International Journal of Production Research

ISSN: 0020-7543 (Print) 1366-588X (Online) Journal homepage: http://www.tandfonline.com/loi/tprs20

Evaluating strategic issues in supply chain

scheduling using game theory

Mohammad Mahdavi Mazdeh & Ayatollah Karamouzian

To cite this article: Mohammad Mahdavi Mazdeh & Ayatollah Karamouzian (2014) Evaluating
strategic issues in supply chain scheduling using game theory, International Journal of
Production Research, 52:23, 7100-7113, DOI: 10.1080/00207543.2014.937880

To link to this article: http://dx.doi.org/10.1080/00207543.2014.937880

Published online: 17 Jul 2014.

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 International Journal of Production Research, 2014
Vol. 52, No. 23, 7100–7113, http://dx.doi.org/10.1080/00207543.2014.937880

Evaluating strategic issues in supply chain scheduling using game theory

Mohammad Mahdavi Mazdeh and Ayatollah Karamouzian*

Department of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran
(Received 1 July 2013; accepted 17 June 2014)

This paper deals with the problem of scheduling and batch delivery of orders in a supply chain (SC) including a
supplier, a manufacturer and a final customer. First, the individual decisions of partners in the SC and their behaviours
are analysed through mathematical models. Second, the best policy is obtained assuming that the SC is vertically
integrated and the partners fully cooperate (this is called SC scheduling in the relevant literature). Since this strategy is
usually against a partner, it might not be implemented in practice as the authors have observed this condition in real
world. Hence, a fair sharing mechanism based on game theory concepts is also introduced which can motivate the
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partners to cooperate and adopt the best policy of the SC. The numerical examples show the superiority of integrated
decisions over independent actions and also the importance of the sharing mechanism.
Keywords: supply chain scheduling; batch delivery; game theory; sharing mechanisms

1. Introduction
Nowadays, the issue of supply chain management is more studied by the researchers and companies around the world
to find the strategies for decreasing the cost price of products or service and also to fulfil customers’ expectations.
Generally, a supply chain (SC) represents all stages involved in moving a product or service from suppliers to custom-
ers. These stages, where a value is added to the product, belong to either a fully vertically integrated company or differ-
ent organisations and companies. In the case of different entities in a SC, because each company seeks its own goals,
the conflicts between them are unavoidable and if these conflicts are not solved, the costs increase and yield to an ineffi-
cient SC. To deal with this problem and guarantee a harmonious relationship between members, it is required that all
members collaborate and make decisions as a whole system.
One of the conflicting issues that might arise in a SC is the sequence and delivery of orders between the stages. In a
make-to-order production environment, customers order different items and therefore manufacturers and suppliers are
involved with different jobs. Each partner has to determine the sequence of processing the jobs and also their delivering
plans. The problem is that the scheduling decision is not necessarily the same for all partners because each of them has
its own constraints and cost parameters. For example, suppose a manufacturer that receives orders from customers.
Based on the due dates and processing times of jobs, the manufacturer plans a sequence of jobs and deliveries. How-
ever, these orders usually need some items that are produced by another company called a supplier. Similar to the manu-
facturer, the supplier has different customers and constraints, and orders of the manufacturer are regarded as a one of its
customers. Clearly, the optimal decision of the supplier for processing and delivery of items is not necessarily the same
as the optimal decision of the manufacturer. Hence, it might results in a conflict between the partners.
Generally, scheduling decisions of participants in a SC might conflict with each other. Here, it is worthwhile to con-
sider the whole SC for obtaining the best strategy instead of individual decisions. This issue in the literature is called
supply chain scheduling (SCS) which first addressed by Hall and Potts (2003). In the SCS, it is focused on the schedul-
ing problems with multiple agents across multiple supply chain stages (Hall et al. 2010). Also, it is emphasised on the
benefits of cooperative decision-making for scheduling in a SC. Although the SC solution brings the best possible reve-
nues for the whole SC, it might be against to one or more stages’ benefits.
Chang and Lee (2003) distinguish between SCS problems and introduce two aspects of SCS namely strategic and
operational issues. The operational SCS deals with solving multi-stage scheduling problems. In fact, the SC is consid-
ered as a whole system and by calculating the optimal decision of the system, the value of cooperation is obtained. As
it is mentioned earlier, this decision might be against some stages’ benefits. Here, one possible solution to motivate the

*Corresponding author. Email: A_karamouzian@ind.iust.ac.ir

© 2014 Taylor & Francis

 International Journal of Production Research 7101

coordination is providing incentives by some partners (Chang and Lee 2003). This aspect of SCS is called strategic
issue. It should be noted that the strategic issues are at least as important as operational issues since if the partners can-
not make an agreement on the best policy of the SC, then the calculation of cooperation’s benefits is worthless. Surpris-
ingly, in real-world environment, sometimes although the different stages understand the interests of cooperation but
owing to lack of a fair sharing mechanism, they are unable to come to an agreement. As one of the authors’ experience
in his country broiler meat SC, this is the case. To make it clear, it is better to make a short description of a broiler meat
SC. To produce chicken meat, several entities are involved including Parent farms, Broiler farms, Hatcheries, Feed mill
factories and slaughterhouses. These stages are usually vertically integrated in many countries and a company owns
most of them. Reasonably, the company adopts the best policy for the whole SC and all stages obey it. But in Iran poul-
try industry, this is not true. In fact, many of these stages are independent and they work based on the spot market.
Because the product of each stage is related to a live animal, then the holding of goods is not possible and in case of
any disturbance of the market, they are vulnerable to collapse. Some studies like Jalalvand et al. (2011) also show the
weakness of this structure. The best solution for members of this SC for being sustainable and having a smooth profit is
to cooperate. According to the surveying of the author, most of them are aware of the potential benefits of the coopera-
tion but they usually cannot come to the agreement due to the fact that one side thinks it deserves more. Consequently,
many of them prefer to work independently and unfortunately many problems arise and both manufacturers and custom-
ers are hurt. This is just a typical example that might happen in any industry and any SC. Another case which our paper
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is motivated by that is in tissue paper industry. A tissue paper producer needs folding cartons for packing its products
(facial tissues, toilet tissues, etc.) and the folding cartons are usually supplied by a supplier. According to the customer
requests (distribution centres), the producer orders different folding cartons each with a specific weight and design and
offers a delivery schedule according to its production plan. The supplier also has many customers (manufacturers) and
they demand their orders (cartons) on due dates like the manufacturer. The supplier can deliver every order of a cus-
tomer as soon as its production is completed or wait until the rest of orders being ready and send them as a batch.
Therefore, the supplier must schedule the orders in such a way that on one hand, all orders meet their due dates and on
the other hand, the transportation costs become minimum. Sometimes, the supplier rejects the manufacturer’s request
since the offer is not consistent with its constraints. Even if the supplier accepts the manufacture’s orders, it tends to
impose its schedule to the manufacturer to deal with all customers profitably. If the folding cartons are delivered to the
manufacturer late, then the manufacturer cannot pack the corresponding products and would lose its customers. Thus,
the release time of the orders is critical and this leads the manufacturer to impose its plan to the supplier. There might
be an opportunity for both parts to cooperate but the cooperation likelihood is a big challenge. In such situations, having
a fair sharing mechanism for cooperation can be very helpful.
In this paper, we study the strategic issues of SCS as well as the operational ones in a general framework of a SC
including a supplier, a manufacturer and a final customer. The aim of the study is to firstly demonstrate the importance
of integrated scheduling in a SC and secondly introduce a fair sharing mechanism that can be used by members of a
SC to adopt the integrated decision. We believe that this kind of study can remarkably be effective for cooperation con-
tracts specially in a make-to-order environment and independent SCs.
The rest of the paper is organised as follows. In Section 2, a review of the relevant literature is given. Section 3
defines the problem in more detail. The model is formulated in Section 4. In Section 5, we present numerical examples,
followed by a conclusion in Section 6.

2. Literature review
In contrast with classical machine scheduling problems, the SCS considers scheduling problems with conflicting objec-
tives from different participants. In the scope of scheduling literature, other topics that study the conflicts can also be
found. According to Hall et al. (2010), there are four modern extensions of classical scheduling theory that address
issues of conflicting objectives or competing agents namely multicriteria scheduling, sequencing games, Integrated
scheduling and SCS. However, the SCS is different from them in that it deals with more than one agent and also the
number of stages of SC is two or more.
One issue that is noticeable in SCS problems is batch delivery. When a supplier decides to dispatch completed jobs
for a manufacturer, the items might be stocked so as to send it as a batch with some next jobs. This will reduce the
transportation and holding costs and also affect the release time of jobs at the succeeded stage of the SC. The batch
delivery and scheduling problems are mainly discussed in integrated scheduling problems such as Lee and Chen (2001),
Mahdavi Mazdeh, Sarhadi, and Hindi (2008), Mazdeh et al. (2011). As it has a remarkable effect on the decision of SC
members, this issue is included in our problem.
 7102 M. Mahdavi Mazdeh and A. Karamouzian

The study of Hall and Potts (2003) can be regarded as the early works introducing SCS. They consider a supplier
and several manufacturers that seek to minimise the total of their sequencing and batching costs. They present schedul-
ing and batching problems with three different objectives and apply several dynamic programming algorithms to obtain
optimal decisions of both parts. By comparing the benefits of joint decision of partners with individual actions, they
demonstrate that the saving potentials of SCS are significant. Although they describe some sharing mechanisms, they do
not present any quantitative or specific models. Chang and Lee (2003) consider a two-stage scheduling problem repre-
senting a manufacturer and a distributer. They present a forward and backward approach for solving a variant of two-
stage production and delivery problems. In the forward approach, the first stage of the system problem is solved first,
followed by the second stage and in the backward approach, the second stage is solved prior to solving the first stage.
They also consider two stages jointly as a system problem and apply worst-case analysis to evaluate each approach.
The strategic issue of SCS is not discussed in this work, but it is addressed to the future research. Agnetis, Hall, and
Pacciarelli (2006) present several models for scheduling decisions of a supplier and several manufacturers. The supplier
and each manufacturer have an ideal schedule based on their own costs. When one side imposes its ideal schedule on
the other in the SC, then the partner has to optimise its own schedule subject to this constraint and also a limited capa-
bility in a storage buffer for changing the sequence. They introduce an interchange cost representing the distance
between the actual and ideal schedule at any stage and based on that they find the optimal supplier’s schedule, manufac-
turer’s schedule and joint optimal schedule. In this work, the strategic issues and also batch delivery are not mentioned.
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Dawande et al. (2006) investigate a real-world SC consisting of a manufacturer and a distributer where the manufacturer
makes the products and the distributer ships them to the customers. The manufacturer tries to minimise its unproductive
time while the distributor minimises either customer cost measures or inventory holding costs. They first evaluate the
cost of conflicts and show that the savings of cooperation is usually significant. Moreover, they consider several scenar-
ios for cooperation in situations that one side dominates the other side. Incentives and sharing mechanisms are also dis-
cussed in this paper. Chen and Hall (2007) study an assembly system where several suppliers provide parts to a
manufacturer. Processing of a product cannot be done until all parts are supplied to the manufacturer. They first deter-
mine the cost of conflicts by two objective functions: minimisation of total completion time and the maximum lateness.
Then, they consider four alternative scenarios for relative bargaining power of partners. In two scenarios, one side is
dominated by the other one, but they negotiate. In one scenario, the manufacturer is dominant but does not accept to
negotiate and finally in the last alternative, both parties cooperate. They evaluate the relative cost saving from coopera-
tion and describe several sharing mechanisms. Manoj et al. (2008) study the benefits of coordinated decision-making in
a SC consisting of a manufacturer, a distributer and several retailers. They consider two alternatives so that either the
manufacturer dominates the distributor and imposes its optimal schedule or vice versa. They evaluate the costs of con-
flicts and compare it with the joint problem where both sides are regarded as a system. Yeung, Choi, and Cheng (2010)
consider a SC involving a supplier, a manufacturer and multiple retailers. They model the scheduling problem as a two-
machine common due windows proportionate flow shop scheduling problem and develop a pseudo-polynomial algo-
rithm to optimally solve the problem. Herrmann and Ullrich (2013) study a manufacturer and a supplier both facing
with a machine scheduling and batch delivery problem. They apply two mixed integer linear models to show the saving
potential of SCS. Choi, Yeung, and Cheng (2012) study a SCS and coordination problem and examine both centralised
and decentralised SC scenarios. Tang, Jing, and He (2013) study the problems of SCS from the perspective of net-
worked manufacturing. They formulate a three-tier SCS model with three objective functions (time, cost and delay pun-
ishment) and develop an ant colony optimisation algorithm for solving the problem. Selvarajah and Zhang (2014) also
address the problem of SCS with the objective of minimising the sum of weighted flow time and the batch delivery
costs considering a manufacturer and several customers. Nevertheless, the strategic issues are not discussed in this paper.
Some other studies in the literature that are relatively related to the subject are Yeung, Choi, and Cheng (2011), Hall
and Liu (2010), Cakici, Mason, and Kurz (2011), Chen and Lee (2008), Ivanov and Sokolov (2013), Chang, Chang,
and Chang (2013).
According to the above-mentioned review of the SCS literature, some facts can be revealed. First, the determination
of penalties that one side imposes on the other side to guarantee its schedule is not analysed. In fact, when one stage
optimises its own schedule, it is interested to set some penalties to persuade the partner to work according to its
schedule. In the available studies, this problem is either not considered or it is assumed as a parameter instead of
decision variable. Second, batch delivery issue in general form (i.e. whether a batch is tardy or not, it is dispatched to
the next stage) is absent in many studies since it makes the problem more complicated and it needs to apply mathemati-
cal programming for modelling the problem. Third and the most important fact is that the strategic issues of SCS either
are not presented or are not completely discussed. For instance, it is assumed that the partners always work with each
other. But in real-world environment, there are many situations that the relation of two companies in a SC breaks due to
the opportunistic behaviour of one side or both. In reality, a game usually forms between partners and each side has a
 International Journal of Production Research 7103

threat strategy to convince the other to cooperate and if they do not reach an agreement, they might leave the relation
and seek for another partner.
Table 1 reveals the distinction of this paper with the relevant literature. In this table, some critical features in the
SCS area such as batch delivery, threat of partners and sharing mechanism are presented. As it is shown, no previous
study considers the problem comprehensively and it needs to fill the gap of the literature by exactly tracing the mem-
bers’ behaviour of a typical SC from the viewpoint of scheduling and delivering. In this study, we try to incorporate all
above-mentioned facts in decision-making by presenting a general model in SCS that includes both operational and stra-
tegic issues. We develop three MILP models to find the optimal decisions of members of a SC consisting of a supplier,
several manufacturers and a customer. We also apply game theory to demonstrate the behaviour of members and analyse
their threat strategies. Finally, based on the game matrix, a fair sharing mechanism for cooperation is developed.

3. Problem definition
Assume a SC consisting of several suppliers, manufacturers and customers (Figure 1). A customer orders different jobs
to one of the manufacturers. The customer also specifies the due dates of its orders and penalty costs of tardy deliveries.
For processing each job of the customer, the manufacturer needs an item that is supplied by suppliers. A product cannot
be processed until the corresponding item is released by the supplier. On the completion of processing a job, the manu-
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facturer has two options: either dispatch the job or hold the product to ship it with some next jobs as a batch. Although,
stocking the completed jobs and dispatching less batches, reduces the transportation cost but it might leads to tardiness
of some jobs and consequent penalty costs to the customer. Note that, the supplier’s items are not available at any time
and they have to be ordered to a supplier to be processed. The manufacturer knows the price and the processing time of
all supplier’s items and therefore based on these data, schedules its jobs so that the total costs of tardiness jobs and also
deliveries being minimised. This would be the best possible strategy of the manufacturer. The manufacturer tries to
impose this schedule on the supplier by assigning penalty costs for tardy items. The supplier has different customers
and therefore the optimal schedule of the manufacturer may not be appropriate for it. Thus, naturally a conflict arises
and a bargaining game between them forms. Both sides can threaten each other to end the relation. But, the rupture will
not be beneficial for them and they are interested in reaching to an agreement.
We first model the individual decisions of the members by means of several MILP models. Then, the game of two
players is depicted by a game matrix according to the coordination game theory. Finally, the possible sharing
mechanism is developed to guarantee the cooperation in the SC.

4. Mathematical models
4.1 Notations
In this part, three models are developed to determine the best strategies that both the supplier and the manufacturer can
adopt. These formulations rely on the following notations. It should be note that symbol ‘/’ means or.

Table 1. The comparison of existence of some features between relevant studies in SCS and our paper.

Objective function Coordination issues

Batch Total tardiness Developing a Determination of Threat
Paper delivery costs sharing mechanism penalties strategies

Hall and Potts (2003) U – – – –

Chang and Lee (2003) U – – – –
Agnetis, Hall, and Pacciarelli (2006) U – – – –
Dawande et al. (2006) – – U – –
Chen and Hall (2007) – – U – –
Manoj et al. (2008) – – U – –
Hall and Liu (2010) – – U – –
Yeung, Choi, and Cheng (2011) – – U – –
Herrmann and Ullrich (2013) U U – – –
Choi, Yeung, and Cheng (2012) – – U – –
Tang, Jing, and He (2013) U – – – –
Selvarajah and Zhang (2014) U – – – –
Our paper U U U U U
 7104 M. Mahdavi Mazdeh and A. Karamouzian

Manufacturer 1 Customer 1
Supplier 1
. Manufacturer 2
. .
.
. . .
. .
Supplier S
Manufacturer M Customer C

Figure 1. The supply chain of the paper.

Indices

S Index to denote the supplier

M Index to denote the manufacturer
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C Index to denote the customer

i Index to denote works (i = 1,…, n,…, m). The first n jobs belong to the manufacturer and the rest represent jobs of supplier’s
customers excluding the manufacturer
k Index to denote batches (k = 1, 2,…, K)

Parameters
S=M
di Due date of job i imposed on the supplier/manufacturer
S=M
ai Tardiness penalty of job i per unit time for supplier/manufacturer
wM Cost of delivering a batch to the customer paid by the manufacturer
wS Cost of delivering a batch to the manufacturer paid by the supplier
S=M
pi Processing time of job i in the supplier/manufacturer facility
S=M
pc i Processing cost of job i in the supplier/manufacturer facility
S=M
ri Revenue of processing job i acquired by the supplier/manufacturer

Variables
S=M
Si Start time of processing job i in the supplier/manufacturer facility
S=M
Ci Completion time of processing job i in the supplier/manufacturer facility
RMi Release date of job i for manufacturer set by the supplier
S=M
Ti Tardiness of job i caused by the supplier/manufacturer delay
S=M
Dk Delivery time of kth batch of the supplier/manufacturer
YijM Binary variable which takes 1 if in the schedule of manufacturer, job i is to be processed before job j and takes 0 otherwise
(it is possible these jobs are not adjacent)
S=M
Xij Binary variable which takes 1 if in the schedule of supplier/manufacturer job i is to be processed just before job j (no other
S=M
job is processed between them) and takes 0 otherwise. X0j means the first job in the sequence
S=M
Aik Binary variable that is 0 if job i is assigned to the kth batch of the supplier/manufacturer, 1 otherwise
S=M
Bk Binary variable which takes the value one if at least one job is assigned to the kth batch of the supplier/manufacturer

4.2 Manufacturer’s problem

In this section, the problem of manufacturer is discussed when it determines the schedule of jobs individually. The man-
ufacturer exactly knows all relevant scheduling and delivering parameters except the release time of jobs. In other
words, the arrival times of jobs are not revealed until the supplier announced when each job is dispatched to the manu-
facturer. Therefore, the manufacturer cannot consider the release date of jobs as parameters. However, it is possible to
determine a lower bound for arrival time of any job by calculating the required processing times for jobs in the supplier
facility. For example, assume that the first job in the manufacturer schedule needs p time for processing by the supplier.
Hence, the earliest time that the manufacturer receives this job would be p. The lower bound for other jobs can similarly
be achieved.
 International Journal of Production Research 7105

Based on the problem definition, the mathematical formulation for determining the optimum schedule of jobs from
the manufacturer viewpoint can be written as follows.
X
n X
n X
K
Max ZM ¼ ðriM  riS  pcM
i Þ i Ti 
aM M
wM BM
k (1)
i¼1 i¼1 k¼1

s.t:

X
n
XijM ¼ 1 j ¼ 1; 2; . . .; n (2)
i¼0;i6¼j

X
nþ1
XijM ¼ 1 i ¼ 1; 2; . . .; n (3)
j¼1;i6¼j

X
n
X0iM ¼ 1 (4)
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i¼1

SjM  RM
j j ¼ 1; 2; . . .; n (5)

SjM  CiM  Lð1  XijM Þ i 6¼ j i; j ¼ 1; . . .; n (6)

CiM ¼ SiM þ PiM i ¼ 1; 2; . . .; n (7)

X
n

j  Pj þ
RM j ¼ 1; 2; . . .; n
S
PiS YijM (8)
i¼1

SjM  CiM  LðYijM  1Þ i 6¼ j i; j ¼ 1; . . .; n (9)

SjM  CiM \LðYijM Þ i 6¼ j i; j ¼ 1; . . .; n (10)

k  Ci  Lð1  Aik Þ
DM 8k; i ¼ 1; . . .; n
M M
(11)

TiM  DM
k  di  Lð1  Aik Þ 8k;
M M
i ¼ 1; . . .; n (12)

X
n

ik  LðBk Þ
AM 8k
M
(13)
i¼1

X
K

ik ¼ 1
AM i ¼ 1; . . .; n (14)
k¼1

ik ; Bk ; Xij ; Yij 2 f0; 1g

AM M M M
8i 8j 8k (15)
TiM ; DM
k ; Si ; Ci ; Ri  0
M M M

The objective of the manufacturer (1) is to maximise its profit which equals to its revenues minus its costs. The reve-
nues are received from customers for delivering their orders. The corresponding costs based on the problem definition,
are scheduling costs (tardiness penalty of jobs), processing costs, revenues paid to the supplier for providing items and
delivering costs.
The restrictions (2)–(4) control the sequence of jobs for processing. Each job is either the first one processed or suc-
ceeds another one (constraint (2)) and similarly each job either precedes another job or is the last one processed on a
machine (constraint (3)). There is also one job that can be processed at first (constraint (4)). The start time of processing
 7106 M. Mahdavi Mazdeh and A. Karamouzian

a job is greater than its release time and also greater than the completion time of the preceding job which is reflected in
constraints (5) and (6), respectively. The completion time of a job equals to its start time of processing plus its
processing time (constraint (7)). As it was discussed before, the release time of jobs is not deterministic to the manufac-
turer. However, the manufacturer considers the values for them such that they are feasible for the supplier. This proce-
dure is presented in constraint (8). In this constraint, the release time of a job is set above the total time that the
supplier needs to process this job and all its proceeding jobs. Constraints (9) and (10) assure that if job i is arranged to
be processed before job j then the value of YijM is one and otherwise it equals to zero. Constraint (11) states that the
delivery time of a completed batch is greater than the completion time of every job assigned to it. In fact, a batch can
be dispatched to the customer when all jobs belonging to it are finished. Constraint (12) calculates the tardiness of each
job. This value equals to the amount of time that a job is late (delivered after its due date). Note that when a job is
delivered prior to its due date, then the tardiness of the jobs is zero. Constraint (13) differs between real and imaginary
batches. That is to say, when at least a job is assigned to a batch, then the batch is considered real and has to be dis-
patched to the customer. Clearly, imaginary batches do not influence on the objective function and the sequence. Con-
straint (14) ensures that each job is assigned to a batch. Finally, constraint (15) defines the type and boundary of
variables.
Here, the optimal solution (profit) of presented model is named the non-cooperative strategy of the manufacturer
and is shown by ZM . The optimal manufacturer’s schedule is guaranteed if the supplier delivers jobs according to the
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values of RM i . Hence, the manufacturer tries to persuade the supplier to dispatch jobs in such a way that job i is
delivered to the manufacturer before RM i . Strictly speaking, the manufacturer assigns the due dates of job i equals to
RMi for the supplier. It should be noted that the manufacturer’s decision is a feasible schedule for the supplier due to
the fact that the manufacturer incorporates the processing time constraints of the supplier. Nevertheless, the supplier
may deviate from this proposal for its own optimal schedule. Therefore, the manufacturer has to impose a penalty
cost for any job that is not delivered before its due date. The penalties have two roles. First, they motivate the sup-
plier to arrange its schedule according to the manufacturer’s schedule. Second, it compensates the manufacturer’s
costs when some jobs are tardy (the manufacturer has to pay penalties to the customers for late deliveries). Theoreti-
cally, the greater the penalties, the more will be the satisfaction of manufacturer. But in practice, when the penalties
increase, there might be a potential risk that the supplier declines the offer. Logically, these penalties should delimit
according to the real additional costs of the remanufacturer if there are some tardy jobs. Late release of jobs that are
placed in the beginning of the manufacturer’s optimal sequence, impose more costs to the manufacturer. That is to
say, when the first jobs are tardy, the rest of them may not be delivered on time. In this part, a simple mechanism
for specifying the penalty cost of jobs is developed. In this manner, the penalty cost for a supplier’s tardy job is
computed according to the corresponding job’s penalty cost of the manufacturer plus a fraction of all succeeded jobs’
penalties which is given by:
" #
X
n
ai;S ¼ ai;M þ b aj;M ðYijM Þ (16)
j¼1

In Equation (16), the value of β ranges from 0 to 1 and should be determined according to the intensity of manufac-
turer’s due dates and idle times of the facility.

4.3 Supplier’s problem

In this part, the decision-making of the supplier when it acts individually is discussed. Generally, the supplier has some
customers and they ordered some jobs to be processed. The manufacturer can be regarded as one of these customers that
is more important. When the supplier receives the orders of the manufacturer, it has a choice to accept or reject the
offer. The supplier has to meet customers’ orders and it might not be economical to process the jobs of manufacturer
according to their due dates and penalty costs. If the supplier rejects the offer, then the manufacturer seeks for another
partner.
The supplier tries to maximise its profit by an optimal schedule for processing and delivering of jobs. This optimal
schedule might be different from the manufacturer’s expectation, since the supplier incorporates all its own costs. Given
that, the framework of supplier’s decision can be presented by the following model.
X
m X
m X
K
Max ZS ¼ ðriS  pcSi Þ  aSi TiS  wSk BSk (17)
i¼1 i¼1 k¼1
 International Journal of Production Research 7107

s.t:

X
m
XijS ¼ 1 j ¼ 1; 2; . . .; m (18)
i¼0;i6¼j

X
mþ1
XijS ¼ 1 8i (19)
j¼1;i6¼j

X
m
X0iS ¼ 1 (20)
i¼1

SjS  CiS  Lð1  XijS Þ i 6¼ j; 8i 8j (21)

CiS ¼ SiS þ PiS 8i (22)

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DSk  CiS  Lð1  ASik Þ 8i 8k (23)

TiS  DSk  diS  Lð1  ASik Þ 8i 8k (24)

X
n
ASik  LðBSk Þ 8k (25)
i¼1

X
K
ASik ¼ 1 8i (26)
k¼1

X
m
ASik  Lð1  ASjk Þ 8k; j ¼ 1; . . .; n (27)
i¼nþ1

ASik ; BSk ; XijS 2 f0; 1g

8i 8j 8k (28)
TiS ; DSk ; SiS ; CiS ; RSi  0
The above-mentioned model is similar to the manufacturer’s formulation due to the fact that their problems are rather
equivalent. Both of them want to maximise their profits by minimising the scheduling and delivering. With respect to
the problem definition, each job at the stage of the manufacturer implies a job at the stage of the supplier.
In the supplier’s problem, it is assumed that all materials required for the processing of jobs are available whenever
they are needed. In fact, the supplier’s production is considered to be just in time. Therefore, constraints (5) and (8–10)
in the manufacturer’s problem related to the release times of jobs and are ignored in the supplier’s problem (RSi ¼ 0).
Constraints (18–26) are exactly the same as corresponding constraints in the first model except that the superscript ‘M’
is changed to ‘S’ in order to show that they belong to the supplier’s problem (The relations are not discussed again and
they are referred to the explanations of the first model). Constraint (27) ensures that a job that does not belong to the
manufacturer is not assigned to its batches. Finally, constraint (28) defines the domain of the variables.
The best solution of the second model determines the non-cooperative strategy of the supplier and is shown by ZS.
While the supplier announces its delivery times to the manufacturer, the manufacturer has to review its sequence if the
deliveries are different with its expectations. In this situation, the manufacturer also gets some penalty costs from the

supplier. Given that, the total profit of the manufacturer is presented by ZM .
The supplier has a threat strategy which is not to process the manufacturer’s jobs if the manufacturer does not tend
to cooperate. Clearly, in this situation, the manufacturer would seek to find another partner and the supplier looses the
potential benefits of processing the jobs. By eliminating the jobs j = 1,…, n from the supplier’s problem (indicating the
relevant jobs of the manufacturer) and resolving the second model, the profit of the supplier’s threat strategy will be
obtained. This value is shown by TS.
 7108 M. Mahdavi Mazdeh and A. Karamouzian

4.4 The combined problem

The non-cooperative strategies of the manufacturer and supplier are introduced in the previous sections. Here, the prob-
lem is analysed from the viewpoint of the SC to reach ideal decisions of both parts. It would help to reveal the potential
benefits of the cooperation.
The SC problem of the supplier and the manufacturer consists of the simultaneous optimisation of both companies’
integrated scheduling and batching. The environment can be interpreted as a flow shop with single machines and batch
delivery. The joint decision is modelled as follows.
P
n Pn M M Pm
Max ZSCS ¼ ðriM  pcM i Þ i¼1 ai Ti þ i¼nþ1 ðri  ai Ti Þ
S S S
(29)
i¼1
P PK
 m i¼1 ðpci Þ 
S
k¼1 ½wk Bk þ wk Bk 
M M S S

s.t:

X
n
XijM ¼ 1 j ¼ 1; 2; . . .; n (30)
i¼0;i6¼j
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X
n
XijS ¼ 1 j ¼ 1; 2; . . .; m (31)
i¼0;i6¼j

X
nþ1
XijM ¼ 1 i ¼ 1; 2; . . .; n (32)
j¼1;i6¼j

X
mþ1
XijS ¼ 1 i ¼ 1; 2; . . .; m (33)
j¼1;i6¼j

X
n X
m
X0iM ¼ 1; X0iS ¼ 1 (34, 35)
i¼1 i¼1

SiM  DSk  Lð1  ASik Þ 8i (36)

SjM  SiM þ PiM  Lð1  XijM Þ i 6¼ j; 8i 8j (37)

SjS  SiS þ PiS  Lð1  XijS Þ i 6¼ j; 8i 8j (38)

k  Si þ Pi  Lð1  Aik Þ
DM 8i 8k
M M M
(39)

DSk  SiS þ PiS  Lð1  ASik Þ 8i 8k (40)

X
n

ik  LðBk Þ
AM 8k
M
(41)
i¼1

X
n
ASik  LðBSk Þ 8k (42)
i¼1

TiM  DM
k  di  Lð1  Aik Þ
M M
8i 8k (43)

TiS  DSk  diS  Lð1  ASik Þ i ¼ 1; . . .; m (44)

 International Journal of Production Research 7109

X
K
ASik ¼ 1 8i (45)
k¼1

X
K

ik ¼ 1
AM i ¼ 1; . . .; n (46)
k¼1

X
m
ASik  Lð1  XjkS Þ 8k; j ¼ 1; . . .; n (47)
i¼n

ik ; Aik ; Bk ; Bk ; Xij ; Xij 2 f0; 1g

AM S M S M S
8i 8j 8k (48)
TiM ; DM
k ; D k ; Si  0
S M

The objective function of the third model (29) consists of revenues of SC from final customer minus penalty costs of
the manufacturer to the customer and total delivery costs in the SC. In this function, tardiness penalties between the sup-
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plier and manufacturer and also supplier’s revenues from the manufacturer are neglected owing to the fact that the both
sides are regarded as one entity.
Constraints (30–35) control the permutation of jobs for both parties. Constraint (36) states that the start time of pro-
cessing a job has to be greater than its delivery time by the supplier. The start time of processing a job also needs to be
scheduled after the completion time of the proceeding job. This fact is shown for the manufacture and supplier in con-
straints (37) and (38), respectively. Constraints (39) and (40) assure that the delivery time of a batch is at least greater
than the completion time of the last job assigned to that batch. Similar to the previous models, constraints (41) and (42)
distinguish a real batch from an imaginary one. Constraints (43) and (44) calculate the tardiness of each job for the
manufacturer and supplier, respectively. Constraints (45–47) control the assigning of jobs to the batches by assuring that
each job is assigned to a batch for both parts and also a job not belonging to the manufacturer is not included in the
batches of the manufacturer. Finally, constraint (48) presents boundary of variables.
The optimal solution of the combined model determines the best strategies that both parts can adopt so as to incur
least possible costs. Choosing these strategies, the total revenue of the supplier and manufacturer become ZSSC ; ZM SC
,
respectively. These values are computed by placing the best strategy of the third model in order in the objective func-
tions of the first and second model. Note that for the manufacturer, (first model) the tardiness penalty of the supplier is
omitted according to the agreement.
The cooperation strategy brings the maximum effectiveness for the SC. However, especially when the nodes of a
SC belong to different companies, this might not occur due to the many reasons such as opportunistic behaviour of a
dominant partner or absence of information of other partners. For the problem we introduced, the supplier can ask the
manufacturer to share their information in order to achieve the best strategy for the SC and then allot the surplus to each
other. The appeal of the supplier might not be accepted unless it proposes an offer that increases manufacturer’s profits
in relation to its previous strategy. Unfortunately, sometimes, the lack of a fair sharing mechanism prevents partners of a
SC to reach an agreement and they prefer to act independently. Consequently, in addition to information sharing and
finding the best strategy of a SC, it is necessary to establish a reasonable allocation mechanism of the benefits between
partners of the SC.

4.5 Sharing mechanism

For the before-mentioned problem, if both partners choose the strategy of SC, then the sum of costs of the SC would
decrease in relation to the sum of costs while they make decision independently. However, in the SC strategy, the costs
of manufacturer go up, but in turn, it decreases for the supplier. The question is how much the supplier should pay to
the manufacturer to convince him to cooperate and ignore the penalty costs of tardiness. We derive the answer of this
question by means of cooperation game theory. Since there are two decision-makers in this game, we apply two-person
cooperative game model with transferable utility. It is assumed that the transferable commodity between partners is
money and both players have a linear utility for money. The scaling of the respective utilities is such that the utility of
no money is 0 and the utility of one money is 1.
First of all, the pure strategies of both sides should be specified. The manufacturer has two strategies: implementing
its own best decision (M1) and adopting the SC strategy (M2). Similarly, the supplier also can choose between two
 7110 M. Mahdavi Mazdeh and A. Karamouzian

Figure 2. The strategic form of the game of the supplier and the manufacturer.

alternatives: accepting the manufacturer’s offer (S1) and rejecting the offer (S2). The strategic form of this game can be
represented by a matrix of ordered pairs depicted in Figure 2. The first component of the pair represents supplier’s pay-
off and the second component represents manufacturer’s pay-off. This matrix is sometimes called the bimatrix. The
game may also be shown by matrices A and B.
If the manufacturer chooses M1 and the supplier uses S1, then they prefer to optimise their own costs and hence, the
pay-off of both parts is ðZS ; ZM

Þ which corresponds to the minimum cost of the supplier and the manufacturer, respec-
tively, in non-cooperative environment. If the supplier rejects the manufacturer’s offer (S2), then their relationship will
rupture and the pay-off is ðTS ; TM Þ.
As mentioned in the supplier problem, TS indicates the profit of the supplier without considering processing of man-
ufacturers’ jobs which implies ignoring the manufacturer from supplier’s customers. TM represents the expected revenue
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of the manufacturer if it decides to find another partner which is evidently less than ZM . If TS is less than ZS , then the
first row dominates the second row. It implies that the supplier has only one choice and always accepts the decision of
the manufacturer. The reason is that he or she behaves rational in the sense that among two options the supplier will
select the one with higher utility. However, if TS is greater than ZS , then the supplier has a credible threat strategy to
break the agreement. Generally, the threats are only a formal method of bargaining. Being rational players, they cer-
tainly will reach an agreement.
If the manufacturer chooses M2 and the supplier chooses S2, the best solution of the SC is achieved and the pay-off
will be ðZSSC ; ZM
SC
Þ. The sum of components of this pay-off is the largest. However, the manufacturer receives less than
its own best and naturally does not tend to use M2, but on the hand, there is a risk of breaking the links with the sup-
plier. Based on the values of the matrix (Figure 2), one the partners has to give a side payment (SP) to reach the agree-
ment. According to the two person TU games, this SP can be computed by the following relations.
ðr þ dÞ
SP ¼  ZSC
S
(49)
2

r ¼ ZSC
S
þ ZSC
M
(50)

d ¼ ValðA  BÞ (51)
In Equation (51), ‘Val’ denotes the value of a matrix. According to the Minimax theorem, for every finite two-person
zero sum games, there is a number called the value of the game (for more details on the above equations and determina-
tion of value of a game matrix, it is referred to the electronic text by Thomas S. Ferguson (Chapter 3) available at:
http://www.math.ucla.edu/~tom/Game_theory/contents.html).
If the quantity of SP becomes positive, then the supplier pays the manufacturer, whereas, if it is negative, then the
SP goes from the manufacturer to the supplier.
In conclusion, a fair cooperation contract for the above-mentioned problem is that first the manufacturer ignores tar-
diness penalty costs by the supplier. Second, the supplier schedules and delivers jobs according to the SC strategy (third
model) and third, the supplier pays SP (Equation (49)) to the manufacturer to compensate its costs.

5. Numerical examples
In this section, a numerical study is presented to show the importance of the models in reality. In the relevant literature,
there is no data-set for benchmarking, therefore, some examples with different sizes are generated randomly and solved
by an optimisation solver (LINGO). This solver can yield global optimum solutions for the examples. In the following,
we first discuss one of the examples in detail and then the results of other examples are shown.
Consider a manufacturer that receives two orders from customers with specifications mentioned in Table 2.
Naturally, the manufacturer optimises the schedule of orders’ processing by means of solving model 1 (Section 4.2)
and sets the due dates and tardiness penalties of jobs for the supplier. According to the optimal solution, the proposal of
the manufacturer to its supplier would be as Table 3.
 International Journal of Production Research 7111

Table 2. The manufacturers’ parameters.

Job riM diM aM

i pM
i pSi pcM
i wM b

1 40 14 3 2 3 2 7 1
2 41 13 9 4 4 4

Table 3. The manufacturers’ proposal.

Job riS diS aSi

1 40 14 3
2 41 13 9

Assume that the supplier has to process two jobs with parameters presented in Table 4. In this situation, the supplier
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is faced with the proposal of the manufacturer. If the supplier accepts the proposal, using model 2 (Section 4.3), its rev-
enue would be 22. Subsequently, the revenue of the manufacturer equals 14 and therefore, the SC revenue would be 37.
Whereas, if the supplier decides to reject the request of the manufacturer, then the manufacturer’s orders are ignored in
the scheduling of supplier’s jobs and using model 2 afresh, the supplier earns 38. As a result, the supplier naturally does
not tend to accept the manufacturer’s offer unless it gains more than 38 from the cooperation. Note that the manufac-
turer has to find another partner if the supplier refuses to cooperate. We assume that finding another partner will result
in 4 units of extra cost. Thus, the manufacturer does not want to break the relation with the supplier.
It is obvious that to achieve the best possible strategy for the SC is to make scheduling and delivering decisions
across the SC simultaneously. According to Section 4.4 and through solving the model, it is found that the optimal SCS
decision will make the revenue of the whole SC to 53. It means that if the partners cooperate, the revenue increases by
47% when compared with the situation the manufacturer imposes its own best policy to the supplier. Although this is
the best strategy for the whole SC, the manufacturer never agrees with that since its pay-off is −2. Here, the problem
that the authors introduced in Section 4.5 is arisen, that is, how the partners of the SC are persuaded to cooperate for
the best strategy of the SC. Following the game theory concepts described in Section 4.5, the bimatrix game of the man-
ufacturer and the supplier for this example is as Figure 3. According to the bimatrix and using Equation (49), the pay-
ment (SP) is derived −16. It means that the supplier must pay 16 to the manufacturer in order to persuade him to apply
the best strategy of the SC.
Similar to the above-mentioned example, we generate five more instances with increasing size. The detailed results
of both examples are given in Table 4.
Table 4 shows that the strategy of SC can massively improve its efficiency. The improvements for the generated
examples vary between 22 and 118%. Generally, when the number of jobs (the size of problems) increases, the schedul-
ing of entities in the SC is more vulnerable to conflict. So, it is expected that for larger problems, the saving potential
of integrated decisions becomes more noticeable. The numerical examples clearly show this fact, where the best
improvement is achieved by the largest problem. It is essential to note that the SC improvement (SCI) is sensitive to

Table 4. The detailed results of numerical examples.

Pr. Pr. Manufacturer Threat Cooperation Supply chain Manufacturer Supplier

Num size strategy strategies strategy SP improvement* share share

(n, m) ðZS ; ZM

Þ ðTS ; TM Þ ðZSSC ; ZM
SC
Þ SP
1 (2,2) (10,19) (0,15) (25,11) −14 24% 69% 31%
2 (2,3) (−4,54) (26,18) (53,8) −18.5 22% 43% 57%
3 (2,4) (22,14) (26,18) (55,−2) −16 47% 26% 74%
4 (2,5) (16,21) (35,17) (37,19) −40 51% 34% 66%
5 (3,6) (11,71) (43,60) (84,35) −33 45% 57% 43%
6 (5,7) (13,43) (44,20) (110,12) −37 118% 40% 60%

*Supply chain improvement = ½ððZSSC þ ZM

SC
Þ=ðZS þ ZM

ÞÞ  1  100:
 7112 M. Mahdavi Mazdeh and A. Karamouzian

Figure 3. The bimatrix game of the manufacturer and the supplier.

Table 5. The sensitivity of SCI towards parameters’ changes.

Changes of parameters* Mean absolute

percentage
Pr. 1 Pr. 2 Pr. 3 deviation of SCI
Parameter
−25% 0 +25% −25% 0 +25% −25% 0 +25% −25% +25%

b 24% 24% 24% 10% 22% 36% 47% 47% 47% 18% 22%**
ws
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9% 24% 50% 18% 22% 28% 23% 47% 65% 44% 57%
wm 21% 24% 28% 21% 22% 23% 50% 47% 45% 7% 9%
S=M
ai 31% 24% 17% 51% 22% 48% 36% 47% 32% 62% 60%
S=M
pc i 21% 24% 28% 20% 22% 24% 41% 47% 54% 11% 13%

*The values under columns ‘0’ refer to the SCI calculated in Table 4 for the corresponding problems and the other values represent
the new SCI obtained after the relevant parameters were changed.
**It is calculated as: [(|24 − 24|/24) + (|36 − 22|/22) + (|47 − 47|/47)]/3.

some parameters of the problem. To show this, a sensitivity analysis is conducted and presented in Table 5. Here, we
consider some parameters and change them by 25% (up and down) to reveal the marginal effects on SCI of problems
1–3. As it is illustrated by Table 5, the penalty costs of customers, delivery costs of supplier and β have the most impact
on the SCI, respectively. If β is assigned very close to 0, then the supplier tries to impose its own optimal decision to
the manufacturer, and if it is assigned greater than 1, then the manufacturer dictates its scheduling to the supplier.
Hence, the values of β can intensify the conflict between the partners and make the cooperation more necessary. Simi-
larly, the penalty costs have the same effect on the SC. As the delivery costs increase, both sides try to make fewer
batches and send the jobs simultaneously. Consequently, the tardiness of jobs increases and the plans of partners would
be disrupted. It can be concluded that when the delivery costs or penalty costs are noticeable relative to other costs in a
SC, the coordinated decision-making becomes vital.
The results from Table 4 emphasise that determining a fair sharing mechanism for cooperation is very important
since the best strategy of a SC might be against one or more parts (see column ZM SC
). The final shares of both sides (last
two columns of Table 4) are computed according to the SP of the manufacture to the supplier. These values state that
based on the bargaining power of one side, it is fair that the other side assents to small portion of total profit of the SC.
Clearly, without the sharing mechanism described by the authors, the exact determination of shares seems difficult. At
this step, the manufacturer and the supplier can negotiate a contract based on the terms obtained before. This contract
imitates the behaviour of a vertically integrated SC, whereas, both sides are different in terms of ownership.

6. Conclusion
This study investigates the behaviour and decisions of partners of a SC dealing with scheduling and delivering of jobs.
First of all, we concentrated on the individual decision-making of partners and the effects of unilateral actions to the
whole SC. Then, the coordinated decision-making for scheduling and delivering of all jobs in the SC were described.
Three mathematical models to obtain the optimal strategy in each situation were also developed.
The numerical examples show the superiority of integrated decisions over independent actions. Based on the
sensitivity analysis, the high penalty and delivery costs substantially enhance the saving potentials. Nevertheless, it is
observed that the best policy of the SC usually is against some nodes of the SC and, therefore, the best policy is not
implemented in reality. We introduced game theory concepts to cope with the problem. Hence, the conditions that both
sides are interested in forming an alliance were obtained and it was discussed that they should sign a contract and
specify the shares of each one form the total profit of the coordination. The fair amount of the SPs can be calculated
 International Journal of Production Research 7113

according to the relations presented in the article. We believe that this kind of contracts motivate individual partners to
bind together and act like a vertical integrated SC which is needed in independent SC.
The analysis of this paper can be extended in several directions. We assumed that there are two decision nodes in
the SC. A direct extension of this paper is to increase the number of layers. Additionally, the objective functions of
scheduling can be changed or developed. It is also interesting to investigate situations where partners are not aware of
all information in SC. In other words, one side might not completely know the other side’s cost and revenue parameters.
Finally, it is needed to develop exact algorithms for the presented mathematical models to solve very large problems.
Evidently, heuristic or metaheuristc algorithms which cannot guarantee to reach to the global optimum solutions are not
helpful for this problem.

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