Coordination of master planning in supply chains

Abstract

This paper proposes a new mechanism for coordinating master planning in a buyer–supplier supply chain. Parties take different roles in the mechanism: there is an informed party (IP) and a reporting party (RP). The mechanism consists of three steps. First, the RP defines a lump sum payment, which he will receive if a supply proposal that deviates from the default is implemented. Second, parties generate new supply proposals based on mathematical programming models. The RP communicates his profit changes for the new proposals to the IP. Third, the IP decides whether to implement one of the new proposals and to pay to the RP the lump sum minus the RP’s local profit change. We show that the mechanism is strategyproof, budget-balanced and individually rational. If the RP has uniformly distributed prior knowledge about the actual surplus from coordination, at least 3/4 of the surplus will be realized on the average. Our computational tests suggest that the coordination mechanism is effective and versatile. It identifies near optimal solutions for various master planning models and outperforms an existing approach from literature.