucking market, valued at $600 billion in the United States alone (American Trucking Association, 2002;Caplice and Sheffi, 2003) procuring transportation services is crucial to shippers who must secure high-quality carrier services while controlling supply chain costs. In buying transportation services, a shipper typically tenders a request for quotes (RFQ) for a network of lanes following a bid preparation stage (Rhinehart, 1989;Foster and Strasser, 1991;Gibson et al, 1993;Caplice and Sheffi, 2003;Sheffi, 2004), where a lane is a one-way movement from an origin to a destination with an associated set of shipments for the period covered by the RFQ (Caplice and Sheffi, 2003).…”

“…In buying transportation services, a shipper typically tenders a request for quotes (RFQ) for a network of lanes following a bid preparation stage (Rhinehart, 1989;Foster and Strasser, 1991;Gibson et al, 1993;Caplice and Sheffi, 2003;Sheffi, 2004), where a lane is a one-way movement from an origin to a destination with an associated set of shipments for the period covered by the RFQ (Caplice and Sheffi, 2003). Once bids are received, a bid-analysis exercise is used to allocate lanes to carriers.…”