Wednesday, August 14, 2013

Building Supply Chain Relationships Through Game Theory and Social Networks

I was contacted by a journalist recently from "Down Under" who was writing an article for manufacturing executives to introduce game theory. He had read my blogpost on sustainable fashion supply chains and game theory and  was interested in the following:

Specifically, there's one thing I'd like your expertise on: So many people think "using game theory" in negotiations is simply a matter of being as hard-nosed as you can to get the best deal. And yes, sometimes that's the route to go. 

But how would you advise manufacturers to use game theory in supply chain negotiations if they're genuinely interested in a long-term relationship with a supplier? Is it okay to leave some value on the table now if you're fairly sure it will pay off later?

I was very impressed that this journalist had realized that elationships are extremely important in supply chains (and, I might add, also in financial networks -- just think of Canada vs. the US in terms of the financial crisis of 2008 and how banks handled transactions with customers).

Two papers of ours address the integration of social networks with supply chain networks:

Dynamic Supernetworks for the Integration of Social Networks and Supply Chains with Electronic Commerce: Modeling and Analysis of Buyer-Seller Relationships with Computations, Tina Wakolbinger and Anna Nagurney, Netnomics 6: (2004) pp 153-185.
Financial Engineering of the Integration of Global Supply Chain Networks and Social Networks with Risk Management, Jose M. Cruz, Anna Nagurney, and Tina Wakolbinger, Naval Research Logistics 53: (2006) pp 674-696.

In these game theory supply chain studies we capture the relationship production cost associated with different agents (say, manufacturers and retailers) who are interacting,  the value of their relationships, as well as the risk incurred that is associated with transactions, with the latter depending on the relationship levels. For example, if the relationship level is high (that is, the relationship is strong) then the risk associated with the transaction would be lower. Thus, firms, by investing in relationships may lower their transaction costs as well as the risks.

And, as the journalist surmised, there is an underlying dynamics to such interactions between and among the various decision-makers in a supply chain.

Through our game theory math modeling and associated algorithms and computations we can trace the evolution of the relationships and product flows along with the incurred profits until a Nash equilibrium is achieved, which gives us the  equilibrium (optimal) product flows and relationship levels.

Dr. Jose Cruz, my co-author and former doctoral student at the Isenberg School of Management at UMass Amherst, has also assessed the vulnerability of supply chains based on our related work on relationships and supply chains:

And, since I cannot resist, and the query and discussion arose because of our game theory work on sustainability, UConn, where Professor Jose Cruz teaches at the Business School, was named the #1 Coolest School by the Sierra Club -- quite amazing (UMass Amherst was #27 on the list). Some related work of his on sustainability, game theory, and dynamics of supply chains is:
 Dynamics of Supply Chain Networks with Corporate Social Responsibility through Integrated Environmental Decision-making
Jose M. Cruz,  European Journal of Operational Research 184: (2008) pp 1005-1031.