Supply chain management with market economics

Abstract

Supply chain management (SCM) is now recognised as one of the best means by which enterprises can make instant improvements to their business strategies and operations. SCM, however, is generally based on the simple theory of constraints (TOC) concept, and is not always concerned with Pareto optimal solutions in product distribution. Since market price systems constitute a well-understood class of mechanisms that under certain conditions provide effective decentralisation of decision making with minimal communication overhead, we propose SCM based on market-oriented programming in this paper. In market-oriented programming, we take a metaphor of economy computing multi-agent behaviour literally, and directly implement the distributed computation as a market price system. We define the agent activities to negotiate the tradeoffs of acquiring different resources, so as to realise the multi-echelon optimisation. Several simulation experiments on the supply chain model with multi-echelon structure clarify the market dynamics that emerge through the agent negotiations. It is confirmed that careful constructions of the decision process according to economic principles can lead to Pareto optimal resource allocations in SCM, and the behaviour of the system can be analysed in economic terms.