Senior Design Team Optimizes Auctions for UPS Service
Less than a decade ago, UPS Supply Chain Solutions began offering a ground shipping service called Direct Ship to serve large retail clients in the United States. Direct Ship clients who previously shipped small packages through UPS sortation hubs at both the origin and destination were now able to combine packages into full-truckload (FTL) shipments directly from a warehouse to a UPS hub near the packages' destination. At the hub, individual packages would be sorted and sent to their final destinations via UPS Ground. Skipping the UPS sortation hub at the origin zone led to quicker shipment times and lower costs, and Direct Ship was used by dozens of major retailers on hundreds of lanes.
Rather than use its own fleet for the FTL shipments from warehouses to hubs, UPS subcontracted each lane to an FTL carrier. Carriers would bid for the right to carry shipments on each lane, with UPS awarding lanes to the low bidders or, in some cases, to incumbent carriers with strong performance records. The resulting shipment network used a hodgepodge of almost 50 carriers, including national, local, and niche carriers of different sizes and varying reliability.
In practice, UPS found its Direct Ship network to be unwieldy. Managing and coordinating almost 50 different shippers was difficult, and the on-time service performance on some of the lanes was worse than UPS's 98% target.
In the spring of 2008, UPS desired to re-bid its network and reassign lanes to carriers, and they turned to ISyE Senior Design for assistance. A team of six ISyE undergraduate students comprised of Katie Buckler, Carlanna Cunningham, Jay Hennington, Kevin Kitchens, Patrick Odneal, and Richard Ward worked with UPS to provide not just a new selection of carriers but also a new way of approaching the entire process of choosing a carrier for each lane. While still hoping to minimize the total network cost, UPS had several characteristics they wanted in a new carrier assignment:
(1) Fewer total carriers, preferably 8-10 of the largest and most reliable.
(2) Balanced assignments of lanes to carriers with respect to mileage and revenue.
(3) 98% or higher on-time service for the largest 25 Direct Ship customers.
At the same time, the ISyE Senior Design team realized that UPS might pay more than necessary to its carriers by bidding out each lane separately. For example, a carrier bidding on lanes from Atlanta to Chicago and Chicago to Atlanta might run the risk of winning just one of the two and having to deadhead drivers on the return trip. To mitigate that risk, the carrier would need to place a higher bid on each lane. But if the carrier were allowed to place a bid for the pair of lanes together, the risk would be removed and the price UPS pays could be lower. More generally, carriers would mix-and-match combinations of lanes that fit best within their networks, offering UPS lower prices in return for the benefit of getting exactly the set of lanes they want. Called combinatorial (or combinational) bidding, these types of auctions have been used in many areas from transportation lane assignments to cell phone frequency sales, resulting in millions of dollars in benefits.
With this design in mind, the ISyE Senior Design team created a user-friendly tool for UPS to run its auctions. The Java-based tool reads auction and carrier data from UPS's Excel files and gives UPS the opportunity to add custom restrictions, define tolerances for mileage and revenue balance, and create differing total-carrier and service-level scenarios. Then, it creates and solves an optimization problem to find the lowest-cost carrier assignments that satisfy UPS's desired characteristics.
In addition to providing a single solution based on each of UPS's scenario inputs, the tool also does what-if sensitivity analysis to point out which bids would be most valuable for negotiation and on which lanes it might be very valuable for UPS to accept a small niche carrier's bid.
Overall, based on the bids received by UPS in 2007, the ISyE Senior Design team's approach was able to save UPS about $1.3 million per year in carrier costs, while reducing the number of carriers in the Direct Ship network from 46 to 8, balancing mileage and revenue among the carriers, and increasing the service level above the desired 98%.
This article originally appeared in the Fall 2009 issue of Industrial & Systems Engineering, the alumni magazine for the Stewart School of ISyE.
- Workflow Status:Published
- Created By:Edie Cohen
- Modified By:Fletcher Moore