Lot Sizing in Procurement Balancing Scale and Competition

Lot structure pulls on competition and cost in several directions at once. Splitting a tender into many small lots tends to broaden participation: smaller suppliers who cannot shoulder a full bundle can still compete for individual pieces, and recent research finds that increasing the number of lots can strengthen competition.

Bundling, however, carries real advantages of its own:

• Economies of scale and scope. Larger packages let suppliers spread fixed costs and lower their per-unit price.
• Sharper competitive pressure. When there are fewer lots than bidders, some firms are guaranteed to walk away empty-handed. That prospect sharpens incentives to bid hard and makes tacit collusion much harder to sustain.

Working against those gains, bundling can also create problems. It may carry a cost premium versus simply cherry-picking the lowest bid for each item, it can exclude capacity-constrained suppliers who genuinely cannot serve the whole package, and it adds organizational complexity wherever bidders face diseconomies of scale.

So the buyer faces a genuine balancing act, not a one-directional choice. The rest of this article develops a Competitive Intensity (CI) Index that captures each of these forces and lets you compare lot scenarios on a single, common scale.

The CI framework breaks the trade-off into three forces you can actually compute from the information in front of you:

• Offered capacity (CI₁) — how much total supplier capacity survives once a bundle excludes some bidders.
• Bidder-to-lot ratio (CI₂) — the competitive pressure and collusion risk that follow from how many bidders chase how many lots.
• Cost gap (CI₃) — how a bundling scenario compares to a cherry-picking baseline on quoted price.

Start with capacity. Imagine two bidders, A and B, and three indivisible lots, where B cannot serve lot 2 at all. Treating each firm's initial bids as a proxy for the capacity it offers, the total capacity on the table is 136. The capacity index simply compares total capacity after bundling with total capacity before.

• Bundle everything into one lot: B is shut out entirely, capacity collapses to 81, and CI₁ falls to roughly 0.6 — a clear loss of competition.
• Bundle lots 1 and 3, keep lot 2 separate: both bidders can still compete somewhere, capacity stays at 136, and CI₁ equals 1.0.

The lesson is concrete: a bundle that quietly excludes a viable supplier is rarely worth it, while a bundle that preserves the full field can be free competition. The cherry-picking cost in this example is 80; bundling lots 1 and 3 costs 81 — a single unit more — which is the small price premium the cost term is built to track.

The second force is the relationship between the number of bidders (N) and the number of lots (L). As a rule of thumb, the number of winnable lots should be lower than the number of bidders, especially when suppliers are likely to chase only one contract each.

When lots equal or exceed bidders, competition tends to weaken. There exists an allocation in which everyone wins a lot, which — particularly in repeated tenders — opens the door to tacit or overt collusion. A classic warning sign is a large gap between the lowest and second-lowest bids combined with only minor differences among the losing bids.

When lots are meaningfully fewer than bidders, the picture flips. Some firms are bound to lose, so a ring would need far more elaborate machinery — side payments to losers, or internal "knockout" auctions to pick the winner — to hold together. Competitive pressure rises with the risk of going home empty-handed. The ratio N/L therefore serves as a workable indicator of competitive intensity, and for tenders with uneven lot sizes it can be refined into a cost-weighted version that reflects where the real money sits.

This structural pressure is precisely what bundling buys you: fewer lots, a higher bidder-to-lot ratio, and harder-to-sustain collusion. It is the upside that has to be weighed against any capacity loss or price premium — one expression of the wider 3Cs of competition, comparability and credibility.

There is a catch the indices alone cannot solve: you usually do not know the bundle price until you ask for it. A supplier's cost for a package is rarely the sum of its single-lot bids, because synergies and capacity limits cut both ways.

The practical fix is to stop guessing and let bidders tell you. Instead of fixing the lot structure in advance, you invite both bundled packages and individual lots in parallel, turning the event into a reduced combinatorial auction. Bidders reveal, through their own pricing, the cases where bundling genuinely beats cherry-picking — for example by quoting an attractive combined price for lots 1 and 3 while others compete for lot 2 on its own.

Why "reduced" rather than fully open? An unrestricted combinatorial auction lets bidders express every possible cost interdependency, but the number of permissible bids explodes. In a tender with just seven items and four bidders, the bidders could submit up to 508 potential bids between them — unmanageable to evaluate fairly. Offering a curated set of buyer-defined packages alongside single lots captures most of the upside while keeping the process tractable. Even so, any combinatorial design asks more of the buyer in both tender setup and cross-bundle evaluation, so reach for it when the synergies are real, not by default.

The integrated CI measure combines the three forces so you can rank lot scenarios on one scale. The structural terms — preserved capacity and a tighter bidder-to-lot ratio — pull the score up; the cost penalty versus cherry-picking pulls it down. A single tuning parameter, often written g, translates the price gap into the same units as the competition terms. In plain language, g encodes how much known, quoted savings you are willing to forgo today in exchange for an expected price reduction from a more competitive lot structure tomorrow.

Worked on a three-bidder, three-lot example where everyone can serve every lot (so capacity is always preserved), the rankings tell a clear story:

• Full bundle (one lot): maximizes intensity when g is low, because collapsing to a single lot drives the bidder-to-lot ratio up to 3.0 — but it slips below the unbundled benchmark once the assumed value of future competition (g) climbs past the high teens.
• A two-lot split that preserves capacity and adds only a minor price premium: stays above the unbundled benchmark across a wide range of g. This is the most robust bundling option when you are unsure how much future competition is really worth.
• A two-lot split that needlessly raises cost: drops below the cherry-picking benchmark almost immediately and should be avoided.

The general principle: bundling pays only when the structural competitive gain outweighs the cost penalty. Because that future gain is always estimated, never guaranteed, the safest designs keep capacity fully intact, deliver a genuine improvement in the bidder-to-lot ratio, and hold the price premium as close to zero as possible.

Note what this framework is not. Measures like the Herfindahl–Hirschman Index or concentration ratios describe a market that already exists; they tell you it is concentrated but offer no lever to pull. CI is the opposite — prescriptive and under your control, built around the design choices you actually make: lot size, scope, and bundling. It is deliberately silent on non-price factors such as quality, risk, and contract terms, which is where a comparison-price approach to bid evaluation takes over. Used together, they turn lot design from instinct into a structured part of your procurement playbook.

Should I always split a tender into the smallest possible lots?
No. Small lots widen participation, which is valuable when smaller suppliers can sharpen your price. But fragmenting the work so that there are as many winnable lots as bidders weakens pressure and, in repeated tenders, invites collusion. The aim is to keep the number of winnable lots below the number of credible bidders while preserving total offered capacity.

When is bundling worth a small price premium?
When the structural competitive gain — a tighter bidder-to-lot ratio and harder-to-sustain collusion — outweighs the premium, and when the bundle does not exclude viable suppliers. A package that preserves full capacity and carries only a minor cost penalty is usually the most robust choice; one that prices out a real competitor rarely is.

What if I cannot estimate bundle prices in advance?
Don't guess. Invite both packages and single lots in parallel as a reduced combinatorial auction and let bidders reveal where bundling genuinely beats cherry-picking.

Competitio has structured more than €35bn in negotiated volume across 16 industries, with methods grounded in mechanism design and guided by our scientific advisory board, including Prof. Dr. Christian Rieck. If you want to pressure-test the lot structure of an upcoming tender, get in touch with our team.