Supply Chain Formation by Combinatorial Auctions

Supply chain management has generated a substantial amount of interest both by managers and by researchers. Supply chain management is now seen as a governing element in strategy and as an effective way of creating value for customers. Complex business negotiations often involve interrelated exchange relationships among multiple levels of production. The paper describes an approach for modeling and solving the supply chain formation problem. Supply chain formation is the problem of determining the production and exchange relationships across a supply chain. To respond to rapidly changing market conditions, companies must be able to dynamically form and dissolve business interactions, requiring automated support for supply chain formation. The problem can be modeled as the task dependency network. A task dependency network is a directed acyclic graph, representing dependencies among agents and goods. Using of combinatorial auctions is promising for solving the supply chain formation problem. Combinatorial auctions are those auctions in which bidders can place bids on combinations of items. Agents submit bids reporting costs and values, and then the auction computes an allocation that maximizes the reported value and informs the agents of results. There are some ways to extend the bidding policies to accommodate more general production capabilities and consumer preferences.