A Piecewise Linear Supply Chain Game for Manufacturing Network Formation

This chapter analyzes the process of forming a coalition within a corporate network. The objective of the partner companies is to create a multi-stage manufacturing system, which generates a chain of increased value from raw materials to end-user market. This process is studied by cooperative game theory, through the key problems of maximizing the total profit and distributing it among the members of the coalition. To construct a pay-off policy that is both stable and fair, the study proposes to represent the productive resources of the firms not only by their capacity, but also by the WIP generated by product flows. The proposed profit sharing rule is then constructed from the dual of the profit maximization problem. It is both efficient and rational, with more fairness than the Owen set policy of classical Linear Production Games.