Open AccessExpressive Commerce and Its Application to Sourcing: How We Conducted $35 Billion of Generalized Combinatorial Auctions
Author(s) -
Sandholm Tuomas
Publication year - 2007
Publication title -
ai magazine
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.597
H-Index - 79
eISSN - 2371-9621
pISSN - 0738-4602
DOI - 10.1609/aimag.v28i3.2054
Subject(s) - common value auction , combinatorial auction , pareto principle , liberian dollar , computer science , negotiation , clearance , production (economics) , reverse auction , steiner tree problem , supply chain , business , industrial organization , operations research , economics , microeconomics , marketing , operations management , engineering , mathematical optimization , mathematics , finance , medicine , political science , law , urology
Sourcing professionals buy several trillion dollars worth of goods and services yearly. We introduced a new paradigm called expressive commerce and applied it to sourcing. It combines the advantages of highly expressive human negotiation with the advantages of electronic reverse auctions. The idea is that supply and demand are expressed in drastically greater detail than in traditional electronic auctions and are algorithmically cleared. This creates a Pareto efficiency improvement in the allocation (a win‐win between the buyer and the sellers), but the market‐clearing problem is a highly complex combinatorial optimization problem. We developed the world's fastest tree search algorithms for solving it. We have hosted $35 billion of sourcing using the technology and created $4.4 billion of hard‐dollar savings plus numerous harder‐to‐quantify benefits. The suppliers also benefited by being able to express production efficiencies and creativity, and through exposure problem removal. Supply networks were redesigned, with quantitative understanding of the trade‐offs, and implemented in weeks instead of months.