Efficient Exchange Mechanisms for Services and Configurable Goods

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Lean manufacturing and just-in-time production are essential in modern supply chain management. Their implementation depends on the goods produced to the specifications agreed upon during the transaction process (the production cycle starts only after the order is placed). Services are often configured and delivered in a similar manner, that is, when they are needed. Internet-of-things provides new opportunities to manufacturing and service delivery processes in that it allows for automated communication between machines and their manufacturers and service providers. These developments create new challenges for the procurement of goods and services; there is a requirement that they be procured quickly and yet they need to be configured during the procurement. Auctions have become a useful mechanism because they are easy to set up and are time-efficient. Multi-attribute reverse auctions (MARA) make the configuration of goods and services during the transaction possible. However, MARA’s efficiency depends on the quasi-linearity assumption that price and configuration are independent and the costs are of any importance for market participants and the economy as a whole. Although it is known that quasi-linearity is not a realistic assumption, yet no MARA mechanisms that do not rely on this assumption have been proposed. If the quasi-linearity assumption is not met then, in many situations, the efficient contracts obtained from MARA may be jointly improved. Although a winning contract is efficient, the efficient frontier may be such that the selection of another contract accompanied with the seller’s side-payment increases the surplus for both the buyer and the seller. Such contracts are beneficial for both sides because they create savings and increase the quality of the procured goods. Procurement--one of the key supply chain functions--controls between 25% and 85% of an enterprise’s total costs. The costs of the procurement average 1% of the total spent; auctions can save between 2% and 12 % of the costs. The use of MARA allows for the procurement of goods and services that have greater value while the cost remains the same or is lower; one study shows that MARA could save $1.2 billion which was 20% of the total costs. The violation of the quasi-linearity assumption means that inefficiencies may approach 50%. This project proposes the design and implementation of new exchange mechanisms that do not rely on this assumption. The proposed mechanisms take into account the type of efficient frontier and either require that the buyers move to post-auction negotiations in which the sellers propose revised contracts or automatically probe the feasible set searching for joint improvements. These procurement mechanisms will be extensively tested in lab and online experiments and used in teaching and training. Their practical significance lies in the savings that they may bring.