Coordination schemes for decentralized supply

chain planning
Saïd Business School
University of Oxford

June 15, 2004

 Collaborative Planning by Model–Based Negotiations

Hartmut Stadtler
Darmstadt University of Technology
Germany

Abstract. SCM is concerned with the coordination of material,

information and financial flows within and across often legally
separated organizational units. Software vendors have developed so
called Advanced Planning Systems (APS) to overcome deficiencies of
traditional Enterprise Resource Planning systems and to better support
the planning functions needed in SCM. However, APS are based on the
principles of hierarchical planning which are well-suited for an intra-
organizational Supply Chain (SC) but fall short when non-hierarchical
collaboration between partners (companies) is needed. This is
particularly true when a buyer and a supplier have to align their
medium term order and supply plans – which is the topic of this talk.

Today inter-organizational collaboration between two SC partners –

each utilizing their own APS – is enabled by an additional module,
called “Collaborative Planning”. After introducing its basic reasoning
we will propose an alternative, namely “model supported negotiations”
at the Master Planning level. We will show that this bilateral
negotiation scheme results in near optimal solutions for the SC as a
whole and a win-win situation for both partners compared with pure
upstream planning.

Transfer prices for multienterprise supply chain

optimization

Nilay Shah
Imperial College
United Kingdom

Abstract. A key issue in supply chain optimization involving multiple

enterprises is the determination of policies that optimize the
performance of the supply chain as a whole while ensuring adequate
rewards for each participant. In this work, a mathematical
programming formulation is presented for fair, optimized profit
distribution between members of multienterprise supply chains. The
proposed formulation is based on a novel approach applying game
theoretical Nash-type models to find the optimal profit level for each
enterprise subject to given minimum profit requirements. A modeling
framework for distributed profit optimization for an n-enterprise supply
chain network is first presented. The supply chain planning problem is
then formulated as a mixed-integer nonlinear programming model
including a nonlinear Nash-type objective function. Model decision
variables include intercompany transfer prices, production and
inventory levels, resource utilization, and flows of products between
echelons, subject to a deterministic sales profile, minimum profit
requirements for each enterprise and various resource constraints. A
separable programming approach is finally applied utilizing logarithmic
differentiation and approximations of the variables of the objective
function. The resulting model is of the mixed-integer linear
programming form. The applicability of the approach is demonstrated
through case studies based on industrial processes relevant to process
systems engineering.

A short summary of supply-chain related research at the Centre for

Process Systems Engineering, Imperial College, will also be given.

Combinatorial Auctions for Supply Chain Management

Richard Steinberg
University of Cambridge
United Kingdom

Abstract. Auctions–especially reverse auctions for procurement–are an

important tool in supply chain management. Recently, there has been
significant interest in a new type of auction, called a 'combinatorial
auction', that is likely to become an important tool for decentralised
supply chain planning. This talk will introduce the concept of a
combinatorial auction, discuss the various approaches to structuring
combinatorial auctions, and suggest where they can be applied in the
setting of a decentralised supply chain.

Strategic behavior in decentralized assignment

problems

Reinder Lok
Maastricht University
The Netherlands
Within the vast literature devoted to the assignment problem,
decentralization has been one of the topics of interest.
Decentralization means that some of the subjects of the
assignment have some decision power in the assignment process.
We are interested in generalizations of the decentralized
assignment problem. These generalizations may arise from the
setting of supply chain planning in which companies may have
contradictory objectives in spite of being part of the same supply
chain. Consider for example the allocation of production tasks
among production plants belonging to the same company. One
can imagine that the objective of each single plant is to exploit its
full capacity. The owning company has to reconcile these possibly
contradictory objectives in such a way that total profit is maximal.
This may be difficult in case the production plants are able to
manipulate the company's production plan by behaving
strategically.

Our goal is to apply mechanisms to these problems such that even

though the players act strategically, it is still possible to achieve
the optimal assignment. One way to eliminate the influence of
strategic behaviour is by means of the so-called Clarke-Groves
mechanism. In this mechanism reporting the true preferences is
the best strategy for all players. We are interested in the stability
of the outcome of the Clarke-Groves mechanism. The so-called
players are substitutes property ensures the stability and the
existence of equilibrium prices. Therefore, we have traced
generalizations of the assignment model for which the substitutes
property holds.

Equilibrium plans in constrained environments

Dries Vermeulen
Maastricht University
The Netherlands

Abstract. In this presentation we analyze equilibria in competitive

environments under constraints across players’ strategies. This means
that the action taken by one player limits the possible choices of the
other players. In this context the classical approach, Kakutani's Fixed
Point theorem, does not work. In particular, best replies against a given
strategy profile may not be feasible. We extend the Kakutani Fixed
Point theorem to deal with the feasibility issue.

Our main motivation to study this co-dependency problem comes from the field of supply
chain planning. Consider a set of buyers faced with external demand over a planning
horizon. To satisfy this demand they request inputs from a set of suppliers. Both suppliers
and buyers face production capacities and the planning is made in a decentralized
manner. A well-known coordination scheme for this setting is the upstream approach,
where buyers report their daily demand to a distribution center, and suppliers report
maximal production capacities. The reports submitted by the buyers are now taken as a
benchmark for the production schedule that the distribution center reports back to the
suppliers. This schedule is constructed by requiring the suppliers to produce as early as
possible given their reported capacities.

We show the existence of equilibria in this coordination model.

However, we illustrate with an example that the centralized solution
may not be an equilibrium, suggesting that further regulation may be
needed.

New Modeling Approaches for Process Industries

Christopher Sürie
Darmstadt University of Technology
Germany

Abstract. Process industries differ from discrete manufacturing

industries in many aspects. These aspects, e.g. campaign production,
production in batches or long setup times have to be considered when
planning for production. Mixed Integer Programming models are often
used in process industries to derive mid-term as well as short-term
production plans. In this talk a new modelling approach to the
aforementioned aspects of production planning in process industries
will be presented and discussed. It rests on some well-known lot-sizing
models which are enhanced to take into account the special aspects
from process industries.