Price Optimization for Distributed Demand Using Newsvendor Model
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Solution Overview
Problem
The reverse auction model for print job vendors faces challenges in ensuring cost competitiveness and profitability, particularly when dealing with international vendors and complex jobs, as it may not accurately calculate the lowest bid amount that maximizes vendor profit while minimizing customer costs.
Innovation Solution
A web-based program that uses historical data and vendor-entered information to calculate an estimated commitment quantity and profit for print jobs, allowing vendors to bid confidently with the assurance of meeting demand and earning a profit, by integrating the Newsvendor Model to optimize operations and provide cost information based on salvage values and fill rates.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If the reverse auction model solicits bids from multiple international vendors, then vendor capability and job completion ability improve, but enterprise-wide cost awareness and bid competitiveness deteriorate
Solution Approach 1:
The system implements feedback mechanisms by providing vendors with preview prices based on contractual rates and capability data before the auction. This allows vendors to adjust their bids accordingly, ensuring cost competitiveness while maintaining the ability to complete complex jobs. The feedback loop continues during the auction process, enabling dynamic bid adjustments.
Solution Approach 2:
The system performs preliminary actions by pre-calculating preview prices using vendor-supplied contractual rates and capability information before the reverse auction begins. This preliminary pricing analysis enables vendors to make informed bidding decisions, reducing the risk of non-competitive bids while maintaining job completion capability.
2Productivity
If the document advisor narrows the vendor group using preview prices, then bid solicitation efficiency improves, but vendor profit maximization opportunities deteriorate
Solution Approach 1:
The system employs dynamic pricing mechanisms where preview prices are calculated based on vendor-specific contractual rates and capability data. This dynamic approach allows each vendor to receive a customized preview price that reflects their individual cost structure and profit margins, enabling them to bid competitively while maximizing their profit opportunities.
Solution Approach 2:
The system applies local quality by providing customized preview prices to each vendor based on their specific contractual rates and capability profiles. Rather than using a uniform pricing approach, the system tailors the preview price calculation to each vendor's local cost structure, enabling them to optimize their bids for both competitiveness and profit maximization.
3Loss of information
If vendors bid without accurate cost information, then bid competitiveness may improve, but vendor profitability and demand fulfillment reliability deteriorate
Solution Approach 1:
The system provides feedback to vendors in the form of preview prices calculated from their contractual rates and capability data. This feedback enables vendors to make informed bidding decisions that balance competitiveness with profitability, ensuring they can fulfill demands reliably while maintaining accurate cost information throughout the bidding process.
Data Source
AI summary
The method for reducing vendor bid amounts includes providing a supplier with an invitation to make a bid for supplying a digital print job. The print job is characterized by a demand for a first number of units by a select date. The method further includes determining if a demand condition can be met. The determination includes using historical data to calculate a first commitment quantity for current jobs being provided by the supplier. The first commitment quantity is then used to calculate a second commitment quantity. The second commitment quantity provides an estimate for the number of the units and a date. The second commitment quantity is displayed to the supplier. The method provides the supplier with an option to bid for producing the estimated number of units by the estimated date.