Supply chain collaboration: A Game-theoretic approach to profit allocation

Abstract: This paper aims to develop a theoretical framework for profit allocation, as a mechanism for aligning incentives, in collaborative supply chains.
Design/methodology/approach: The issue of profit distribution is approached from a game-theoretic perspective. We use the nucleolus concept. The framework is illustrated through a numerical example based on the Beer Game scenario.
Findings: The nucleolus offers a powerful perspective to tackle this problem, as it takes into consideration the bargaining power of the different echelons. We show that this framework outperforms classical alternatives.
Research limitations/implications: The allocation of the overall supply chain profit is analyzed from a static perspective. Considering the dynamic nature of the problem would be an interesting next step.
Practical implications: We provide evidence of drawbacks derived from classical solutions to the profit allocation problem. Real-world collaborative supply chains need of robust mechanisms like the one tackled in this work to align incentives from the various actors.
Originality/value: Adopting an efficient collaborative solution is a major challenge for supply chains, since it is a wide and complex process that requires an appropriate scheme. Within this framework, profit allocation is essential.
Keywords: Beer Distribution Game, Game Theory, Incentive Alignment, Profit Allocation, Supply Chain Collaboration
Author: Borja Ponte, Isabel Fernández, Rafael Rosillo, José Parreño, Nazario García
Journal Code: jptindustrigg160054

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