Negotiation-Based Collaborative Planning Between Supply Chain Partners

European Journal of Operational Research 163 (2005) 668–687
www.elsevier.com/locate/dsw
Negotiation-based collaborative planning

between supply chains partners
Gregor Dudek *, Hartmut Stadtler
Department of Production and Supply Chain Management, Darmstadt University of Technology,
Hochschulstrasse 1, Darmstadt 64283, Germany
Available online 26 February 2004
Abstract
It is often proposed that operations planning in supply chains can be organized in terms of a hierarchical planning
system. However, the hierarchical approach assumes a single, centralized planning task for synchronizing operations
across the supply chain. As central coordination can usually be realized only for isolated parts of an overall supply
chain, the question arises whether there are alternative ways of coordination.
In this paper we propose a non-hierarchical, negotiation-based scheme which can be used to synchronize plans
between two independent supply chain partners linked by material flows. Assuming that plans are generated based
upon mathematical programming models, we show how modified versions of these models can be utilized for
evaluating material orders or supplies proposed by the supply chain partner and for generating counter-proposals.
Resulting is an iterative, negotiation-like process which establishes and subsequently improves a consistent overall
plan. Computational tests suggest that the scheme comes close to optimal results as obtained by central coordina-
tion.
2004 Elsevier B.V. All rights reserved.
Keywords: Supply chain planning; Collaborative planning; Mixed- integer programming
1. Introduction
Supply chain management (SCM) deals with the management of the multiple relationships across the
supply chain, i.e. the network of organizations involved in creating final customer products and services
(Christopher, 1998). As such, SCM embraces various business processes which are of relevance for servicing
customers (e.g. order fulfillment, customer service management, product development) and explicitly ac-
counts for the structure of the supply chain (SC) (Cooper et al., 1997).
Planning and control of operations, i.e. production, storage, and distribution processes, across the SC
clearly forms a key aspect of SCM. Rohde et al. (2000) identified the various planning tasks of interest and
*
Corresponding author.
E-mail addresses: dudek@bwl.tu-darmstadt.de, gregor.dudek@gmx.de (G. Dudek).
0377-2217/$ - see front matter 2004 Elsevier B.V. All rights reserved.
doi:10.1016/j.ejor.2004.01.014
G. Dudek, H. Stadtler / European Journal of Operational Research 163 (2005) 668–687 669
procurement production distribution sales
long- Strategic Network Planning

term
mid-
Master Planning
term
Demand
Material Production Distribution Planning
Require- Planning Planning
ments
short- Planning Transport Demand
term Scheduling
Planning Fulfilment
Fig. 1. Supply chain planning matrix (taken from Rohde et al., 2000).
showed how they can be organized in terms of a hierarchical planning structure, the supply chain planning
matrix (Fig. 1).
At the operational planning level the task of master planning (MP) plays a crucial role. It serves to
balance supply with demand over the planning horizon and to synchronize operations across the SC
(Rohde and Wagner, 2002). In order to achieve this purpose, a single centralized planning task is proposed
for the entire SC as indicated in Fig. 1. The implementation of a centralized MP however requires a high
degree of integration among participating organizational units. In practice, centralized MP can therefore
only be realized for relatively small, isolated parts of the SC, such as for entities belonging to a single
company.
Thus, the question arises of how to link and coordinate planning between these isolated parts of the SC.
This paper contributes to the question in laying out a negotiation-like coordination scheme for two parties,
a buyer and a supplier, which establishes and subsequently improves a consistent overall plan.
The coordination process of autonomous, yet inter-connected MP activities is referred to as collabo-
rative planning (CP) in the following. The integrated parts of the SC for which centralized MP is realized
are called planning domains (in analogy to Kilger and Reuter, 2002). The resulting situation is depicted in
Fig. 2. It shows the facility networks pertaining to each planning domain and the corresponding planning
processes. Within each planning domain, centralized MP takes place and coordinates subsequent, short-
term planning activities. In absence of any supply chain integration each MP task is accomplished with an
isolated view of the corresponding domain and based on local demand forecasts. However, since operations
Supplier Domain Buyer Domain
Collaborative
Planning
supplies final
demand
external demand
Fig. 2. Collaborative planning between adjacent planning domains.

670 G. Dudek, H. Stadtler / European Journal of Operational Research 163 (2005) 668–687
at the distinct domains actually interrelate due to supplies required at the buyer domain, uncoordinated
planning results in sub-optimization and inefficiencies such as unnecessary inventory buffers or frequent
plan adjustments.
Therefore, to improve supply chain performance, domain-specific MP tasks can be linked by CP. The
scheme developed in the following assumes that mathematical programming models are used for domain-
specific MP. The idea is to pass order proposals (generated by the buyer) and supply proposals (generated
by the supplier) as well as associated cost effects between the parties in an iterative manner. A proposal
received from the partner is analyzed for its consequences on local planning, and a counter-proposal is
generated by introducing partial modifications. Resulting is a negotiation-like process which subsequently
improves supply chain wide costs without centralized decision making and with limited exchange of
information between the partners. Specifically, only the respective order/supply proposals and associated
effects on local cost are exchanged.
The paper is organized as follows. A literature review is presented in the next section. Thereafter, we
further detail the decision situation outlined above and introduce a quantitative modeling framework. The
CP coordination scheme is described in Section 4, followed by computational results which demonstrate its
performance in Section 5. A summary and some final remarks conclude the paper.
2. Literature review
Relevant literature originates from several fields of contemporary research on SCM. First, there is a
large and growing stream of literature on SC coordination by contracts. An often studied situation within
this context is the news vendor problem where a retailer faces random demand and has to buy a certain
quantity from the manufacturer prior to the realization of demand (e.g. Silver et al., 1998; Lariviere and
Porteus, 2001). Another class of papers is concerned with individual and SC wide operating costs when a
manufacturer and retailer face lot-sizing decisions for replenishments. Monahan (1984) shows how the
manufacturer can induce the retailer to order globally optimal quantities by offering a quantity discount.
The analysis is generalized by Lee and Rosenblatt (1986) and enhanced by additional features e.g. by Weng
(1995) who adds price sensitivity of demand.
Lee and Whang (1999) devise an incentive scheme for optimal control of a SC resembling a serial multi-
echelon inventory system managed by independent entities. Fransoo et al. (2001) demonstrate how
exchange of demand information and definition of service level constraints can be used to improve coor-
dination of a divergent SC with one supplier and several retailers. Reviews of articles on supply contract
design can be found in Tsay et al. (1998) and Cachon (in press).
A second area of research deals with multi-agent systems for the coordination of SCs. Agent orientation
is a paradigm of constructing software solutions such that autonomous entities (agents), which are able to
interact with each other, are responsible for sub-tasks of an overall problem (Yu, 2001). Fox et al. (2000)
describe a system for modeling SCs with functional agents responsible for e.g. order acquisition, logistics,
transport, or scheduling. Similarly, Swaminathan et al. (1998) develop a software library which contains
functional agents such as plants, suppliers, etc. and control agents for inventory management, transpor-
tation flows or demand planning. In operating the SC, functional agents utilize control agents to support
their decision making. An overview of various articles on agent-based solutions for production planning
and control as well as SCM is given by Grolik et al. (2001).
Finally, a field of research is concerned with mathematical programming models for SC planning at
both, the strategic level of network design and the operational planning level. At the operational planning
level, Ereng€uc et al. (1999) present sub-models for production, distribution, and inventory planning in SCs.
€
Ozdamar and Yazgac (1999) develop an aggregate and a detailed planning model for a production–dis-
tribution system. Z€ apfel and Wasner (2000) propose a planning model for the SC of a steel manufacturer
which covers procurement decisions besides manufacturing and distribution. Reviews of mathematical
programming planning models within the SC context are given in Bhatnagar et al. (1993), Thomas and
Griffin (1996) and Ereng€ uc et al. (1999). The models mentioned above assume central decision making and
hence are not applicable to coordinating planning between independent partners.
A few contributions however combine mathematical programming approaches with distributed deci-
sion making. Here, planning models are used for planning within separate domains. In order to account
for the inter-relations between domains, coordination mechanisms are proposed. The simplest coordi-
nation scheme is discussed by Bhatnagar et al. (1993) and is referred to as ‘‘upstream planning’’ in the
following. It consists of determining plans level by level or hierarchically. Beginning with the most
downstream domain, the plan is prepared and defines (among others) supply requirements for its sup-
pliers. These requirements are passed to suppliers, and the procedure continues in upstream direction. The
scheme is easy to implement and results in an improvement vs. completely isolated planning at each
domain based on local information only. However, it ignores effects of local decisions on upstream
partners and thus yields sub-optimal plans compared to central coordination (Bhatnagar et al., 1993). The
degree of sub-optimization is studied through computational tests by Simpson and Ereng€ uc (2001) for a
three-tier SC. In comparing upstream to central planning results they observe an average gap in total SC
cost of 14.1%.
As upstream planning can be easily implemented, but results in sub-optimization of the SC as a whole,
some authors propose extensions to upstream planning intended to improve the quality of resulting plans.
€ ur (1999) consider a SC with a distribution and a production stage and plans by a
Barbarosoglu and Ozg€
mechanism which rests on upstream planning. However, they extend the scheme by a heuristic method
which modifies distribution decisions, if capacity shortages occur at the production stage. Zimmer (2001)
proposes a coordination scheme for a buyer and a supplier which, too, grounds on upstream planning. She
extends the basic scheme by anticipation at the buyer domain. That is, a simplified model of the supplier
decision situation is included in the buyerÕs planning model. For the scenario studied, significantly im-
proved results vs. mere upstream planning are obtained.
Finally, a differing approach is presented by Ertogral and Wu (2000). They develop a coordination
mechanism based on Lagrangean relaxation of a total SC model. Balance constraints linking adjacent
stages are relaxed by introducing Lagrangean multipliers. In this way the total SC model decomposes into
domain-specific sub-models. A central agent iteratively sets target values for supply quantities and multi-
pliers and evaluates resulting domain-specific plans for convergence.
This work draws from and combines aspects of all three research domains: contract design, agent-based
solutions, and mathematical programming. The coordination mechanism for aligning individual planning
domains is based on a mathematical programming approach. The coordination mechanisms reviewed
above suffer from shortcomings such as a poor quality of solutions (upstream planning), extensive
information needs about partners (anticipation approach), or being tailored to specific problem structures
and models (Barbarosoglu and Ozg€ € ur, 1999; Ertogral and Wu, 2000). Therefore, a novel approach is
presented in the following. As collaborative planning affects the cost outcomes of individual partners,
contract terms need to be adapted based on the planning result in order to achieve mutual benefits. Fi-
nally, the coordination scheme can be considered and implemented as a multi-agent system for SC
planning.
3. Decision situation and modeling
In this section we outline the model assumed being used for intra-domain master planning. Also, links to
adjacent planning domains will be explicitly considered by additional constraints, so that the model can be
employed to collaborative planning.
As mentioned above, master planning serves to synchronize operations and material flows across the SC
at a medium term such that market demands are met at minimum cost. Planning decisions may concern
purchasing, production, transportation, and inventory holding as the major types of operations within SCs
(Ereng€uc et al., 1999). Also, availability of resources is planned for as far as it can be adjusted at a medium
term (working time). The planning interval is divided into several periods. The objective is to minimize the
total cost of fulfilling given, deterministic customer demand. In order to create feasible plans, capacity
constraints and the multi-level structure of operations (consumption of intermediate and raw components)
are considered.
The majority of these relationships can be modeled by linear equations and inequalities. Some decisions
may however demand binary ‘‘go’’/‘‘no go’’ variables. In fact these decisions often are the ones of par-
ticular importance e.g. due to their impact on costs. Discrete decisions can, among others, regard lot-
sizing in production and transportation, availability of resources, or activation of supply quantity
discounts. The inclusion of binary variables converts the otherwise linear model into a mixed-integer
program.
In modeling the above decision situation we adopt a framework as presented in Ereng€ uc et al. (1999).
Setup decisions for all operations are included in the formulation resulting in a multi-level capacitated lot-
sizing problem (e.g. Stadtler, 2003). Although in practical applications binary decisions are usually required
only for a subset of the operations considered, this is not reflected in the model for ease of exposition. Also,
setup times are neglected.
Model 1 MP (master planning model)

Indices
t planning period 2 T
j operation 2 J
m resource 2 M
Index sets
T set of planning periods
J set of operations
M set of resources
Sj set of direct successor operations of j
Data
cvj unit cost of operation j
chj unit holding cost of operation j
cfj fix setup cost of operation j
com unit cost of overtime (capacity expansion) at resource m
Dj;t (external) demand for operation j in period t
Cm;t capacity at resource m in period t
Bj large constant
am;j unit requirement of resource m by operation j
rj;k unit requirement of operation j by successor operation k
Variables
c total cost
xj;t output level at operation j in period t
ij;t inventory level of operation j in period t
yj;t setup variable of operation j in period t
om;t overtime at resource m in period t
Formulation
min c ð3:1Þ
XX XX
s:t: c ¼ ðcvj xj;t þ chj ij;t þ cfj yj;t Þ þ com om;t ; ð3:2Þ
t2T j2J t2T m2M
X
ij;t1 þ xj;t ¼ Dj;t þ rj;k xk;t þ ij;t 8j 2 J ; t; ð3:3Þ
k2Sj
X
am;j xj;t 6 Cm;t þ om;t 8m 2 M; t; ð3:4Þ
j2J
xj;t 6 Bj yj;t 8j 2 J ; t; ð3:5Þ

xj;t P 0; ij;t P 0 8j 2 J ; t; ð3:6Þ
om;t P 0 8m 2 M; t; ð3:7Þ
yj;t 2 f0; 1g 8j 2 J ; t: ð3:8Þ
The model plans output ðxj;t Þ and inventory levels ðij;t Þ for all operations considered as well as expansions of
resource capacity ðom;t Þ. Operations represent production, transport or other value-adding activities. The
objective function minimizes the value of variable c which due to constraint (3.2) represents the total cost
incurred from operation levels, lot-sizing, inventory holding, and capacity expansion. Constraints (3.3)
capture the flow balance between output, inventory and consumption by external demand or successor
operations. Constraints (3.4) represent capacity restrictions, while lot-sizing relationships are expressed in
(3.5). Constraints (3.6) through (3.7) specify domains of variable values. Assigning total cost to the extra
variable c is not strictly required at this point, but will prove handy in later sections.
The above model depicts the isolated perspective of a single planning domain facing only external
(market) demand. Accounting for collaborative planning entails extensions in order to explicitly model links
to SC partners. Those links are composed of supply or order proposals received from the collaboration
partner. They are introduced in turn for buyer and supplier (only additional data and variables are listed).
Extension 1: Buyer domain

Index sets
JSð 6 J Þ set of supplied items (operations)
Data
XSj;t proposed supply quantity of j in period t
Variables
xsj;t supply quantity of j in period t
isj;t supply inventory of j in period t
Formulation
XX XX XX
s:t: c ¼ ðcvj xj;t þ chj ij;t þ cfj yj;t Þ þ com om;t þ chj isj;t ; ð3:9Þ
t2T j2J t2T m2M t2T j2JS
X
isj;t1 þ xsj;t ¼ rj;k xk;t þ isj;t 8j 2 JS; t; ð3:10Þ
k2Sj
xsj;t ¼ XSj;t 8j 2 JS; t; ð3:11Þ

isj;t P 0 8j 2 JS; t: ð3:12Þ
Constraints (3.9) through (3.12) can be used in two ways. Assuming that the supplier has announced supply
proposals XSj;t they can be added to Model 1 as presented above in order to find the optimal intra-domain
plan given supply quantities XSj;t ((3.9) replaces the original cost function of (3.2)). Supply quantities XSj;t
are input to the model due to constraints (3.11). Balance equation (3.10) link supplies to their consumption,
thereby restricting internal operations by the availability of supply items. However, inventory holding of
supplied quantities is permitted, in order not to fully dictate internal operations by supply quantities.
Consequently, the cost function in (3.9) is enhanced by inventory holding costs of supply items. Even
though these costs may in fact be covered by the supplier, their inclusion is important for ensuring a proper
trade-off between supply inventory holding and remaining operations.
Alternatively, when no supply proposals are known, constraints (3.11) can be skipped. In this case
supply quantity variables xsj;t take any desired values, and no inventory holding in the form of isj;t occurs.
In this mode, constraints (3.10) reveal order quantities (values of xsj;t ) that have to be requested from the
supplier in order to realize the resulting plan.
The situation is similar at the supplier domain.
Extension 2: Supplier domain

Index sets
JOð J Þ set of ordered items (operations)
Data
XOj;t proposed order quantity of j in period t
Variables
xoj;t order quantity of j in period t
Formulation
X
s:t: ij;t1 þ xj;t ¼ Dj;t þ xoj;t þ rj;k xk;t þ ij;t 8j 2 J ; t; ð3:13Þ
k2Sj
xoj;t ¼ XOj;t 8j 2 JO; t: ð3:14Þ

Assuming that the buyer has announced order proposals XOj;t constraints (3.13) and (3.14) can be used to
incorporate the order quantities into intra-domain planning and generate the optimal plan given the
proposed pattern of orders. Constraints (3.13) replace the original flow balance equation (3.3), so that two
sources of demand are considered: external demand Dj;t and orders by the buyer.
If no order quantities are announced by the buyer, (3.14) can be skipped, and the extended model can be
used to generate a proposal of supply quantities (values of xoj;t ). However, for doing so lower and upper
bounds on xoj;t must be specified at minimum, otherwise values of xoj;t would be zero. This aspect is dis-
cussed in more detail in the following section.
4. Collaborative planning scheme
In this section we present the negotiation-based scheme for collaborative planning. Thereby, the plan-
ning model presented above is utilized throughout every stage of the process.
The following section gives an overview of the coordination process in question. Thereafter, the process
steps carried out by buyer and supplier in each iteration are described in more detail. Section 4.3 is con-
cerned with the total process flow and financial implications resulting from the negotiation scheme.
4.1. Coordination scheme overview
As described in the literature review, coordination between planning domains is achieved in the simplest
way by upstream planning. The scheme developed in the following uses upstream planning as a starting
Table 1
Negotiation process example
Data Period 1 2 3 4 Cost B Cost S Cost total
exchange item.
BfiS 1 168 230 363 397 98,667 129,574 228,241
2 77 239 239 375
3 247 347 548 650
SfiB 1 122 363 397 397 102,727 120,122 222,849
2 239 239 239 431
3 247 299 548 650
BfiS 1 95 363 363 426 100,679 120,459 221,038

2 77 239 239 404
3 247 347 548 650
SfiB 1 95 397 397 397 105,451 106,228 211,679
2 77 404 404 404
3 347 442 442 869
point. The simple, hierarchical coordination process is however extended in a way which establishes a
negotiation-like process among the partners.
The resulting scheme assumes an equal role for both partners. As a metaphor we can think of supply
chains planners holding a meeting to manually coordinate their respective plans. Each planner will analyze
the consequences of partner plans and actively propose modifications which improve his situation. Even-
tually, the planners will commit to a compromise solution.
A similar logic applies to the scheme presented below. In a first step, any given partner order/supply
proposal is analyzed. Second, as partner requirements usually cause a deviation from the locally optimal
plan, targeted modifications to the order/supply pattern are generated and proposed to the partner. The
partner then carries out the same process of analyzing the modified order/supply pattern and introducing
new modifications to it. It should however be clear that modifications can only be made to a limited extent.
Otherwise, the parties would re-generate their original order/supply pattern as their preferred situation.
Therefore, the underlying idea is to only allow for the most effective modifications, i.e. those offering the
largest marginal reduction of local cost. These modifications yield the largest local cost improvement per
unit change, thereby giving the greatest chance for a total SC cost improvement.
The negotiation process is visualized by an example in Table 1 which contains the first four periods of an
order/supply pattern (the example is taken from one the computational tests presented below with a
planning horizon of 12 periods). Note that quantities represent cumulated orders/supplies from period 1
through t which immediately indicate excess or short supply up to a given period.
The top contains the initial order pattern requested by the buyer based on his locally optimal plan. If the
supplier fully covers the orders, he faces costs of 129,574 monetary units (MU), and total supply chain costs
sum up to 228,241 MU. Based on this outcome, the supplier proposes a modified supply pattern as shown
in the second section of Table 1 (excess supplies (vs. the initial orders) are printed bold, short supplies italic
and bold). The modifications result in a cost decrease for the supplier of about 9500 MU. Once the
modifications are communicated to the buyer, he evaluates the new proposals finding a cost increase of
about 4000 MU. In summation, the new proposal however creates net savings of 5500 MU compared to the
initial situation. The buyer proposes additional modifications (Section 3) by partly returning to its initial
orders and partly introducing new changes. The modifications decrease local cost by 2100 MU, but in turn
increase cost at the supplier by about 300 MU. In total, additional net savings of 1800 MU can be realized.
According to the iterative nature of the process the supplier suggests further modifications at this point,
thereby once more generating significant additional savings.
In order to implement the above process, the collaboration partners need to exchange the respective
order/supply patterns as well as effects on local cost incurred by the modifications.
From a contractual perspective, we assume that a fixed unit-price contract exists between buyer and
supplier initially. Since the negotiation scheme does not affect the total volume provided to the buyer, the
payment received by the supplier remains unchanged and is not regarded during the negotiation. However,
since the cost outcomes per partner are affected by the scheme, an adaptation of the contract terms needs to
take place after the negotiations in order to ensure that both partners realize benefits.
Also, the negotiation process is presumed having a short duration compared to the length of a planning
period, such that effects of time-passing or changes to underlying data can be neglected. With this overview
in mind, we can now consider the outlined scheme in more detail. The following section presents the distinct
process steps carried out by the collaboration partners in each iteration.
4.2. Iterative planning steps
As we have seen above each partner repeatedly evaluates received order/supply proposals and generates
compromises in reply. An intermediate step required for the compromise generation is to determine a
locally best outcome that can be reached by modifying the given order/supply pattern. These basic planning
activities hence represent the distinct process steps carried out in each iteration and are described in detail
subsequently.
4.2.1. Evaluating a proposed order/supply pattern

In order to determine the cost resulting from the current order/supply proposal, the planning model as
described in Section 3 can be directly applied.
From the buyerÕs perspective the situation is as follows: The buyer receives supply proposals XSj;t for all
supplied items j 2 JS from the supplier which are input to the model through constraints (3.11). Solving the
model hence reveals the optimal local plan given the supply proposals received from the supplier.
The supplier is confronted with an analogous situation: He receives order proposals XOj;t for items
j 2 JO from the buyer. The order proposals are input to his model through constraints (3.14) as explained
above such that its solution yields the optimal local plan given the order proposals.
The optimal solution to the model at either domain (buyer and supplier) provides the basis for evalu-
ating a given partner proposal. The major insight naturally comes from resulting cost c . c is in every case
greater (or equal) than the cost resulting, if a deviation from the partner proposal is permitted to some
degree. Therefore, we reference it as
CBmax ¼ c ; CSmax ¼ c ð4:1Þ
for the buyer and supplier, respectively.
4.2.2. Determining the best outcome

The purpose of this second step is to find all modifications to the received order/supply pattern which
improve the local cost situation. Therefore in contrast to step one, deviations from the received order/
supply proposal are permitted and explored in their cost effect. Resulting is the most preferred order/supply
pattern that can be devised from the one just received from the planning partner. An important issue here
concerns the degree to which modifications can be introduced. As we will see shortly, some limits to the
degree of change should be specified. For the moment, we assume that those limits exist and are known at
this stage of the process.
Again the model as presented above can be used to determine the preferred order/supply pattern after
introducing a few extensions. The resulting, modified model for the buyer is given below.
Model 2 CP-B (Buyer)

Data
cum;min
XSj;t minimum cumulated supply quantity of j, in periods 1 through t
cum;min
XSj;t maximum cumulated supply quantity of j, in periods 1 through t
e arbitrarily small number ð 1Þ
Variables
þ
dj;t =dj;t supply shift to next/previous period of j in t
Formulation
XX
þ
min c þ e ðdj;t þ dj;t Þ ð4:2Þ
j2JS t2T
s:t: ð3:3Þ–ð3:8Þ; ð3:9Þ; ð3:10Þ; ð3:12Þ;

þ þ
xsj;t þ dj;t þ dj;t ¼ XSj;t þ dj;t1 þ dj;tþ1 8j 2 JS; t; ð4:3Þ
Xt
cum;min
xsj;s P XSj;t 8j 2 JS; t; ð4:4Þ
s¼1
Xt
cum;max
xsj;s 6 XSj;t 8j 2 JS; t: ð4:5Þ
s¼1
cum;min cum;max þ
Model 2 contains new input data XSj;t , XSj;t and variables dj;t =dj;t . The data items represent the
discussed modification limits, expressed as cumulated minimum/maximum supply quantities. The variables
capture modifications vs. the original supply proposals. All constraints of the original model are still in
place except for (3.11) which are replaced by constraints (4.3). Hence, supply variables xsj;t are no longer
strictly linked to proposed supply quantities. Instead, according to the LHS of (4.3) supply quantities can
þ
be shifted to the next ðdj;t Þ or previous ðdj;t Þ period. Likewise, the RHS contains proposed supply quantities
plus shifts from the previous and next period. The degree to which shifts are introduced is limited by
constraints (4.4) and (4.5). They guarantee that the resulting supply pattern stays within the specified limits.
The objective is still to minimize total cost in the first place. The second term of the objective function
makes sure that ineffective shifts, which do not improve resulting cost, are avoided.
The corresponding model for the supplier is largely equivalent. The only difference stems from the fact
that modifications are introduced vs. order quantities. Hence, constraints (4.14) are extended in analogy to
(4.3). Accordingly, shift limits as expressed in (4.4) and (4.5) apply to received order quantities.
Solving Model 2 reveals the locally best, minimum cost solution which can be reached within the
specified shift limits. Since the solution obtained at this process step incurs the lowest possible cost, the
resulting cost c will be referred to as
CBmin ¼ c ; CSmin ¼ c : ð4:6Þ
Also, it contains more modifications as will be present in the compromise solution. To capture the
amount of changes present, we introduce an item-specific difference measure
X þ; ;
Dmax
j ¼ ðdj;t þ dj;t Þ 8j 2 JS; JO; ð4:7Þ
t2T
þ; ;
which measures the total amount of modifications for each supplied or ordered item, respectively (dj;t =dj;t
þ
refer to the values of variables dj;t =dj;t: at the modelÕs optimal solution).
The solution obtained at this stage depends on the allowed deviation from the original order/supply
pattern. The question in setting the maximum deviation limits, i.e. XOcum;min =XOcum;max for the supplier, is to
which extent the proposed order/supply pattern can be reasonably modified without yielding unacceptable
results for the collaboration partner. Defining precise, acceptable limits is clearly difficult, if not impossible.
However, a simple rule is proposed in the following which draws from a lot-sizing heuristic developed by
Simpson and Ereng€ uc (1998). The idea is to define the maximum deviation (for the supplier) as a shift of the
entire order quantity XOj;t to the previous (or the next) order period, that is the nearest preceding (or
following) period with an order greater than zero. Since the partner requests a non-zero quantity in
neighboring order periods, he has a general need of the item. Hence, there is a realistic chance that he can
make use of a surplus supply with small adjustments to his current plan.
Resulting minimum and maximum cumulated quantities then are computed as
cum;max
XOj;t ¼ XOj;nextt ; ð4:8Þ

cum;min XOcum
j;prevt if XOj;t > 0
XOj;t ¼ ; ð4:9Þ
XOcum
j;prevt 1 else
where prevt =nextt represent the previous and next order periods relative to a given period t. The maximum
cumulated amount which can be supplied up to a period t corresponds to the cumulative order up to the
next order period. The minimum amount equals to the cumulated order up to the previous order period, if
period t is an order period. Otherwise ðXOj;t ¼ 0Þ the order quantity of prevt can be shifted beyond t and the
1
minimum amount to be supplied through to t correspond to XOcum j;prevt 1 .
The computation of limits for the buyer is equivalent, but based on the supply proposals XSj;t .
4.2.3. Generating a compromise proposal

The minimum cost solution obtained above contains all modifications which yield a decrease of local
cost. However, among those modifications some incur significant marginal savings while others only have a
minor impact on cost. Since we can assume that modifications tend to increase cost for the collaboration
partner, only (locally) most advantageous modifications should be included in a compromise proposal. The
underlying assumption here is that the most effective modifications offer the greatest chance to improve the
overall cost outcome, since they create the greatest local cost savings per unit change.
In order to identify the most effective modifications and their cost effects, the model above can be used,
once more in an extended version. Principally, the objective of this process step is to maximize the cost
savings (vs. C max ) per unit deviation from the order/supply pattern. Mathematically this can be expressed as
max ðC max cÞ=d; ð4:10Þ
where d corresponds to a measure of the total deviation.
As both c and d depend on the modifications in place, the term in (4.10) is non-linear. Methods for
dealing with non-linear objective functions in mathematical programming models have been developed
known as ‘‘successive linear programming algorithms’’ (see e.g. Zhang et al., 1985). The approach taken
there is to linearize the objective function around a given point and then to repeatedly solve the LP and
update the linearization. As this method is fairly complex and requires many iterations.
The basic idea is to define two (conflicting) goals as (1) maximize the cost savings and (2) minimize the
amount of modifications. Each goal by itself is computed linearly (numerator and denominator in (4.10)).
In order to pursue both goals simultaneously a goal programming approach can be applied (see e.g. Tamiz
et al., 1998). Solving the corresponding two-objective goal program does not guarantee maximization of
(4.10). However, it produces a compromise close to the maximum, as it contains only modifications which
have a higher impact on cost savings than on the deviation measure.
1
If the possibility of order shifts causing backorders or lost sales at the buyer shall be avoided, the supplier can be additionally
notified of latest, minimum supply requirements based on a bill-of-material explosion of final demand forecasts at the buyer.
Implementing this approach requires to define the total deviation measure d. The item-specific maximum
deviations Dmax
j observed by solving Model 2 can be utilized at this point. Given Dmax
j an item-specific
percentage deviation can be easily computed. The total deviation then follows by averaging item-specific
values. The resulting definition is
X wj X
þ
d¼ ðdj;t þ dj;t Þ: ð4:11Þ
j
Dmax
j t2T
In case all item quantities are measured in identical units (or can be converted to such), a reasonable weight
assignment P is to use an itemÕs maximum deviation compared to the total deviation across all items
(wj ¼ Dmax
j = k Dmax
k ).
Resulting target values for goal programming are zero for the deviation (d ¼ 0) and minimum cost for
cost (c ¼ C min ). As both objectives are of different magnitude, an appropriate normalization has to be put
in place. Based on the definition in (4.11) d takes values between 0 and 1. Since the total deviation serves as
an estimator of the ‘‘harm’’ caused to the collaboration partner, d is scaled by an estimate DP of the
partnerÕs cost increase that would follow from suggesting the minimum cost solution C min as counter-
proposal. In that way an anticipation of partner cost increases is included in the goal programming model.
It is realized by a linear function which assumes proportionality between total deviation d and the partnerÕs
cost increase above his current outcome.
The resulting goal programming model formulation for the buyer is presented in Model 3.
Model 3 CP-C (Buyer)

Data
C max maximum cost (Model 1 solution)
C min minimum cost (Model 2 solution)
DP estimated partner cost increase associated with C min -solution
Dmax
j maximum deviation in supply units of j
wj weight of operation (item) j in total deviation calculation
Variables
D deviation from minimum cost
d percentage distance in supply pattern
Formulation
min D þ DPd ð4:12Þ
s:t: ð3:3Þ–ð3:8Þ; ð3:9Þ; ð3:10Þ; ð3:12Þ;
þ þ
xsj;t þ dj;t þ dj;t ¼ XSj;t þ dj;t1 þ dj;tþ1 8j 2 JS; t; ð4:13Þ
Xt
cum;min
xsj;s P XSj;t 8j 2 JS; t; ð4:14Þ
s¼1
Xt
cum;max
xsj;s 6 XSj;t 8j 2 JS; t; ð4:15Þ
s¼1
X wj X
þ
d¼ max
ðdj;t þ dj;t Þ; ð4:16Þ
j2JS
D j t2T
c D ¼ C min : ð4:17Þ
Except for the objective function and the additional constraints (4.16) and (4.17), the model is equivalent to
Model 2. (4.16) and (4.17) capture the off-sets from target goal values. Since the target value for dðd Þ is
zero, (4.16) simply represent formula (4.11). D captures the cost increase above C min . The objective function
contains the sum of both off-sets, where d is scaled by the estimated cost increase for the collaboration
partner as explained above.
Once again, the corresponding supplier model is identical, except that modifications vs. order values
(XOj;t ) instead of supplies are considered.
A final point here concerns the questions of how to determine the parameter DP . The exact way to obtain
it is by sending the order pattern which correspond to the C min solution to the partner for evaluation.
However, to avoid such a direct inquiry, the partnerÕs likely cost increase is estimated from the effect of the
previous compromise proposal. Given that the previous proposal caused a cost increase DP act to the partner
and was based on a total deviation of d act , the estimate is obtained as 2
DP ¼ DP act =d act : ð4:18Þ
The savings realized with the compromise are
DC ¼ C max c ; ð4:19Þ
where c is the cost associated with the solution to Model 3.
4.3. Total process flow and implications on contract terms
We have seen above that, based on a given solution, each new compromise order/supply pattern yields
savings to its initiator but (typically) a cost increase to the other partner. Therefore, the compromise pattern
and associated cost effects have to be exchanged between the partners in order to determine the total cost
effect corresponding to a proposal.
Assuming team behavior, i.e. truthful communication of cost effects, this can be accomplished such that
the initiator transmits the compromise pattern and associated local savings to his partner. Given this
information, the partner determines the total cost effect of the proposal as the difference between reported
savings DC and his local cost increase vs. the previous iteration. If the process continues, the partner
generates a new compromise proposal in return yielding a new order/supply pattern and local savings DC.
He then transmits the respective data items for further inspection to his partner.
Apparently, it seems reasonable to continue this process as long as additional net savings occur.
However, a degradation of total cost can be tolerated, too, because temporary degradations may give way
for additional improvements in subsequent iterations. Therefore, a stochastic acceptance function can be
applied to degraded solutions as known for example from simulated annealing (Van Laarhoven and Aarts,
1987; Johnson et al., 1989; Pesch and Voss, 1995). That is, denoting DC Total as the total cost effect (net
savings) of a new solution, we define an acceptance function of the form

1 if DC Total > 0
p¼ DC Total
lnðN Þ Cumulated ð4:20Þ
e DC else
and draw a random number r from a uniform distribution over the [0,1] interval. If r is smaller than p, the
new solution gets accepted and the process continues. Otherwise, the process is terminated. In (4.20) N
represents the number of degraded solutions accepted so far in the process. Hence, the more degraded
solutions have been accepted, the smaller the chances to accept yet another one. DC Cumulated refers to the
cumulated savings generated so far and takes the role of a normalizing factor.
2
Since no previous DP act is known in the first iteration, an initial value DP ¼ C max C min is used which assumes that the cost
increase accruing to the partner is equivalent to the savings generated locally.
Once the process is terminated by denial of a degraded solution, the partners can determine the best
solution and the associated supply pattern by inspecting cumulated net savings of the respective outcomes,
i.e. by adding net savings per iteration up to each outcome.
Since the negotiation process starts with the buyerÕs locally optimal plan, it is clear that any other
outcome bears cumulated savings to the supplier but cost increases to the buyer, as also observable from
Table 1. Therefore, the question of contractual consequences becomes apparent in order to offer an
incentive to the buyer. This can be achieved by adding a savings sharing component to the basic fixed price
contract. It can be specified as a ‘‘quantity commitment with bonus reward’’ (Anupindi and Bassok, 1998)
which suggests that the buyer is rewarded a bonus if he complies to the order quantities of the final
negotiation outcome. A win-win situation is established, if the bonus comprises a compensation of the
buyerÕs cost increase vs. his initial solution plus a pre-negotiated share of net savings.
The process flow just described rests on the assumption of cooperative team behavior of the partners.
This is not overly optimistic in well-established, long-term SC partnerships which typically rely on trustful
cooperation (Lambert et al., 1996) and may be supported by agreed-to cost controlling and auditing
processes.
However, the negotiation process can also be applied in loose relationships where self-interested,
opportunistic behavior may occur. In such a setting, each partner tries to maximize his share of the net
savings generated during the negotiation process regardless of the effect on his partner. Therefore, the
initiator of a compromise proposal is reluctant to announce true savings accruing to him, while the other
partner will usually report an exaggerated cost increase in order to receive a high compensation.
Now, to counteract these cheating opportunities the ‘‘rules of the game’’ can be changed such that the
initiator is no longer expected to announce the actual savings accruing to him. Instead he can make an offer
of what he is willing to ‘‘pay’’ for the otherÕs acceptance of the new compromise. The partner can then
analyze the compromise pattern for its cost increase and either accept the new proposal (and payment offer)
or deny it (typically, when the offer is smaller than his cost increase). From a total SC perspective this
procedure can yield identical results as the team approach. However, the savings accruing to each partner
are affected depending on the offers submitted during the process. Also, this mode of negotiation bears the
risk that proposals which actually improve total SC costs are discarded, if the initiatorÕs offer is insufficient
to cover the cost increase faced by his partner. Once the negotiations end, accepted payment offers can be
cumulated over all iterations to form a single bonus rendered to the buyer as in the team approach dis-
cussed above.
5. Computational results
Computational tests have been conducted and are discussed in the following in order to explore the
performance of the CP scheme. Thereby, the team approach with correct announcement of cost effects
underlies all computations.
An automated version of the collaboration process was implemented in MS Visual Basic. The optimi-
zation models were solved using the ILOG CPLEX 7.0 standard mathematical programming solver.
The structure of input parameters considered here is taken from Tempelmeier and Destroff (1996).
Resource capacities are constrained; they can however be expanded up to 20% of given base capacity per
period incurring overtime costs. The planning horizon covers 12 periods for all problems.
Five classes of test structures are considered as shown in Table 2. The major difference lies in the
structure of operations and in the number of resources per planning domain. Small test classes S1 to S3
contain six or seven items, while 10 items are present in classes M1 and M2. Class S1 includes a single
resource per planning partner and a two-level bill-of-material. Three levels and two resources at one of the
partners are regarded in the remainder (classes S2 to M2).
Table 2
Problem structure by test class
Small S1 S2 S3
S B S B S B
1
5 4 2 4 1
2
6 5 1 6 2
3
7 6 3 5 3
4
Medium M1 M2
S B S B
1 8 7 1
8 5
2
9 6 9 2
3 10 5
10 7 3
4 6
4
Six demand series were randomly generated for each test class based on a constant, weakly seasonal and
strongly seasonal average demand and a coefficient of variation of 0.1 or 0.2. Also, three cost structures
were considered for each class based on the average ratio between holding and setup costs at buyer and
supplier (constant, high at buyer/low at supplier, and low at buyer/high at supplier). Finally, seven capacity
utilization profiles were regarded as shown in Table 3. In profiles 3 and 4 available capacity varies over
time, the numbers in brackets show the corresponding periods. Available resource capacity, which is input
to the planning model (constraints (3.4)), is calculated from the average capacity need derived from the final
demand series and the utilization factor as given in Table 2. Resulting are 126 (6 3 7) test instances for
each class which gives a total of 630 test instances.
Two benchmark solutions are used in the following for evaluating the performance of the negotiation
scheme. First, pure upstream planning results are considered. They represent an upper bound on resulting
total cost, as upstream planning forms the starting point of the negotiation. Second, as a lower bound the
best solution to a single, global planning model containing both buyer and supplier domain, (central
planing) is considered. 3
An overview of the test results is given in Table 4. Concerning upstream planning, the number of
capacity infeasible test problems, i.e. instances where given capacity and overtime budget are insufficient to
cover buyer orders, is listed first. In these situations the supplier is not able to fulfill all orders on time.
Secondly, the percentage gaps of upstream to corresponding central planning solutions, i.e.
ðC res;UP C central Þ=C central
3
Solutions with proven optimality to the central planning model are available in 528 out of 630 test problems based on a
computational time limit of 600 seconds. for classes S1 to S3 and 1200 s. for classes M1 and M2. In remaining cases, the best, yet not
optimality-proven, integer solution is used.
Table 3
Capacity utilization profiles
Profile Buyer Supplier
1 90% 90%
2 70% 70%
3 90% (1–3,10–12), 70% (4–9) 70% (1–3,10–12), 90% (4–9)
4 70% (1–3,10–12), 90% (4–9) 90% (1–3,10–12), 70% (4–9)
5 90% 70%
6 70% 90%
7 50% 50%
Table 4
Test results overview
Class Upstream planning Negotiations Gap closure Iterations
Cap. inf. Gap to central Gap to central

# Av. (%) Std. dev. Av. (%) Std. dev. Av. (%) Std. dev. Av. (%)
(%) (%) (%)
Total 64 22.4 40.9 1.6 1.9 69.8 37.9 4.6
S1 25 25.6 32.6 2.4 2.4 71.4 35.2 5.3
S2 4 33.9 61.7 1.5 1.8 61.7 39.9 3.7
S3 22 18.3 32.7 0.9 1.2 71.3 38.0 4.4
M1 6 18.8 38.7 1.5 1.7 69.1 35.1 4.7
M2 7 15.3 21.7 1.6 1.8 76.1 38.9 4.3
are given for the remaining test instances. Gaps to central planning are also shown for negotiation out-
comes as a major indicator of the solution quality. Please note that capacity infeasible solutions do not
occur in negotiation results, indicating that capacity shortages present in initial upstream outcomes are
successfully corrected during the negotiations in all instances.
Furthermore, a percentage ‘‘gap closure’’ is shown of the form
ðC res;UP C res NEGO
Þ=ðC res UP
C central Þ:
It serves as a measure of the improvement realized with the negotiation scheme and is captured only in test
instances without capacity overrun in upstream planning. Finally, the number of iterations is presented.
For all criteria average and standard deviation are listed.
The top row shows total results over all test instances. As can be seen, capacity overruns occur in up-
stream planning in 64 out of 630 instances. Upstream solutions of remaining test problems deviate on
average by 22.4% from central planning. Thereby, the standard deviation of 40.9% indicates that individual
outcomes vary strongly in solution quality. In contrast, the results obtained with the negotiation scheme
deviate on average by a mere 1.6% from central planning. Also, a standard deviation of 1.9% implies that
the majority of results falls into the vicinity of central planning. Inspecting the gap closure reveals that, on
average, 69.8% of the gap between upstream and central planning are closed. Here, the standard deviation
is however higher in magnitude suggesting that individual outcomes are distributed over a large interval
(potentially between 0% and 100%). The average number of iterations comes to 4.6. That is, around nine
order/supply patterns (one per iteration and partner) are exchanged on average before the process is ter-
minated.
Upstream & Negotiation Gaps vs. Central

100%
cumulated
percentage test instances [%] 80%
60%
negotiation
upstream
40%
20%
0%
<1% <2% <3% <5% <8% <12% <20% <30% <50% <80% <130% >130%
gap vs. central pl. solution [%]
Fig. 3. Cumulated frequency distribution of optimality gaps.
Considering the results by test class shows that the quality of upstream planning changes considerably
from one test class to another, particularly in the number of capacity infeasible outcomes. Average
negotiation results are on the other hand of a similar magnitude in all classes ranging between 0.9% (S3)
and 2.4% (S1), implying that the performance of the negotiation scheme is independent of individual
problem structures.
As average and standard deviation are aggregate measures, the results (across all test instances) are
examined more closely in Fig. 3 which shows frequency distributions of the number of test instances as a
function of the gap to central planning. The bars indicate that in upstream planning gaps to central
planning between 3% and 12% are most frequent. It can also be seen that a noteworthy number of test
problems exhibits gaps of 0 to 1% or 1% to 2%, respectively, indicating that upstream planning can yield
good solutions in some problem structures, as also observed by Simpson and Ereng€ uc (2001). On the other
hand, arguably weak results with gaps of 30% and beyond are too obtained in some 20% of test instances.
This situation changes drastically after negotiations. Here, the majority of test results (more than 50%)
has gaps to central planning of less than 1%. Another 20% of test problems yield a gap of 1–2%, and the
worst outcome falls into the interval of 8–12%. Inspecting the cumulated frequency curves, it can be ob-
served how the negotiations literally shift the upstream planning curve to the left, towards significantly
lower gaps to central planning. In result, almost 90% of test results after negotiations have a gap to central
planning of less than 5%.
The important role available capacity, namely at the supplier domain, has been mentioned as a
determinant of solution quality. Therefore, results by capacity profile (as defined in Table 3) are shown in
Table 5. Inspecting the number of capacity infeasible solutions and average gaps of upstream to central
planning makes apparent that upstream planning performs particularly weak with high capacity utilization
at the supplier. This applies to profiles 1, 4, and 6. The high average cost gaps are due to costly overtime
which has to be planned for in many test instances. The poorest results are obtained when utilization is
relatively low at the buyer but high at the supplier over the entire planning horizon (6) or during the first
couple of periods (4). The average gap of profile 3 is comparably low, presumably because of the 70%
utilization at the supplier in periods 1–3.
In contrast, average gaps of the negotiation scheme are largely insensitive vs. changes in utilization
(differences between the profiles seem rather random than structural). This finding suggests that good
solutions can be obtained regardless of the capacity situation at the buyer and supplier domain, respec-
tively. Overtime situations present in initial solutions are successfully corrected during negotiations.
Average gap closures alter significantly between distinct capacity profiles. This is due to varying gaps of
upstream to central planning solutions. Since most negotiation outcomes expose a gap to central planning
Table 5
Test results by capacity profile
Cap. Upstream planning Negotiations Gap closure
Cap. inf. Gap to central Gap to central

# Av. (%) Std. dev. (%) Av. (%) Std. dev. (%) Av. (%) Std. dev. (%)
1 0 35.5 40.9 2.3 2.5 80.2 17.5
2 0 7.6 8.9 1.1 1.3 76.5 27.7
3 0 7.0 15.6 1.3 1.5 68.0 30.5
4 22 53.9 49.0 2.5 2.7 73.2 19.6
5 0 2.9 1.7 1.6 1.4 37.6 65.0
6 42 75.6 77.1 0.8 0.9 90.3 8.4
7 0 6.9 9.8 1.5 1.5 70.2 27.9
of a few percent, it is natural that the average gap closure is relatively large in cases where gaps of upstream
to central planing is large (profiles 1, 4, and 6). On the other hand, when upstream results are close to
central planning (profile 5), it is more difficult for the negotiation scheme to realize additional improve-
ments. Hence smaller gap closures are observed in these cases.
Similarly, the wide range of initial gaps of upstream vs. central planning leads to relatively large standard
deviations of the gap closure measure in both Tables 4 and 5. The percentage closure varies strongly, when
small initial gaps prevail as in profile 5, because chances of substantial cost improvements in negotiations
are lower here. In contrast, its standard deviation is lower when initial gaps are large (profile 6), indicating
that substantial improvements are reached here in most test problems.
A final note shall be devoted to cost outcomes per partner. As described above, the improvements in
total costs realized by the negotiation scheme originate in savings at the supplier but cost increases at the
buyer. The average savings realized by the supplier across all test problems with capacity-feasible upstream
solutions comes to 19.6% (relative to his initial cost in upstream planning). At the same time, the buyer
faces on average a cost increase of 8.4% (again relative to initial local cost). This underscores the necessity
of compensation and savings sharing as discussed in Section 4.3.
6. Summary and conclusions
In summary, a negotiation-based scheme for collaborative planning between two partners was laid out in
this paper. It extends the simple coordination form of upstream planning by giving the collaboration
partners an opportunity to modify suggested order/supply patterns in an iterative way. In doing so,
mathematical programming planning models can be utilized. In particular, it has been shown how the same
models as are applied to intra-domain master planning, can be used (in adapted versions) for evaluating
partner proposals and generating modified order/supply patterns.
The negotiation process aims at reducing total SC costs. Since this brings savings to the supplier but
comes at a cost increase to the buyer as compared to the initial upstream solution, payment terms between
the partners need to be adapted accordingly in order to ensure that both buyer and supplier realize benefits.
As outlined above, this can be accomplished in the form of a bonus which is granted to the buyer, if he
complies to agreed-to order quantities.
Computational results show that the proposed scheme yields promising results. Significant improve-
ments compared to upstream planning are realized across all problem structures and regardless of available
capacity. Final outcomes deviate on average by 1.6% from central planning solutions and are reached
within an average of 4.6 iterations.
It should be added that the principal logic and structure underlying the scheme developed here is
independent of the particular decision situations faced by the planning partners and corresponding plan-
ning models.
Also, the collaborative planning concept can be extended in two important directions. First, it can be
applied to a rolling schedule environment. This is a useful extension, since, in practical applications,
planning often happens on a rolling basis such that only a part of the overall plan (e.g. the first period) is
put into practice, followed by re-planning with updated information. Second, the negotiation-based scheme
can be utilized in general two-tier SCs comprising several buyers and/or suppliers, too. Research which aims
at adapting the negotiation scheme to these situations is currently under way.
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Negotiation-Based Collaborative Planning Between Supply Chain Partners

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European Journal of Operational Research 163 (2005) 668–687

Negotiation-based collaborative planning

Keywords: Supply chain planning; Collaborative planning; Mixed- integer programming

procurement production distribution sales

long- Strategic Network Planning

Supplier Domain Buyer Domain

Fig. 2. Collaborative planning between adjacent planning domains.

3. Decision situation and modeling

Model 1 MP (master planning model)

xj;t 6 Bj yj;t 8j 2 J ; t; ð3:5Þ

Extension 1: Buyer domain

xsj;t ¼ XSj;t 8j 2 JS; t; ð3:11Þ

Extension 2: Supplier domain

xoj;t ¼ XOj;t 8j 2 JO; t: ð3:14Þ

4. Collaborative planning scheme

4.1. Coordination scheme overview

BﬁS 1 95 363 363 426 100,679 120,459 221,038

4.2. Iterative planning steps

4.2.1. Evaluating a proposed order/supply pattern

for the buyer and supplier, respectively.

4.2.2. Determining the best outcome

Model 2 CP-B (Buyer)

s:t: ð3:3Þ–ð3:8Þ; ð3:9Þ; ð3:10Þ; ð3:12Þ;

4.2.3. Generating a compromise proposal

Model 3 CP-C (Buyer)

4.3. Total process ﬂow and implications on contract terms

Cap. inf. Gap to central Gap to central

Upstream & Negotiation Gaps vs. Central

percentage test instances [%] 80%

Fig. 3. Cumulated frequency distribution of optimality gaps.

Cap. inf. Gap to central Gap to central

6. Summary and conclusions

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