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

Abstract

Purpose: 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.