Combinatorial Auctions in the Procurement of Transportation Services

Most shippers go through an annual auction process of procuring transportation services, leading to an annual contract. This paper argues that the use of combinatorial auctions in this procurement can unlock significant reductions in operating costs for shippers, while protecting carriers from “winning” the lanes that do not fit their network, thus improving carriers’ operations as well. Combinatorial auctions account for carriers’ economies of scope, which, by many accounts, are more important than economies of scale in transportation operations. Any transportation procurement procedure, however, has also to account for level of service and other non-price variables. Such factors are just as important as price in determining which carrier should serve what lane. These considerations can be incorporated into the combinatorial auction framework easily and holistically. The paper introduces the approach and its potential for creating win/win situations for carriers and shipper. After several years of using this approach it has become the preferred procurement mechanism for leading shippers, with several software providers offering the requisite software.