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Coordination Mechanisms for Supply Chain Planning

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Supply Chain Coordination Mechanisms

Part of the book series: Lecture Notes in Economics and Mathematical Systems ((LNE,volume 628))

Abstract

In recent years, a large number of papers have been produced that propose and analyze mechanisms for supply chain coordination. The number of existing surveys about the literature of this area is considerable, too.1 These surveys, however, are not exhaustive; surprisingly few emphasis has been placed on a central topic for the design of coordination mechanisms, the determination of appropriate incentives for decentralized parties in light of information asymmetry.2

In this chapter, we provide a literature review, which comprises new classifications as well as explanations of central ideas behind different types of mechanisms. We focus on mechanisms that are directly applicable or transferable to the coordination of Master Planning. In addition, we include approaches that address operational planning (e.g., scheduling) and provide interesting, novel ideas for the design of coordination mechanisms, but exclude those dealing with strategic planning tasks.3

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Notes

  1. 1.

    See, e.g., Whang (1995, p. 413), Fugate et al. (2006, p. 129), Cachon and Netessine (2004, p. 1), and the references provided below.

  2. 2.

    One exception is the paper by Cachon and Netessine (2004, p. 13), which, however, completely omits the literature on bilateral information asymmetry provided in Sect. 3.3.

  3. 3.

    See, e.g., Van Mieghem (1999, p. 954), Böckem and Schiller (2004, p. 219), Plambeck and Taylor (2007, p. 1872), and Ha and Tong (2008, p. 701).

  4. 4.

    As a further obstacle in this context, note that if one party determines the optimal solution for the whole supply chain and asks the other parties for an implementation of this solution, the other parties might not consent due to their missing involvement into the decision-making process.

  5. 5.

    Non-cooperative and cooperative game theory are branches of game theory that basically differ by their focus: Whereas non-cooperative game theory yields a prediction about the outcome of the game (in monetary terms) without exactly specifying the actions taken, cooperative game theory focuses on the specific actions taken by players assuming that parties can negotiate effectively, see, e.g., Cachon and Netessine (2004, p. 26).

  6. 6.

    Note that in the section at hand, we will also include simple contracting schemes, where no sophisticated game theoretical analysis is needed since neither uncertainty nor coalition building is considered. This is a convention taken here since these approaches could be subsumed under both cooperative and non-cooperative game theory in principle. However, we do not include approaches that, instead of relying on contracts, advocate a unilateral determination of the systemwide optimum by one party and disregard the design of incentives for its implementation (e.g., Shirodkar and Kempf, 2006, p. 420; and Barbarosoĝlu, 2000, p. 732).

  7. 7.

    For an introduction to the newsvendor model, see, e.g., Silver et al. (1998, p. 385).

  8. 8.

    See, e.g., Cui et al. (2007, p. 1303), for a paper that does not rely on these standard assumptions. There, it is shown that wholesale price contracts may lead to supply chain coordination, given fair (and not self-interested) behavior of parties.

  9. 9.

    Similar analyses can be found, e.g., in Cachon (2003, p. 233), Lariviere (1999, p. 233), and Thonemann (2005, p. 215).

  10. 10.

    A Nash equilibrium is a central solution concept in non-cooperative game theory, where “each player’s strategy choice is a best response […] to the strategies actually played by his rivals,” Mas-Colell et al. (1995, p. 246).

  11. 11.

    See, e.g., Cachon and Lariviere (2001a, p. 20).

  12. 12.

    See Tsay et al. (1998, p. 299).

  13. 13.

    See Lariviere (1999, p. 233).

  14. 14.

    See Cachon (2003, p. 227).

  15. 15.

    See Corbett and DeCroix (2001, p. 881).

  16. 16.

    See Ferguson et al. (2006, p. 376).

  17. 17.

    E.g., Cachon and Zipkin (1999, p. 936).

  18. 18.

    E.g., Caldentey and Wein (2003, p. 1).

  19. 19.

    See, e.g., the analysis of Cachon (2003, p. 271).

  20. 20.

    See, e.g., Gerchak and Wang (2004, p. 29).

  21. 21.

    See, e.g., Cachon and Lariviere (2005, p. 32), for the equivalence of revenue-sharing and buyback contracts in a buyer–supplier newsvendor setting.

  22. 22.

    See Goyal (1976, p. 107).

  23. 23.

    For the EOQ model, see also Sect. ??.

  24. 24.

    E.g., the relaxation of the lot-for-lot assumption (Lee and Rosenblatt 1986, p. 1177) and the coordination of production and shipment policies (e.g., Hill 1999, p. 2463).

  25. 25.

    E.g., Monahan (1984, p. 720) and Joglekar and Tharthare (1990, p. 492).

  26. 26.

    See, e.g., Sucky (2004b, p. 110), Sarmah et al. (2006, p. 1), Li and Wang (2007, p. 1), and Ben-Daya et al. (2008, p. 726).

  27. 27.

    Among those are Kohli and Park (1989, p. 693), Gjerdrum et al. (2002, p. 586), and the analysis in the paper by Nagarajan and Sošic (2008, p. 725).

  28. 28.

    Coalition analysis in cooperative game theory usually relies on games with transferable utility (TU games), where utility (most often money) is freely transferable among players, see, e.g., Myerson (1991, p. 422).

  29. 29.

    E.g., Dror and Hartman (2007, p. 78).

  30. 30.

    See, e.g., Drechsel and Kimms (2008) for capacitated lot-sizing and Houghtalen et al. (2007) for freight alliances.

  31. 31.

    See, e.g., Myerson (1991, p. 452) for more on these concepts.

  32. 32.

    See Meca and Timmer (2008, p. 1).

  33. 33.

    See Nagarajan and Sošic (2008, p. 719).

  34. 34.

    For a similar definition, see Mas-Colell et al. (1995, p. 436).

  35. 35.

    See Akerlof (1970, p. 488).

  36. 36.

    See Spence (1973, p. 355).

  37. 37.

    See Cachon and Lariviere (2001a, p. 629).

  38. 38.

    See Cachon (2003, p. 325).

  39. 39.

    See Özer and Wei (2006, p. 1238).

  40. 40.

    Among the first to study screening have been Rothschild and Stiglitz (1976, p. 629), who applied this mechanism for coordination in insurance markets.

  41. 41.

    See Myerson (1979, p. 61).

  42. 42.

    See, e.g., Salop and Salop (1976, p. 619).

  43. 43.

    See Corbett and de Groote (2000, p. 444).

  44. 44.

    See, e.g., Fudenberg and Tirole (1991, p. 209). The pioneering work for the modeling of incomplete information in game theory is the three-part essay of Harsanyi (1967, p. 159), Harsanyi (1968b, p. 486), and Harsanyi (1968a, p. 320), where it is shown how to model a game with incomplete information by a game with imperfect information. For a recent review on this topic, see Myerson (2004, p. 1818).

  45. 45.

    For an approach that assumes discrete choices, see, e.g., Schenk-Mathes (1995, p. 176).

  46. 46.

    See Table 3.2 on p. 16.

  47. 47.

    E.g., Burnetas et al. (2007, p. 465).

  48. 48.

    E.g., Corbett et al. (2004, p. 550).

  49. 49.

    The driver T has been considered by Corbett (2001, p. 487), Cachon and Zhang (2006, p. 881), and Lutze and Özer (2008, p. 898), and L by Corbett and de Groote (2000, p. 444), and Sucky (2004a, p. 493). Note in this context that there are further publications of Sucky (e.g., Sucky 2006) with almost identical scopes. We did not include them separately into our classification.

  50. 50.

    See Corbett et al. (2005, p. 653).

  51. 51.

    E.g., Klemperer (1999, p. 229).

  52. 52.

    See Myerson (1981, p. 65).

  53. 53.

    See, e.g., Klemperer (1999, p. 230). The proof of truth-telling in the second-price sealed bid auction is due to Vickrey (1961, p. 8) and is among the most famous results in auction theory.

  54. 54.

    See Chatterjee and Samuelson (1983, p. 835) and Myerson and Satterthwaite (1983, p. 265) for seminal papers on this topic.

  55. 55.

    For a formal description of this type of knowledge, see Aumann (1976, p. 1236).

  56. 56.

    See Satterthwaite and Williams (1989, p. 107) for characterizations of equilibria when parties play differential strategies and Leininger et al. (1989, p. 63) when parties’ strategies are step-functions.

  57. 57.

    See Radner and Schotter (1989, p. 179) and Rapoport and Fuller (1995, p. 179).

  58. 58.

    See Chatterjee and Samuelson (1983, p. 838).

  59. 59.

    See Chatterjee and Samuelson (1983, p. 844).

  60. 60.

    See, e.g., Satterthwaite and Williams (1989, p. 108).

  61. 61.

    See Williams (1993, p. 1101).

  62. 62.

    See Rustichini et al. (1994, p. 1041).

  63. 63.

    See Cripps and Swinkels (2006, p. 47).

  64. 64.

    See Chu and Shen (2006, p. 1215).

  65. 65.

    See Chu and Shen (2008, p. 102). This paper, in fact, synthesizes double auctions with multiunit auctions (see the next paragraph) since the buyers bid on bundles of goods there.

  66. 66.

    See, e.g., Milgrom (2004, p. 251).

  67. 67.

    See, e.g., the application of combinatorial auctions for the US spectrums for telephone services reported by Milgrom (2004, p. 297).

  68. 68.

    See Pekec and Rothkopf (2003, p. 1485). For recent surveys on combinatorial auctions, refer further to Abrache et al. (2007, p. 131), de Vries and Vohra (2004, p. 247), de Vries and Vohra (2003, p. 284), and Milgrom (2004, Chap. 8

  69. 69.

    See, e.g., Milgrom (2007, p. 935).

  70. 70.

    See Elmaghraby (2004, p. 213) for a survey about the application of auctions in e-marketplaces.

  71. 71.

    See Chen (2007, p. 1562).

  72. 72.

    See Gallien and Wein (2005, p. 76).

  73. 73.

    See Meyer (1974, p. 223).

  74. 74.

    This procedure can be initialized, e.g., be solving DPi with prices of zero for central resource use, see Ho and Loute (1981, p. 306).

  75. 75.

    With our exposition of this approach, we follow Holmberg (1995, p. 61) and Klose (2001, p. 74). Alternative descriptions provide, e.g., Dantzig and Wolfe (1960, p. 101) and Wolsey (1998, p. 185).

  76. 76.

    Note that the constant ub 0 is omitted in the objective functions of these problems for ease of exposition.

  77. 77.

    See, e.g., Minoux (1986, p. 212).

  78. 78.

    Note that for this purpose, it is sufficient for the central entity to know proposals \({A}_{i}{x}_{i}^{v}\) and the cost changes \({c}_{i}^{T}{x}_{i}^{v}\), which are actually supplied by the decentralized parties (instead of \({x}_{i}^{v}\)).

  79. 79.

    See Held et al. (1974, p. 62).

  80. 80.

    See Holmberg (1995, p. 76).

  81. 81.

    For an overview of these techniques, see, e.g., Holmberg (1995, p. 61).

  82. 82.

    Within primal decomposition, Benders decomposition (see Benders 1962, p. 238) is the counterpart to Dantzig–Wolfe decomposition.

  83. 83.

    See the paper by Arikapuram and Veeramani (2004) discussed below.

  84. 84.

    See also our discussion of these drawbacks at the end of this section.

  85. 85.

    Team behavior trivially satisfies the important requirement that parties should have incentives to implement the actions specified by the mechanism.

  86. 86.

    See Heydenreich et al. (2007, p. 437).

  87. 87.

    See Arikapuram and Veeramani (2004, p. 111).

  88. 88.

    See, e.g., Birge and Louveaux (1997, p. 155).

  89. 89.

    See Dudek and Stadtler (2005, p. 668) and Dudek and Stadtler (2007, p. 465).

  90. 90.

    See Ertogral and Wu (2000, p. 931).

  91. 91.

    See Jeong and Leon (2002, p. 789).

  92. 92.

    See Walther et al. (2008, p. 334).

  93. 93.

    See Jung and Jeong (2005, p. 167). Note that these authors have published further papers (e.g., Jung et al. 2008) relying on essentially the same setting and the same approach. Hence, we did not include these papers separately in our classification.

  94. 94.

    See Karabuk and Wu (2002, p. 743).

  95. 95.

    See Schneeweiss and Zimmer (2004, p. 687).

  96. 96.

    See Chu and Leon (2008, p. 484).

  97. 97.

    See Fink (2006, p. 351).

  98. 98.

    See Guo et al. (2007, p. 1345).

  99. 99.

    See Kutanoglu and Wu (1999, p. 813).

  100. 100.

    See Lee and Kumara (2007, p. 4715).

  101. 101.

    Lee and Kumara (2007, p. 4724), argue that truth-telling is ensured since the final allocation is determined by a Vickrey-type auction. However, amongst others, they did not address the suppliers’ incentives to reveal their inventory cost functions and capacities truthfully.

  102. 102.

    See Fan et al. (2003, p. 1).

  103. 103.

    The latter drawback has also been pointed out by Guo et al. (2007, p. 1346), who in addition provide a simple numerical example, for which the scheme developed by Fan et al. (2003) does not converge.

  104. 104.

    See, e.g., Arikapuram and Veeramani (2004, p. 111).

  105. 105.

    See, e.g., Wu (2003, p. 67), for a generic description of the possibilities of third parties to mediate bargaining processes.

  106. 106.

    See, e.g., Chu and Leon (2008, p. 484), for a paper supporting this argument.

  107. 107.

    E.g., Wolsey (1981, p. 173).

  108. 108.

    E.g., Guzelsoy and Ralphs (2008, p. 118).

  109. 109.

    E.g., using inverse optimization, see Troutt et al. (2006, p. 422).

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Albrecht, M. (2010). Coordination Mechanisms for Supply Chain Planning. In: Supply Chain Coordination Mechanisms. Lecture Notes in Economics and Mathematical Systems, vol 628. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-02833-5_3

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