Economic Properties of Multi-Product Supply Chains

TL;DR

This paper models multi-product supply chains as coordinated markets, using duality theory to analyze economic flows and proposing incentive mechanisms to improve market efficiency, demonstrated through urban waste management case studies.

Contribution

It introduces a market-based interpretation of supply chains, develops stakeholder graph representations, and proposes minimum bid mechanisms to enhance market incentives and efficiency.

Findings

Market interpretation explains resource and price flows in supply chains.

Forcing stakeholder participation can cause inefficiencies and economic losses.

Stakeholder graph helps determine minimum bids to activate markets.

Abstract

We interpret multi-product supply chains (SCs) as coordinated markets; under this interpretation, a SC optimization problem is a market clearing problem that allocates resources and associated economic values (prices) to different stakeholders that bid into the market (suppliers, consumers, transportation, and processing technologies). The market interpretation allows us to establish fundamental properties that explain how physical resources (primal variables) and associated economic values (dual variables) flow in the SC. We use duality theory to explain why incentivizing markets by forcing stakeholder participation (e.g., by imposing demand satisfaction or service provision constraints) yields artificial price behavior, inefficient allocations, and economic losses. To overcome these issues, we explore market incentive mechanisms that use bids; here, we introduce the concept of a stakeholder graph (a product-based representation of a supply chain) and show that this representation allows us to naturally determine minimum bids that activate the market. These results provide guidelines to design SC formulations that properly remunerate stakeholders and to design policy that foster market transactions. The results are illustrated using an urban waste management problem for a city of 100,000 residents.