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Unformatted text preview: A Bayesian Incentive Compatible Mechanism for Decentralized Supply Chain Formation Y. Narahari and Nikesh Kumar Srivastava Electronics Commerce Laboratory, Computer Science and Automation Indian Institute of Science, Bangalore, India hari,firstname.lastname@example.org Abstract In this paper, we consider a decentralized supply chain forma- tion problem for linear, multi-echelon supply chains when the man- agers of the individual echelons are autonomous, rational, and in- telligent. At each echelon, there is a choice of service providers and the specific problem we solve is that of determining a cost- optimal mix of service providers so as to achieve a desired level of end-to-end delivery performance. The problem can be broken up into two sub-problems following a mechanism design approach: (1) Design of an incentive compatible mechanism to elicit the true cost functions from the echelon managers; (2) Formulation and so- lution of an appropriate optimization problem using the true cost information. In this paper, we propose a novel Bayesian incen- tive compatible mechanism for eliciting the true cost functions. This improves upon existing solutions in the literature which are all based on the classical Vickrey-Clarke-Groves mechanisms, re- quiring significant incentives to be paid to the echelon managers for achieving dominant strategy incentive compatibility. The pro- posed solution, which we call SCF-BIC (Supply Chain Formation with Bayesian Incentive Compatibility), significantly reduces the cost of supply chain formation. We illustrate the efficacy of the proposed methodology using the example of a three echelon man- ufacturing supply chain. Keywords Supply chain planner (central design authority) (CDA), mean vari- ance allocation, mechanism design, Groves mechanism, dAGVA (dAspremont and G rard-Verat) mechanism, SCF-DSIC (Supply Chain Formation-Dominant Strategy Incentive Compatible), SCF- BIC (Supply Chain Formation-Bayesian Incentive Compatible). 1 Introduction In this paper, we describe a decentralized supply chain forma- tion problem where the supply chain planner or a central design authority (CDA) is faced with the decision of choosing a partner or service provider at individual supply chain echelons so as to meet delivery quality levels at minimum cost. If all the relevant information is available in accurate form with the CDA, then the problem could be formulated and solved as an appropriate opti- mization problem. In such a case, the problem becomes a central- ized one. However, in the real-world, the CDA does not always have access to all the required information. The primary reason for this is the fact that typical supply chain entities (such as eche- lon managers and service providers) are autonomous, rational, and intelligent, and consequently exhibit strategic behavior. These en- tities may not reveal their true cost information; in fact, they may provide false information in the best hope of maximizing their in- dividual utility functions. Eliciting truthful information is key todividual utility functions....
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This note was uploaded on 09/27/2010 for the course EE 229 taught by Professor R.srikant during the Spring '09 term at University of Illinois, Urbana Champaign.
- Spring '09