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Integrating Auctioning and Contracting in Supply Chain and

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      Auctioning and Contracting in Supply Chains and Distributed
              Manufacturing: Opportunities For Research
                                                       Ahmer Inam
                                Department of Industrial Engineering, Texas A&M University
                  Submitted in Partial Fulfillment of the Requirements of the course INEN 685: Directed Study

Abstract

     The shift in industry from traditional business to E-Business and the expanding importance of supply chain integration along
with emerging systems of manufacturing like, distributed production, has created challenges to researchers. Despite the extensive
conceptual literature in these areas, very few researchers have attempted a more rigorous approach of integrating the two at
quantitative and analytical modeling level and addressing issues like, dynamic pricing strategies, auctioning and coordination
mechanisms. This paper presents a comprehensive study of the recent conceptual literature and is an attempt at investigating
potential research areas.

Keywords: Supply Chain Management; Contracting; Supplier-Buyer Relationship; Integrated Production-Distribution Systems; E-Commerce;
Distributed Production Systems; Auctions; Coordination Mechanism; Game Theory; Revenue Management



1. Introduction

    In recent years, there have been many                              an opportunity to go beyond the lose-lose nature of
conceptual and technological innovations that have                     single issue price wars by determining sellers‟ and
drastically changed the business dynamics.                             buyers‟ preferences across multiple issue and
Strategic implementations of these key concepts                        encouraging negotiations, thereby creating
determine the success or failure of modern                             possible gains for all parties [2].        In this
businesses. This paper seeks to provide a review of                    environment, not only the vertical interactions
current research in the areas of auctioning and                        between supplier and buyer pairs need to be
contracting in supply chain and distributed                            considered, but also the horizontal interactions
production systems and attempts to consolidate                         among suppliers (or buyers) have increasing
current learning, identify possible gaps, and                          importance. Auctions are a fundamental
investigate potential areas of future research.                        mechanism for automating negotiations, serving as
    Supply chain management has become a                               a price-determination mechanism and accounting
subject of increasing interest in recent years, to                     for an enormous volume of transactions on the
both academics and the business managers, who                          Internet. Jin and Wu [3] have shown that auction
seek to make it not just a system of achieving cost                    could also serve as a coordination mechanism and
reduction and profit improvement, but also a                           its form could have a significant impact on the
competitive advantage. The supply chain                                dynamics of supplier-buyer interaction and
encompasses every effort involved in producing                         contracting.
and delivering a final product or service, from the                         Another interesting concept is that of
supplier's supplier to the customer's customer.                        Distributed Manufacturing which, along with other
Supply Chain Management (SCM) includes                                 similar terms, such as Holonic production (a
managing supply and demand, sourcing raw                               holarchy which integrates the entire range of
materials and parts, manufacturing and assembly,                       manufacturing activities from order booking
warehousing and inventory tracking, order entry                        through design, production and marketing to
and order management, distribution across all                          realize the agile manufacturing enterprise, with
channels, and delivery to the customer [1]. It                         holarchy being a system of holons which can co-
involves coordinating and integrating these flows,                     operate to achieve a goal or objective), Virtual
both within and among companies, while E-                              Manufacturing (a very dynamic and restructuring
Commerce provides the operational backbone.                            organization, where supplier and supplied are
    The electronic revolution has created a chaotic                    undifferentiated and no dominant position exists),
nature of price wars because of the zero-sum                           Networked       Manufacturing     and    Extended
nature of the channel. The technology has created                      Enterprise (entities develop more durable, coupled
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and mutual intervening relation, sharing               work, in terms of presenting scope for further
technological and strategic efforts. Yet, supplied     research.
entity maintains a dominant position over
suppliers), have gained a lot of interest. The most    2. Supply Chain Modeling and Analysis
significant     characteristic     of  these   new
organizational structures is that they recommend            A supply chain is defined as an integrated
the distribution of the enterprise on manufacturing    system wherein a number of business entities work
and logistic units with a certain degree of            together to acquire raw materials, convert these
autonomy. The assignment of projects in a              raw materials into specified final products, and
distributed production system is based on              deliver these final products to retailers. Its need is
auctioning where multiple business units bid for       the result of a number of changes in the
multiple projects. The presence of such a complex      manufacturing environment, including the rising
system within the supply chain further complicates     costs of manufacturing, the shrinking resources of
the pricing strategies of the system. Since the        manufacturing bases, shortened product life cycles,
individual stakeholders; the quasi-autonomous          the leveling of playing field within manufacturing,
manufacturing units, the suppliers, the buyers;        and the globalization of market economies.
encounter different sets of decision constraints       Recently, there has been increasing attention
associated with their individual units, it could       placed on the performance, design, and analysis of
result in sub-optimization of the outcomes, unless     the supply chain as a whole. There are basically
a coordination scheme is established to ensure         four modeling approaches, as per the inputs and
system-efficient decisions. Not much research has      the objectives, viz., deterministic models,
been undertaken to address this issue, most            stochastic models, economic models, and
importantly the interaction between multiple           simulation models.
suppliers and multiple buyers in a networked                Beamon [4] has comprehensively reviewed
system where simultaneous auctioning takes place       seminal research works in the above-mentioned
with stochastic demands.                               modeling categories, encompassing all the areas of
     In this paper, the concern is not so much with    supply chain. Most notably the works of Williams
advanced theory per se, but in investigating the       [5, 6], Ishii et al [7], Cohen and Lee [8, 9], Cohen
gaps in the present research, which may be helpful     and Moon [10], Newhart et al [11] Arntzen et al
in identifying possible areas of future research.      [12] Voudouris [13], and Camm et al [14] in the
The paper is organized in eight sections. Section 1    area of deterministic modeling; Cohen and Lee
is the introduction. In section 2, modeling and        [11], Svoronos and Zipkin [15], Lee and Billington
analysis of supply chains are discussed and the        [16], Lee et al [17, 24], Pyke and Cohen [18, 19],
framework and the methodology used for                 Tzafestas and Kapsiotis [20], Towill and Del
integrating production-distribution systems have       Vecchio [21], Lee and Feitzinger [22], and Altiok
been reviewed. Section 3 considers the body of         and Ranjan [23] in the area of stochastic modeling;
literature    associated       with   buyer-supplier   Christy and Grout [25], and Zipkin [26] in the area
relationships and builds on supply chain               of economic modeling; and Towill et al [27, 28,
contracting. In section 4, auctioning and              29], in the area of simulation modeling.
contracting in supply chains has been examined,             Beamon [4] has also outlined qualitative and
underlining various methodologies and concepts of      quantitative performance measures to determine
auctions presented in literature. Section 5            the efficiency and effectiveness of an existing
concentrates on coordination mechanisms in             system and compare competing alternative
supply chains and section 6 discusses the              systems. The issues identified as receiving
Distributed Production Systems and their               increasing attention in supply chain modeling are
integration in the supply chain. In section 7, the     product postponement, global vs. single-nation
feasibility of using Revenue Management pricing        supply chain modeling, and demand distortion and
strategy in integrating distributed production         variance amplification. Product postponement is
systems in supply chains and developing                the practice of delaying one or more operations to
coordination mechanism via auctioning and              a later point in the supply chain, thus delaying the
contracting is explored. Section 8 presents a          point of product differentiation. Global Supply
summary and the conclusions drawn from this            Chains are supply chains that operate in multiple
                                                       nations and has added considerations of export
                                                                                                           3


regulations, duty rates and exchange rates.             chain optimization; integration with different types
Demand distortion is the phenomenon in which            of manufacturing systems [37]; and optimizing
“orders to the supplier have larger variance than       information flow via software agents. Some other
sales to the buyer” and variance amplification          specialized areas of research are in inter/intra
occurs when the distortion of the demand                organizational coordination of supply chain and
“propagates” in amplified form [24]. These              determination of the effects of forecast error
phenomena are collectively known as “Bullwhip           volatility [38]; clustering in supply chain networks
Effect” or “Whiplash Effect” and are common in          [39, 40]; dynamics of using two suppliers, one
supply chain systems, for more information on           reliable, the other unreliable [58]; multi-objective
this, refer Lee et al [24] and Metters [30].            decision analysis incorporating production,
     Beamon [4] further suggests potential areas of     delivery, and demand uncertainty to model an
future research to encompass, (1) evaluation and        integrated multi-objective supply chain model,
development of supply chain performance                 providing a multi-objective performance vector for
measures; (2) development of models and                 the entire supply chain network and aiding in the
procedures to relate decision variables to the          design of efficient, effective, and flexible supply
performance measures; (3) considerations of issues      chain systems and evaluation of competing supply
affecting supply chain modeling, and (4)                chain networks [59]; using MRP and NPV models
classification of supply chain systems to allow         to investigate the results of customers‟ behavior
development of heuristics to aid in the design and      when the supply units compete for customers and
analysis of manufacturing supply chains. Some of        are exposed to an uncertain demand resulting in a
the directions suggested for future research by         possible shortage of goods, assuming the total
Thomas and Griffin [64] are: (1) knowledge of all       market are to be constant for both players [63].
value-added activities in the supply chain for               Apart from these, from both the managerial
coordinated modeling; (2) long supply chains            and operational perspective, there has been a
inhibit a firm‟s ability to respond quickly to          considerable amount of research work being
consumer requirements, especially if the products       undertaken in the area of cooperative supply
life cycles are very short hence life cycle             chains and buyer-supplier relationship.
constraints and costs need to be considered in
supply chain models; (3) determination and design       3. Buyer-Supplier Relationship
of interface points between stages of the supply
chain; (4) addressing supply chain coordination at           A Harvard Business School study concluded
an operational level; (5) the environmental impact      that a key reason for the decline of US
of supply chain activities, models that could be        competitiveness in the international marketplaces
used to evaluate how green the manufacturing and        has originated from investing less in intangible
distribution of a new product is.                       benefits such as supplier relations [41].
     Traditionally, attempts to improve upon the        Recognition       of     strategic    buyer-supplier
operations in a supply chain have focused on            partnerships as a fundamental driver for success in
reducing the costs associated with individual           present economic scenario and its importance in
activities. Currently, attention has been paid to the   promoting desired economic behaviors from
way in which the activities of one link of the          suppliers and customers has resulted in extensive
supply chain affect the costs of another, and           research in this area. Since both parties share risks
opportunities are now being recognized that             and resources, these relationships play an
involve coordinating activities across the              important role in managing the uncertainties of the
boundaries of firms in a supply chain. This is          commercial exchange process and reducing the
another potential are of research where much            cost of conducting business activities.
needs to be done in terms of identifying and                 Most of the research on partnership has
quantifying the specific benefits.                      focused on the procedures involved in identifying
     Further reviewing the existing body of             and selecting a suitable partner, delineating the
research in supply chain modeling, the recent trend     risks and benefits involved in creating such a
seems to be extensively focused in the areas of,        relationship, and chronicled the various factors and
integrated production-distribution systems [31-36]      characteristics of successful cooperative exchanges
focusing on optimizing flows across each                [42-49]. What is missing from this body of
interacting business component for total supply         knowledge is a full and complete understanding of
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coordination mechanisms involved in cooperative         support or hinder efficient supply chain
buyer-supplier relationships and how they are           relationships.
effectively managed over time. The inter-                    Apart from the wide range of case studies
organizational relationships are dynamic in nature      undertaken on success and failure of the
and are becoming very complex with time. The            relationships, some other areas of buyer-supplier
existing models of real-life cooperative buyer-         relationship that have been explored are: Carter et
supplier relationship governance are inadequate at      al‟s [54] research on integrating TQM though the
describing its nuances and unique characteristics.      supply chain via buyer-supplier relationship;
Patterson et al [50] propose an alternative             Hsuan‟s [55] investigation on the impact of
theoretical framework, which combines and               supplier-buyer relationships on modularization of
extends the earlier work on organizational culture      new product development; Shin et al‟s [56] study
by Ouchi [51] and transaction cost economics by         on the impact of supply management orientation
Williamson [52] and others.                             (SMO) on the supplier‟s operational performance
     The transaction cost economics approach is         and buyers‟ competitive priorities, supporting the
based on the premise that the existence of different    conclusion that an improvement in the SMO
organizational forms, whether they are markets,         improves both the suppliers‟ and buyers‟
hierarchies, or clans, is primarily determined by       performance, which is a win-win situation for
how efficiently each form can mediate exchange          supply chain; Hult et al‟s [57] examination of the
transactions between parties [53]. The theory has       effects of transformational and transactional
been proposed to explain how firms exchange             leadership commitment in the supplier-buyer-user
resources and information with each other and           supply chain; and Naude and Buttle‟s [60]
could be used to explain why various                    assessment of the quality of buyer-supplier
organizational relationships form and under what        relations within business-to-business markets.
conditions each type may perform best. The                   The recent work of Serel et al [61] examining
concepts emphasizes a lot on the ability of the         the sourcing decisions of a firm in the presence of
transacting parties to adapt to environmental           a capacity reservation contract that this firm makes
uncertainty and additional insights can be gained       with its long-term supplier in addition to the spot
by investigating literature on organizational           market alternative has given way to another
development regarding existing organizational           potential research area. The contract is considered
forms.                                                  as a vehicle for establishing a stronger buyer-
     Patterson et al [50] extend these theories from    supplier relationship and entails delivery of any
their original, internally focused perspective          desired portion of a reserved fixed capacity in
regarding organizational culture and intra-             exchange for a guaranteed payment by the buyer.
organizational relations, to include cooperative        The authors suggest various research extensions.
external relationships between buyers and                    A game-theoretic analysis based on risk
suppliers. This paradigm-shift could help expand        preferences and bargaining powers of the parties
the line of research needed for understanding both      could provide further insight into the mechanism
the network context in which these relationships        of negotiations between the buyer and the supplier.
thrive and how those cohesive inter-organizational      It is also possible to generalize the proposed
relationships grow and evolve over time. They also      framework to the case when the buyer contracts
propose that the future research should strive to       with more than one long-term supplier, here the
empirically test the applications of transaction cost   solution would depend on the order in which
analysis     (TCA)      theory     specifically    to   parties make their decisions. Furthermore, in
transcendental and other types of buyer-supplier        addition to price-based competition among the
relationships. An effective longitudinal study of       suppliers, the differences between quality and
these complex and highly dynamic inter-                 reliability of deliveries from the short and long-
organizational relationships offer great potential      term suppliers could be incorporated into the
for development of theory, helping emerging             proposed model. Another possibility of further
business practices in buyer-supplier relationships      investigations could be the problem of allocating a
[50]. This could further be studied in terms of         supplier‟s production capacity among multiple
contracting and economic alliances to answer            buyers within a capacity reservation framework
whether long-term formal contract arrangements          [61].
                                                                                                          5


     Tang et al [62] have explored the interactive      Much of the literature on auctions is devoted to the
nature of the buyer-supplier relationship in E-         study of properties of various types of auctions and
Commerce environment. They have proposed a              their mechanisms. Recently, there has been a shift
conceptual model to demonstrate the rationale of        towards analyzing the existence questions, which
the buyer-supplier interaction with the intervention    arise naturally in the general auction environments.
of an Information Service Provider (ISP), helping       Page [66] provides a unified approach to the
in creating a direct buyer-supplier link with the       problems of existence of optimal auctions for a
associated advantages of cost reduction, faster         variety of auction environments by constructing a
delivery, quick response and better service.            Stackelberg revelation game, which is systemically
     With the advent of Electronic Marketplaces,        specialized to cover single and multiple unit
the business dynamics have changed and gave the         auctions with risk neutral and risk-averse sellers/
buyer-supplier relationship a new dimension.            buyers and for contract auctions with moral hazard
Extensive research work is being undertaken to          and adverse selection. This paper‟s main
explore the coordination of buyers and suppliers in     contribution to the body of knowledge is that, it
the electronic environment where the negotiations       shows that the existence of optimal Bayesian
are efficiently resolved by auctions – popular,         auction mechanisms in a wide variety of auction
distributed and autonomy-preserving ways of             environments follows from the existence of an
allocating items among multiple agents that are         optimal Bayesian revelation mechanism for a
relatively efficient both in terms of process and       particular Stackelberg revelation game. Monderer
outcome [70].                                           and Tennenholtz‟ [65] study on optimal auctions
                                                        addresses several basic problems inspired by the
4. Auctioning in Supply Chains                          adaptation of economic mechanisms to
                                                        computational and artificial environments, such as
     The buyer-seller interaction consists of three     the Internet.
distinct steps; (1) potential buyers and sellers find        Auctions have already begun to play an
one other, (2) they negotiate the terms of the          important role in E-Commerce. As automation of
exchange, (3) and execute the transaction.              online negotiations become more prevalent,
Business-to-Business and Business-to-Customer           researchers would continue to introduce innovative
electronic marketplaces have automated these            auction mechanisms to cater to the needs of the
steps. Auctions account for an enormous volume          businesses. Teich et al [3] propose several
of transaction on the Internet and are a                multiple-issue auction and market algorithms and
fundamental mechanism for automating price              heuristics for web environment, to match
negotiations. The Internet exhibits forms of            businesses to businesses and consumers, based on
interactions, which are not captured by current         dovetailing underlying interests and preferences
studies and theories in Economics.                      and show that such dovetailed matches help
     The new economic mechanism consists of one         stabilize markets and make them more efficient.
or many buyers and one or many sellers. One             Wurman et al [68] consider a general family of
buyer and one seller defines a traditional              auction mechanisms that admit multiple buyers
negotiation, which may take place face-to-face or       and sellers, and determine market-clearing prices.
electronically. One seller and many buyers define       They analyze the economic incentives facing
an auction, which may be conducted online. Many         participants in such auctions and demonstrate that,
sellers and one buyer define a reverse auction, like    under some conditions, it is possible to induce
government auctions. Many sellers and many              truthful revelation of values by buyers or sellers,
buyers define a market or a double auction, which       not both, and for single, not multi-unit, bids.
may be electronic [2]. The highly distributed                LaGrangian relaxation (LR) is used as an
nature of the Internet, the relatively easy access to   auction method for bidding in a deregulated
trades carried out in remote locations, and the         environment. It is a power-pool type auction that
ability of defining various types on Internet trades    formulates the auction problem as Unit
by individual users, lead to new kind of settings for   Commitment (UC) problem and uses LR to find
which new theories should be developed and              the solution. Identical units can prevent LR from
evaluated [65].                                         finding the optimal solution when only one of the
     The part of economic theory most noted for its     units should be committed. If many units are
contribution to the auction design is Game Theory.      similar, LR may have trouble selecting some
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subset of them for the optimal solution. A unique      exchanges, especially corporate and government
feasible solution may not thus be found. This leads    procurement auctions.
to inequity among the units not selected and may            In procurement auctions with a fixed number
result in less revenue for one or more competitors.    of bidders, there is a tradeoff between cost
Dekrajangpetch et al [69] focus on how to change       efficiency and rent extraction. An optimal
unit data to obtain an advantage while using LR as     mechanism, therefore, entails distortions of effort
an auction method. The authors suggest alternative     [71]. If potential suppliers must sink an entry
strategies based on associated problems with           investment before they can participate in the
selection by unit commitment and subsequent            auction, then decreasing the firms‟ rent may imply
dispatch by economics. The auction scenario            reduced entry. Kjerstad and Vagstad [72] show
considered is one-sided and the objective function     that if potential bidders are uninformed before
is cost minimization. The suggested strategies         entry, commitment to a plain, non-distortive
could be applied to both uniform pricing, every        auction is optimal. In contrast, if potential bidders
player gets paid equally, and discriminating           learn all their private information before entry, the
pricing, each player gets paid corresponding to its    optimal mechanism entails the same distortions as
bid.                                                   in Laffont and Tirole‟s [71] static model. The
     Combinatorial auctions, i.e., bidding on          authors conclude that procurers should think twice
combinations of items, tend to lead to more            before trying to improve upon a plain auction,
efficient allocations than traditional auctions in     making sure that the benefits of being „smarter‟
multi-item auctions where the agents‟ valuations of    exceed the costs, paying particular attention to the
items are not additive. This is because the users      effect on entry. Wang [73] studied renegotiation in
can express complementarities in their bids, and       procurement auctions, conveying information
the winner determination algorithm will take these     about a firms‟ cost of completion and concluded
into account. Unfortunately, determining the           that the negotiable prices are not just „cheap talk‟
winners - determining what items each bidder gets      or „ceiling prices‟, these costs serve
- so as to maximize revenues is NP-complete.           simultaneously as bids to win the contract and
Sandholm [70], to tackle the limitations of the        conveys information regarding a firm‟s cost, which
existing approaches, propose a new search              is vital to later negotiations.
algorithm      for    optimal    anytime      winner        In auctions, often times, there exists both a
determination.      It significantly enlarges the      production-to-order (PTO) market and a product-
envelope of input sizes for which combinatorial        to-stock (PTS) market. Phillips et al [74] have
auctions with optimal winner determination are         investigated buyer and seller behavior in these
computationally feasible. The highly optimized         markets, when they are linked and the choice of
algorithm achieves this mainly by capitalizing on      participation is endogenous; buying and selling
the fact that the space of bids is necessarily         agents can chose to participate in either or both
sparsely populated in practice. The algorithm can      types of markets. In a PTS market, the seller has
be terminated at any time before completion with a     inventory on hand. Production takes place in
feasible monotonically improving solution in hand.     advance of the sale and the buyer usually takes
The author has also developed an E-Commerce            delivery within a short period of time after the sale
server that implements several techniques for          is made. PTO market transactions usually result
automatically facilitating commerce; including an      from long-term buyer-supplier contracts. Sales are
auction house with combinatorial auction –             made before output is available. Agents agree on
currently the first and only Internet auction to       prices and the future delivery of quantities before a
support combinatorial auctions.                        production run begins or it is completed. The
     Bichler [67] investigates multi-attribute         authors observed prices, the quantities traded, and
auctions, an economic mechanism, which                 earnings when participants buy and sell in
automates negotiation on multiple attributes of a      computerized double auctions. The authors show
deal. A basic question of auction design theory is     that sellers fare best in a PTS only market and earn
which auction format maximizes the bid-taker‟s         the least in a PTO only market whereas opposite is
profit. Bichler [67] shows that the overall utility    observed for buyers. The linked design offers a
achieved in multi-attribute auction formats is         middle ground for both buyer and seller earnings.
significantly higher than in single auctions and has        The body of knowledge of auctions is very
good potential to automate negotiations in various     extensive. Another important area of research is in
                                                                                                            7


the designing of auction agents who scour the             agent-mediated bidding, auctions and contracting,
Internet and decide for themselves which actions          and enterprise knowledge management [79].
to pursue, for whom and under what terms and
conditions. These autonomous agents represent             5. Coordination Mechanism in Supply Chains
different organizations and are increasingly being
required to operate in open, distributed systems               Research on supply chain coordination spans
comprising multiple problem solvers with                  the domains of marketing, economics, and
competing objectives. In such situations, agents          operations management. Gilbert and Ballou [80]
need to interact with one another, via a negotiation      extensively review and analyze present literature in
mechanism, in order to procure services and to            coordination mechanisms, encompassing the
manage their action interdependencies. Besides,           aspects of design, implementation and strategies
delays and long communications can carry                  for improvement. Not much research has been
negative externalities, in addition to addition to        done to investigate the role pricing and ordering
their direct negative effect on agents‟ utilities. This   policy can play in coordinating supply chains and
calls for work on negotiations as an essential            in fact, the authors could not find any literature
component of multi-agent systems research and             that specifically addresses the benefits that accrue
development [75].                                         to a supply chain when downstream firms are
     The most common form of buyer-supplier               given incentives to provide earlier commitment to
relationship in supply chains is one-to-many.             purchases. Based on this, Gilbert and Ballou [80]
Vulkan and Jennings [75], based on auctions and           develop a model for identifying and quantifying
game theory and mechanism design, devised a               the benefits to the supplier from obtaining
negotiation model focusing on the specific                advanced commitments           from downstream
problem      of    service     allocation     amongst     customers. This model could aid a firm in
autonomous, automated agents. Their work could            determining the maximum price discount and
be extended to address more complex buyer-                incentives to be offered to encourage them to
supplier interactions, like many-to-many. Yung            commit to their orders in advance. Careful
and Yang [77] propose the integration of multi-           balancing of the advanced ordering time with the
agent technology and constraint network for               price discount can lead to cost reductions for both
solving the supply chain management problem.              members of the supply chain.
Yan et al [78] develop a multi-agent based                     In electronic market transactions, auctions
negotiation support system for distributed electric       serve as a price-determination mechanism. Jin and
power transmission cost allocation based on the           Wu‟s [3] seminal work shows that auctions could
network flow model and KQML.                              also serve as a coordination mechanism and its
     A fundamental question that must be                  form could have a significant impact on the
addressed in software agents is coordination in           dynamics of supplier-buyer interaction. The
multi-agent systems. However, the coordination            authors re-examine the incentives of participants in
mechanisms have neither been formally addressed           electronic environment, and propose mechanisms
in agent-based manufacturing nor in agent-based           that would achieve channel coordination. The main
supply chains. Wu [79] and his collaborators              focus of their research is to provide insights that
developed several multi-agent systems for                 allow market makers to compare alternative
knowledge management in manufacturing, supply             contracting mechanisms, and to evaluate their
chains, negotiation, and agent-mediated auctions.         impact on the suppliers, buyers, and the supply
Their research mainly focuses on three areas: (1)         chain. The authors first investigate a two-supplier,
coordination mechanisms in agent-based supply             one-buyer system under complete information and
chains; (2) coordination mechanisms in agent-             evaluate the effects of contract coordination on the
mediated auctions; and (3) Multi-agent enterprise         players involved. They then examine the
knowledge management, performance impact and              asymmetric information case and propose new
human aspects. The author reviews current work in         mechanisms that would achieve channel
the above-mentioned categories and proposes               coordination. From these models, they derive
future directions of research. Although still in its      analytical insights for four main market schemes,
infancy, multi-agent based systems have been              and their implications to supply chain
found very promising in supply chain knowledge            coordination. The market schemes considered are:
management, in coordination and collaboration in          wholesale price auction; catalog auction; and two-
                                                                                                         8


part contract auction where side payments are          adaptability and agility. A DPS can engage in co-
introduced for channel coordination, but the           operation, competition, co-ordination, and
buyer‟s retail price and handling cost                 command processes to reach a coherent state, a
observable/not observable.                             state where conflicts and redundant efforts are
     Furthermore, they show that buyers could          avoided. The specific classes of DPS‟s viz., Fractal
extract significant benefits from supplier             Factory, Bionic Manufacturing and Holonic
competition, while market intermediaries, i.e., the    Manufacturing Systems, present organizational
host of supply chain exchange markets, could play      models for the corporation as well as guidelines for
an important role to improve channel efficiency.       the development of the system regarding its
Although the authors consider the situation up to      implementation and expected behaviors [88].
two suppliers one buyer, their models could further         The inter-entity interactions in a DPS closely
be extended for multiple-supplier one buyer and        match the buyer-supplier behavior in a supply
multiple-supplier multiple-buyer systems with          chain, with a few conceptual differences, and
deterministic and stochastic market demands.           hence the concepts and present research in areas
Further research could also be done with other         such as; coordination mechanisms, contracting and
forms of auction mechanisms, supplier costs and        auctioning mechanisms and automated agents;
pricing incentives. The authors propose further        could be replicated and studied from DPS‟
investigation of their models from the particular      perspective.
perspective of the market intermediary.                     The presence of a DPS in a supply chain
     The new economic dynamics in the supply           further complicates the coordination between the
chains are presenting researchers with unique          entities involved in the network. Timpe and
challenges. Single organizational units no longer      Kallrath [89] develop a general mixed-integer
handle development and manufacturing. Instead,         linear programming model based on a time-
these tasks are distributed among various              indexed formulation covering the relevant feature
companies or among several organizational units        required for the complete supply chain
within a company. In a supply chain network, the       management of a multi-site production network.
companies involved form customer-supplier links.       The model combines aspects related to production,
With the exception of the consumer, each customer      distribution and marketing, and involves
is a co-producer within the supply chain, and thus     production sites and sales points. The paper also
is also a supplier. This scenario, present in          addresses new conceptual aspects like, defining the
Distribution     Production    Systems,     further    capacity of a multi-site, multi-product production
complicates the buyer-supplier interaction and         network, and the approaches to complex planning
coordination; this calls for extensive research in     problems. Their work could further be extended to
integrating a distributed production system with       consider different aspects of lot sizing problems,
supply chains.                                         different time scales attached to production and
                                                       distribution, the use of periods with different
6. Distributed Production Systems                      lengths, and the modeling of batch and campaign
                                                       production.
     Globalization     forces   organizations     to        Montreuil et al [90], based on distributed
recognize that performance is not the feature of a     collaborative vision of manufacturing systems,
single firm, but the complex output of a network of    present a strategic framework for designing and
interconnected individual firm performances.           operating        responsibility-oriented       agile
Current economic practices and trends lead to the      manufacturing        networks,       enabling     to
development of new ways of thinking, managing          collaboratively plan, control and manage day-to-
and organizing in corporations, where autonomy,        day contingencies in a dynamic environment. The
decentralization and distribution are some of the      authors first introduce a network-oriented
buzzwords. This lead to the development of a new       organizational strategy according to which a
class of organizational models named Distributed       manufacturing business dynamically organizes its
Production System (DPS). As its name suggests, a       operations through the configuration and activation
DPS has several entities, which must interact with     of a distributed network of interdependent
each other to become a system. DPS‟s basic             responsible manufacturing centers. Then, they
properties     are:      autonomy,     distribution,   present a collaborative relationships strategy as a
decentralization, dynamism, reaction, flexibility,     contractual approach to implement operational
                                                                                                          9


networks. Finally, they introduce an operational        network as well as interacting with the outside
strategy,    showing       how     this    networked    channel.
collaborative approach can be used to manage day-           The proposed system is based on a one buyer-
to-day activities and contingencies in a close-to-      one supplier relationship with deterministic
reality manner.                                         demands. There is no mechanism devised to
     To achieve these objectives, Montreuil et al       encompass      multiple-buyer     multiple-supplier
[90] present „NetMan‟ strategic framework for           scenarios where simultaneous auctioning takes
enabling networked manufacturing according to           place with time dependent demands. This could be
which, a manufacturing business dynamically             a possible extension of the research, where
organizes its operations through the configuration      auctions, contracting and coordination mechanisms
and activation of a distributed network of              could be studied further, and aid in providing a
interdependent manufacturing entities, called           framework for developing „real-world‟ integrated
NetMan centers. Each of these entities may be an        DPS-Supply Chain models.
external     business     (external     supplier   or
subcontractor), as well as an internal center           7. Revenue Management in Supply Chains
(manufacturing cell, process center, a department,
maintenance center). Each of these internal centers          Revenue Management (RM) is a business
recursively operates as a manufacturing business,       principle that balances supply and demand to
subject to a mission agreed upon with the parent        control price and or/inventory availability in order
business. These centers are organization units          to maximize revenue and profit growth [81]. It can
composed of a group of one or more functional           be viewed as a special class of the problem of
entities responsible for making decisions and           matching supply to demand. Harris and Pinder [82]
executing tasks, with each center having its own        define revenue management as an order acceptance
focalized mission, contributing to the overall          and refusal process that employs differential
business mission. In NetMan, each responsibility is     pricing strategies and stop sales tactics to
defined in terms of satisfying some specific set of     reallocate capacity, enhance delivery reliability
needs from the center‟s clients, and in general         and speed, and realize revenue from change order
from the center‟s interactors (all other centers with   responsiveness in order to maximize the revenue
which it has to interact), with different kinds of      from pre-existing capacity. RM helps firms
interactions linking them. Within its mission, each     reallocate undifferentiated units of capacity to
NetMan center is self-managed and responsible for       alternative market segments of varying
making its own strategic, tactical and operational      profitability as booked orders diverge from the
decisions, and in order to achieve its mission, each    forecast. Cross [83] delineates seven core concepts
center must satisfy the needs of its clients and its    of RM as: (1) focus on price rather than costs when
interactors. All transactions are based on win-win      balancing supply and demand, (2) replace cost-
client-provider relationships. Once the mission of      based pricing with market-based pricing, (3) sell to
each NetMan center is well defined, the                 segmented micromarkets, not to mass valuable
relationships between the centers become critical       customers, (4) reserve sufficient product of your
to the performance of the overall network. This is      most valuable customers, (5) make decisions based
achieved by setting and managing information-rich       on knowledge, not suppositions, (6) exploit each
collaborative relationships between centers, based      product‟s value cycle, and (7) continually
on contract agreements negotiation. They may            reevaluate revenue opportunities.
define the pricing mechanisms, as well as the                RM can apply to virtually all businesses. Cross
general response time and quality requirements.         [83], Kimes [84], Weatherford and Bodily [85] and
The elements such as, needs, plans, offers, client      Harris and Peacock [86] have identified several
and supplier models, and rules of the games,            common characteristics of business environments
describe the NetMan business dynamics. In a             where the impact of RM is most significant. They
minimalist implementation of NetMan, a buyer            include: perishability of inventory, products or
would propagate its supply needs to each of its         services; fixed capacity or no short-term
suppliers and wait for their feedback before            adjustments of supply; high capacity change costs
making the offer. In essence, the model emulates        and      pricing     incentives;     demand/market
the workings of a DPS interacting within its            segmentation;     advance      sales/bookings     of
                                                        inventory; stochastic demand and dynamic
                                                                                                                              10


markets; historical sales data; forecasting                       concepts in analyzing coordination mechanisms in
capabilities; and competition between individual                  supply chains.
and bulk purchasers. The extent to which a firm                        Due to the quasi-autonomous nature of the
encounters these uncertainties in its businesses,                 production units and their organizational objective
and the degree of challenges it faces, forms the                  of attaining a cumulative maximum gain in
basis for understanding how useful RM would be                    revenue, the concepts of RM can effectively be
and assist in the development of appropriate tools                applied in a DPS environment. The different
and processes to address the issue it is facing.                  production units in a DPS are aware of the
     RM was pioneered in airline industry and is                  capacity/loading status of each other because of
extensively being applied in hotel, transportation,               real-time information flow, making them capable
utility, telecommunications, healthcare, and other                of better handling the „bullwhip effect‟ that are due
services industries. It has considerable potential for            to uncertainties embedded with demand forecasts.
research in supply chains and manufacturing                       Quantitative models based on RM concepts could
operations, especially in the such areas as, analysis             be developed for the pricing and reallocation
of integrated production distribution systems,                    decisions to accurately assess the relative tradeoffs
dynamic pricing models, price-determination                       between under and over utilization of individual
auction models, price-based buyer-supplier                        production units. Besides, these models could be
relationships, and examination of contracting and                 analyzed from the particular perspectives of both
coordination mechanisms across the supply chains.                 the supplier and the production units, aiding in
Not much has been done in this area and in fact,                  achieving channel coordination and efficiency of
the author is unaware of any literature available                 the supply chain.
that would address these issues from the
perspective of RM. McGill et al [87] present                      8. Conclusion
comprehensive reviews of general RM problems
and suggest future research directions. Their                         With this extensive review of literature in the
survey includes a glossary of RM terminology and                  areas of Supply Chain Management, this paper has
a bibliography of over 190 articles. There are four               served to identify and shed some lights on the
key areas of RM research: demand forecasting,                     possible areas of future research. The dynamic
overbooking, inventory control, and pricing. All                  economic scenario complicates supply chain
these areas are encountered in both traditional and               partnerships and buyer-supplier interaction and
electronic supply chains, as well as manufacturing                necessitates the researchers to stay abreast of the
operations. Increasing demand for customer                        recent and emerging issue to help the businesses
responsiveness has created service-oriented                       sustain their competitive advantage. The discipline
manufacturing-distribution environments, suitable                 of operations research has both the competence
for the application of RM methods. Harris and                     and capacity to address these complex issues
Pinder [82] apply RM concepts and techniques to                   through effective supply chain modeling in the
assemble-to-order manufacturing environments                      form of simulation, heuristics, game theory,
and presents models for optimal pricing and                       optimization, and revenue management. Such
capacity decisions for demand management. The                     operations research modeling will help firms
customer responsiveness usually takes place in the                understand the true benefits of effective supply
form of contracts and buyer-supplier relationships,               chain integration and enhance the design and
thus there is considerable potential of using RM                  implementability of supply chain research.


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