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Fair profit distribution in multi-echelon supply chains via transfer prices

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  • Liu, Songsong
  • Papageorgiou, Lazaros G.

Abstract

The total profit maximisation of a supply chain may result in an uneven and impractical profit distribution among the members. This work addresses the fair profit distribution within a multi-echelon supply chain using transfer prices. A mixed integer linear programming (MILP) model framework is proposed for the optimal production, distribution and capacity planning of a supply chain of an active ingredient (AI), consisting of AI plants, formulation plants and markets. The transfer prices of the AI from AI plants to formulation plants, and those of products from formulation plants to markets are to be optimised. The proportional and max–min fairness criteria are adopted to define fair profit distributions. Considering bargaining powers of supply chain members, game theoretic solution approaches are developed for fair solutions using Nash bargaining and lexicographic maximin principles. Especially, a hierarchical approach is developed to obtain an approximate optimal fair solution efficiently. The applicability and efficiency of the proposed approaches are demonstrated by two examples, including a real world agrochemical supply chain.

Suggested Citation

  • Liu, Songsong & Papageorgiou, Lazaros G., 2018. "Fair profit distribution in multi-echelon supply chains via transfer prices," Omega, Elsevier, vol. 80(C), pages 77-94.
    • Handle: RePEc:eee:jomega:v:80:y:2018:i:c:p:77-94
    DOI: 10.1016/j.omega.2017.08.010
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    2. Shejun Deng & Yingying Yuan & Yong Wang & Haizhong Wang & Charles Koll, 2020. "Collaborative multicenter logistics delivery network optimization with resource sharing," PLOS ONE, Public Library of Science, vol. 15(11), pages 1-31, November.
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    4. Changwen Li & Bin Cao & Yong-Wu Zhou & T. C. Edwin Cheng, 2023. "Pricing, coalition stability, and profit allocation in the pull assembly supply chains under competition," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(3), pages 977-1011, September.
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    7. Peng Ma & Yeming Gong & Mingzhou Jin, 2019. "Quality efforts in medical supply chains considering patient benefits," Post-Print hal-02312386, HAL.
    8. Christ, Quentin & Dauzère-Pérès, Stéphane & Lepelletier, Guillaume, 2019. "An Iterated Min–Max procedure for practical workload balancing on non-identical parallel machines in manufacturing systems," European Journal of Operational Research, Elsevier, vol. 279(2), pages 419-428.

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