Billions and Billions Sourced: Lessons Learned Building eMarkets Robert T. Monroe Tepper School of Business Carnegie Mellon University October 28, 2004

Introduction Market Making is an art as well as a science This talk focuses on the art of market making Specifically in reverse auctions for sourcing Economist General’s Warning: This talk consists of conjecture, opinion, and anecdotes. The rigor you are probably used to finding in talks of this nature is likely to be notably absent. You have been warned.

Market Making Process Needs Feasibility Contracts Market Conditions Identify Opportunities Create RFQ Recruit Suppliers Auction Evaluate Bids Award What How Many When Where Specs Drawings T & C’s Lotting Commoditize! Auction format Distribute Iterate Identify Qualify Evaluate Inform Recruit Convince Compel Iterate Game Day Negotiate Real-Time competition Scenarios Create Evaluate Iterate Audits Due Diligence Select Winners Communicate award Sign contracts

Bidding Dynamics: Typical BidGraph Bid Price Time Ceiling Reserve Scheduled Closing Time Actual Closing Time Overtime Intervals Bidder A Bidder B Bidder C Bidder D (incumbent)

Configuring Auctions Formats Single bidder input English Dutch Index Transformation Multiple bidder inputs Total Cost/Multivariate NPV Combinatorial Number of rounds Feedback Unique/generic bidder ID All bid prices Rank only Rank plus lead price Government rules Lot Opening and Closing Overtimes/no overtimes Ranks that trigger overtimes Contingent staggered Parallel The following parameters have proven useful in configuring auctions

Auction Design Heuristics Simplify, simplify, simplify Human cognition is more limiting than algorithmic complexity One factor easy, Many factors hard Let the bidder know what they must do to win Much harder with combinatorial auctions Confusing and/or frustrating bidders is bad… Select auction format and parameters wisely

Key Ideas Market Making is an art as well as a science The science of auctions is important … … but the effort prior to the auction generally determines its success Simplify, simplify, simplify

Thanks! Feel free to contact me for further discussion Robert T. Monroe Tepper School of Business Carnegie Mellon University