Dynamic procurement subject to temporal and capacity constraints

Reverse auctions offer the prospect of more efficiently matching suppliers and producers in the face of changing market conditions. Prior research has ignored the temporal and finite capacity constraints under which reverse auctioneers typically operate. In this paper, we consider the problem faced by a manufacturer that can procure key components from a number of possible suppliers through multi-attribute reverse auctions. Bids submitted by prospective suppliers include a price and a delivery date. The manufacturer has to select a combination of supplier bids that maximize its overall profit, taking into account its own finite capacity and the prices and delivery dates offered by different suppliers for the same components. The manufacturer´s profit is determined by the revenue generated by the products it sells, the costs of the components it purchases as well as late delivery penalties it incurs if it fails to deliver products in time to its own customers. We provide a formal model of this important class of problems, discuss its complexity and introduce rules that can be used to efficiently prune the resulting search space. We also introduce a branch and bound algorithm and an efficient heuristic search procedure. Computational results show that our heuristic procedure typically yields solutions that are within 10 percent of the optimum. They also indicate that taking into account finite capacity considerations can significantly improve the manufacturer´s bottom line.