Price-based approach for activity coordination in a supply network

Pressed by market globalization and concomitant competition, more and more manufacturers are relying on their suppliers to provide raw materials and component parts so as to focus on their core competence. As a result, the coordination of activities across a network of suppliers becomes critical to quickly respond to dynamic market conditions. In this paper, a novel framework combining mathematical optimization and the contract net protocol is presented for make-to-order supply network coordination. Interactions among organizations are modeled by a set of interorganization precedence constraints and the objective is to achieve the organizations’ individual and shared goals of fast product delivery and low inventory. These interorganization constraints are relaxed by using a set of interorganization prices that represent marginal costs per unit time for the violation of such constraints. The overall problem is thus decomposed into organizational subproblems, where individual organizations schedule their activities based on their internal situations and interorganization prices. Coordination is achieved through an iterative price-updating process carried out in a distributed and asynchronous manner. With prices dynamically updated and schedules adjusted, this approach coordinates activities to fulfill existing commitments while maintaining agility to take on new orders. Numerical testing results show that interorganization prices converge and prices may change as new orders arrive to reflect the new pressure on deliveries. The method thus provides a novel framework for activity coordination across a supply network and answers in a quantitative manner the perennial question, “Time is money, but how much?”