Mars Incorporated: Online Procurement Harvard Case Solution & Analysis

Mars Incorporated: Online Procurement Case Study Solution

Cost Minimization Using Linear Programming Framework

The linear programming model has been used in order to formulate a model at which all the set of the cost-minimizing bids could be selected and the overall costs for Mars Incorporated could be minimized for purchasing the materials. The objective function has been constructed, which is going to minimize the overall costs and meet all the demands.(Chang, 1996)

The objective function in this case has been developed on the basis of the required quantities of the materials from the range of the suppliers. Furthermore, as shown in the excel spreadsheet, the decision variables of the problem is the respective cost per unit for each of the item, which is represented by X1,X2,X3,X4 and so on. The objective function for this problem is based on the minimization of per unit cost of each input. The objective function can be written as;

Objective Function = 1000 x1 + 2500 x2 + 4000 x3 + 800 x4 + 1500 x5 + 2500 x6 + 400 x7 + 750 x8 + 1200 x9 + 100 x10 + 100 x11 + 50 x12

Using the solver in the excel spreadsheet, the optimal costs per unit for each of the supplier have been calculated and the optimal quantities that each supplier could supply. The total minimal costs for the procurement of the materials would be $ 4639. The calculations could be referred to in the excel spreadsheet.

Bid Winners in case of Ties Using Optimization Framework

As described previously that the bids were formulated for this auction. The first one was that in the case of a tie the first bidder would be considered as the winner. This requirement could be met by the management by identifying the respective quantities that each bidder of the company is willing to supply through the optimization problem. For example, consider that there are two suppliers. The first supplier has submitted a bid of $120 for items A, B and C and the second supplier has submitted a bid of $ 50 for item A.

Therefore, based upon the winner determination criteria, the first supplier would be chosen. The reason for this would be that all the three items would be supplied by this supplier. Along with this, another simple method to identify who submitted the first bid is to put a specific numeric time stamp on each of the bid.

Operation of Mars-Type Combinatorial Auction without Optimization

Usually combinatorial type auctions are created by Mars Incorporated. This type of auction is the one in which all the bidders bid on the items in the form of combinations based on the number of the discrete items and this type of auction takes place in a small market. No individual or continuous items are there for bidding. Industrial procurement utilizes this type of auction frequently. There are many challenges faced under this type of the auction, which might be computational, economic or hybrid.

However, in the case of Mars, the challenges that are faced by the management under this type of the auctions are computational. For instance, the management must determine the most feasible and efficient allocation of the items that are to be purchased. This is done when all the suppliers’ submit their bids in bundle or package form. This computational problem is referred to as the winner determination problem. Furthermore, the management of Mars Incorporated has to determine the winning bids in just a few minutes which poses significant challenges for the company. In future, the management will have to deal with even larger problems of around 500 to 5000 bid items. Therefore, it is clear that without optimization, the combinatorial problems cannot be solved within a short period of time.

Conclusion

Although, the company is quite competitive in the market, with presence of high consumer loyalty of its products, but the competitors are gaining a saving of 5% by using online procurement auctions, and could capture the market with competitive pricing strategies. Therefore, the company should also consider reducing its material cost along with managing its value related to mutual benefits by using optimal procurement model.

 

Appendices

Appendix-1: Types of Auctions

 

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