A Three Stage Multi-attribute Procurement Auction: A Proposal for Department of Defense (DoD) Vendor Selection Decisions

Abstract

This paper explores vendor selection decisions where competing vendors offer similar products with multiple non-price attributes. Traditional multi-attribute auctions such as the USAF Air Tanker competition include prices alongside other attributes in vendor proposals. Buyers generally select winning bidders using a weighted average of price and non-price attributes. A different approach is recommended here: to embed vendor prices directly in the buyer's budget constraint. A first step is to conduct a simple multi-attribute auction with a fixed budget. The government buyer only evaluates vendor proposals that satisfy the budget constraint, choosing the proposal (non-price attribute bundle) which offers the greatest value for money (i.e., budget). The next step is to address budget uncertainty, expanding the model to incorporate a range of budgets. This leads to several interesting results, including that the traditional practice, and classroom technique, of eliminating dominated alternatives can lead to sub-optimal decisions. Improving public procurement decisions requires forecasting a range of future budgets, and soliciting information from vendors that allows procurement alternatives to be defined as functions of the value offered by each vendor over a range of budgets, rather than as a single point in budget-value (cost-effectiveness) space. Under more realistic budget scenarios, different vendor selection decisions will occur that benefit both troops and taxpayers.