Price Negotiations for Procurement of Direct Inputs

strategic sourcing relates to the procurement of direct inputs used in the manufacture of a hn’s primary outputs. Such tlansactions are usually very large (in total quantity and the ddl2.r value) and require the use of special price negotiation schemes that incorporate the appropriate business pmtices. In this paper, we present tvm auction mechanisms that have been developed for price negotiations in the context of strategic sourcing for a large food man”facturer. The first auctio,n solicits supply curves as bids for procuring forecast demand for a direct input ‘xer a long planning horizon (such as a quarter). Typically suppliers provide volume discounts for such large orders and we call such auctions volume discount auctions. The second auction aggregates short-term (weekly) demand eve* direct inputs across multiple manufacturing plants in an e&m to increase the total seletion size and allows suppliers to provide bundled all-or-nothing bids. Such auctions are called combinatorial auctions. A fundamental consideration that arises in the design of these schemes is the incorporation of business rules that appear as side constraints in the mathematical formulation for determining the winning bids (called the winner determination pmbiem). We model the winner determination problem for these auctions as integer programs and provide some c0mputatiom.l results using commercial integer programming salvers to illustrate the efficacy of these formulations.