2013 International Conference on Management Science & Engineering (20th) July 17-19, 2013 Harbin, P.R.China A Lot Sizing Order Model and Solution Based on Win-win Negotiation BAO Xiao-min,HE Xi-jun,JIANG Guo-rui The Economics & Management School, Beijing University of Technology, P. R. China, 100124 Abstract: Recent years, in the field of supply chain coordination, the collaborative planning mode based on negotiation is getting more and more attention. For solving the problem of order quantity between supplier and demander in collaborative supply chain under the condition of stochastic demand and asymmetric information, this paper established lot sizing order models: Retailer’s model and Manufacturer’s model that are used to calculate their annual profit separately. To get a satisfy solution that both sides accept, a win-win algorithm is proposed. This algorithm applies the equivalents curve theory to the negotiation theory under the condition of time constraints. It is good to simulate the negotiation between sealer and buyer in practice. Also, the win-win algorithm breaks the restriction of Master-slave status in Stackelberg mode and doesn’t need the global information like the centralized decision-making mode. The algorithm proposed in this paper is shown more effective and practical by the analysis of numerical example. Keywords: supply chain, lot sizing order model, win-win negotiation,Stackelberg, centralized decision making 1 Introduction With the development of economic globalization, the environment that enterprises face is getting more and more complex, and single company doesn’t have the ability to meet the market demand [1]. All the partners like producers, manufacturers, and the distributors have to coordinate with each other for survival [2]. The competition between enterprises is transforming into the competition between supply chains, and research on supply chain is getting more and more attention from the companies in reality [3]. The key to improve the competitiveness of the supply chain is cooperating with each other in the supply chain. Meanwhile, negotiation is very important way to the cooperation [4]. So, negotiation has become the hot issue in the supply chain collaboration. In the supply chain, every enterprise node is not only a supplier to the next node, but also a demander to the precious node, the relationship between supplier and Supported by the National Natural Science Foundation of China (71071005) 978-1-4799-0474-7/13/$31.00 ©2013 IEEE demander is always running through the entire supply chain[5-7]. Therefore, the research on coordination between supplier and demander is a basic and important issue. Recently, there are three modes of supply chain coordination: Stackelberg coordination mode [8], centralized decision-making mode [9] and collaborative planning mode based on negotiation [10]. Regarding the Stackelberg mode, the leader grasps all the information and announces the sales price firstly, and then the buyer decides the optimal order quantity. P.C.Yang [11] studied the problem of supplier’s optimal production quantity and calculated the price discount that the buyer would accept under the Stackelberg mode. Hojung Shin [12] made a research on coordination of the supply chain based on sharing inventory risk between the companies. The result is that all the participants’ profits are improved, but the overall interest of the whole supply chain can’t achieve the highest. In response to the shortcoming of the Stackelberg mode, centralized decision-making mode is widely used, which makes the overall optimal as the target for all enterprises. D. Jafari [13] got the range of price discount that all the partners can accept under the centralized decision-making mode. Also, Kamal Chaharsooghi [14] built the coordination model that allowed a second order, and found that the final interest depends on the capacity of negotiators, which is actually the process of allocating the increase profit of whole supply chain. Later, Wang nengmin [15] made the comparison of those two modes, and found that the Stackelberg mode couldn’t reach the best collaboration due to lack of communication or one of the parties hold the dominant position. At the same time, the hypothesis of information sharing in centralized decision-making mode must be recognized, which couldn’t meet the reality enterprise circumstance.The supply chain coordination under asymmetric information conditions deserves further study. In the negotiation-based collaborative planning mode, every company in the supply chain is treated equally. This mode breaks the restrictions in Stackelberg. Meanwhile, the participants don’t need to know the information of the others, and achieve the balance of interests between members through several rounds of interaction. There are also researches on that aspect. For multi-player consultation, Nash had proposed a bargaining mode of negotiations, and given the well-known Nash bargaining solution. Harsanyi and - 562 - Selten (1972) proposed the asymmetric Nash bargaining mode on the basis of Nash’s work. Stanislaw Bylka [16] solved the lot-sizing problem under the asymmetric Nash bargaining mode. And then , Ye fei [17] made a comparison between Nash bargaining mode and Stackelberg mode. He got the conclusion that Nash bargaining mode is better than the other mode on the supply chain’s global profit and the restrictions. Though the Nash negotiation mode solved the problem of information asymmetry in centralized mode, there is still a problem that has to discuss is the difficult of measuring the negotiating capacity. In 2007, Li ying [18] introduced the bi-level programming theory with the application of fuzzy satisfaction to solve this problem and used the genetic algorithm to simulate the behavior of negotiation in practice, and got the global interest close to the best. But, every company has their own attitudes towards the negotiation that has to be noticed. This paper proposes a win-win negotiation algorithm, by using the negotiation theory under time constraints [19], learning the equivalents curve theory [20] and considering the attitude of the negotiators [21]. In the end, a numerical example is given to prove the effectiveness and applicability of the algorithm this paper proposed. π r (Q ) = w * D − p * D − k r D − Q Where w is the purchase price of each unit of product for the retailer; Q is retailer’s order quantity; k r is the retailer’s setup cost; hr is the cost of holding for each product per time of the retailer; B is the shortage cost for each unit product; σ is the standard deviation of customer’s demand in forecast period; k is the constant coefficient of retailer’s safety stock which follows a standard normal distribution; G (k ) is the probability distribution function of the customer’s demand in lead time. ∞ G (k ) = ∫ (u − k ) k 1 exp(−u 2 / 2)du 2π The optimized amount of order size and the maximum profit that the retailer expects can be calculated through the following formulas: EOQ = 2(k r + BσG (k )) D hr (2) * π r = ( w − p) D − hr kσ − 2(k r + BσG (k ))hr D 2 The lot sizing order model 2.1 Model hypothesis (1)The commodity demand rate is a random variable. When the market demand is stable, the demand obeys normal distribution. Let D the mathematical expectation of demand; (2)The manufacturer's production capacity(R) is much higher than the rate of demand, and the manufacturer’s shortage cost is ignored; (3)The production volume is an integer multiple ( n ) of the order quantity; (4)Transportation cost is proportional to the number of transport, and it is borne by the retailer; (5)In steady state, the sales price of the retailer is basically stable. Set a constant w as the sales price; (6)The transaction price between supplier and demander is p , the retailer’s expectation is p , and the manufacturer’s expectation is p ( w > p > p > c) ; (7)The price taker is retailer, who allows market supply shortage, and uses ( s, Q ) as ordering policy. When the inventory reduces to s , the buyer sends an order batch of Q . 2.2 Model definition Definition 1: Retailer’s model Retailer’s revenue is sales income; its cost includes the procurement cost, order processing (including logistics) cost, inventory holding cost and shortage cost. π r is the notation of retailer’s annual profit. (1) Q D + kσ ) − BσG ( k ) h( r 2 Q (3) Definition 2: Manufacturer’s model Manufacturer’s revenue is also the sales income; its cost includes production cost, preparation cost for each order, order processing cost, and inventory holding cost. π m is the notation of manufacturer’s annual profit. D D − lm nQ Q − [(n − 1) − (n − 2) D / R](Q / 2) * hm π m (n, Q) = p * D − c * D − k m Where (4) c is the cost of each unit product; k m is the manufacturer’s setup cost; lm is the order processing cost; hm is the cost of storage for each product per time of the manufacturer; According to the references [5],the annual average inventory of manufacturer is [( n − 1) − (n − 2) D / R ](Q / 2) . The optimized production volume of manufacturer can be calculated as follows: 2k m D (1 − D / R )Q 2 hm (5) 2k m D (1 − D / R ) EOQ 2 hm is an integer , n= If n = then the manufacturer’s optimized production volume is n; Else if n= 2k m D is not an (1 − D / R ) EOQ 2 hm integer, then the optimized production volume of - 563 - manufacturer is either [ n ] or [ n ] +1. To determine the manufacturer’s choice, we have to calculate the fourth formula with [n] and [n] +1 separately. Then we choose the larger value and note n S .If the two values are equal. We choose[n] as n S , because it can reduce the manufacturer’s production pressure. After the manufacturer’s optimized production volume is fixed, there is also an expected order quantity that the manufacturer has, and a maximum profit that the manufacturer hopes to get can be calculated through the following formulas: EPQ = 2(k m / n + l m ) D hm [(n S − 1) − (n S − 2) D / R] π m* = ( p − c) D − 2( km + l m ) * ((n S − 1) − (n S − 2) D / R) * hm nS (6) (7) 2.3 Description of the coordination process Because of the conflict between the manufacturer and retailer, we give a description of coordination process. Firstly, the manufacturer announced the sales price p . According to the market demand, the retailer announced its economic order quantity ( EOQ ) and the expected sales price p (Generally p ≠ p ); Secondly, the manufacturer determined its own optimal production lot size n , and then offered its economic production quantity ( EPQ ). If ( p, EOQ )=( p, EPQ ), there is no need to coordinate, then the two parties make a deal directly. Else, the two sides went into the coordination process. In this paper, Section 3 will introduce a win-win solution algorithm to simulate the coordination process between the manufacturer and retailer. Also, this algorithm can make the partners reach their respective profit and maximize the overall interests of the whole supply chain. 3 Win-win negotiation algorithm 3.1 Coordination agreement The enterprises involved in this negotiation take rounds to give proposals and counter-proposals. In each round, the supplier and demander calculate their profit according to the other’s proposals. If the value is greater than or equal to the expected profit in the next round, the transaction is done. Otherwise, they make a counter proposal. In addition, both the supplier and buyer don’t reduce the value of their own profit when they propose in each round. Instead, they offer a set of proposals to the other side to choose, which concludes M elements. Also, it is a good reflection of desire for cooperation between the enterprises. That is to say, in the negotiation process, the participants make a horizontal search firstly (without reducing one’s own profit).If an agreement is not reached, then go to the next round. One or both two parties reduce their expected profit, and go to the horizontal search again. Make those searches repeatedly until reach a final agreement. Otherwise, Exit the negotiation. The consultation way proposed in this paper guarantees the satisfactory of the enterprises and optimizes the overall interest of the whole supply chain. 3.2 Win-win negotiation solution In the initialization phase, the two parts are going to offer their proposal from their own profit without considering the other. There is one and only one quotation to meet their interests. If the two parties’ proposals are the same, then they make a deal. If not, they enter the negotiation phase. The two sides make a vertical search (concession).This paper uses the classic time-constraints concessions strategy. Learning from the literature [19], we build the dynamic negotiation model. Define three negotiation strategies as follows: (1) Anxious transaction type: The concession amplitude is going to become smaller as the negotiation time goes to disappear. This pattern reflects that the negotiator is eager to make a deal at the beginning, while in the latter he adheres to the bottom line. At this time ϕ > 1 ; ( ϕ reflects the time-preferences of the negotiator) (2) Stable transaction type: The concession amplitude is a fixed constant. This pattern reflects that the negotiator’s relatively stable characteristic. At this time ϕ = 1 ; (3) Patient transaction type: The concession amplitude is going to become larger as the negotiation time goes to disappear. This pattern reflects that the negotiator is dawdling in the beginning, while the concession amplitude increase as the negotiation goes to the end. At this time ϕ < 1 ; In this paper, the supplier and demander both maximize the profits as the foundation of their decision-making, and therefore, we will use the following formula to make the concessions. π (k ) = π min (k ) + (1 − Φ(k ))(π * − π min (k )) (8) Where k is the k-th round of negotiation, π (k ) is the profit the partner want to achieve, and Φ (k ) is the utility that the partner planned, and π * is the expected value that the partner want to attain at the beginning, and the acceptable minimum profit π min (k) is * π m (0) = π m * , π mmin (0) = π m ; π r (0) = π r , π rmin (0) = π r . π m , π r is the minimum interest that maintains the normal operation of enterprises for the manufacturer and retailer separately. Here, the negotiation time is valuable resource for both sides, and it is limited. The utility will decrease over time, and the negotiation rounds reflect the time consumption. - 564 - 0, k = 0 1 Φ(k ) = k ϕ k p + (1 − k p )( ) , k ∈ [1, N ] N hp la so p or p ali ti nI Supplier Demander First proposal First proposal (9) Where k p is a constant, and 0 ≤ Φ (k ) ≤ 1 , and S E Y Match NO sea hp no it iat og e N Vertical search Concession Horizontal search Accepted History YES Deal Update NO N is the maximum negotiation rounds. Through the mentioned concession based on time, the partners will both have the expected profit they want to achieve in the next round. And then one partner will search horizontally to generate a proposal set for the other. The specific horizontal search process is described as follows: (1) Retrieval the case base to find historical data which can meet the concession profit. Here, we assume that m groups of proposals meet the requirement; (2) According to the scope of attributes which are determined by the opponent, generate the other attributes’ ranges. Choose (M-m) decision variables randomly, and calculate the other attributes’ value. Thus, there are M-m groups of new proposals. (3) To sum up, the proponent gives set concluding M proposals. Above all, the win-win negotiation solution procedure is described in detail as follows: Step 1: The supplier and the demander both offer their expected transaction value. If they are the same, go to Step 6. Otherwise, go to Step 2; Step 2: The negotiating parties both take the vertical search, and reduce the expected profit value in current round; Step 3: One party as proponent take the horizontal search and provide the alternative proposal collection for the other; Step 4: The proposed recipient calculates the highest profit that he can get from the opponent’s proposals. If the profit is higher than or equal to the excepted one in the current round then go to Step 6. Otherwise, go to Step 5; Step 5: Detect the negotiation rounds to see whether or not the maximum tolerated time has been reached. If reached, go to Step 7. Otherwise, update the minimum acceptable profit value and change the role as proponent and go to Step 3; Step 6: Make a deal; Step 7: The transaction fails. Through the description of the entire negotiation process, we draw the win-win negotiation flow chart as Fig 1. k>K YES Fail Fig.1 The flow chart of win-win negotiation Retailer’s parameter: k r = 80 , hr = 1.6 , B = 0.5 , p = 7 , p = 0.1 , π r = 2500 ; The retailer selects the anxious transaction type of negotiation strategy ϕ = 2 ; the maximum tolerated negotiation rounds are N r = 30 ; each round’s proposal number M r = 5 ; Manufacturer’s parameter: c = 4 , k m = 200 , l m = 50 , hm = 0.2 , R = 3000 , p = 9 , π m = 3500 ; Manufacturer selects the stable type of negotiation strategy ϕ = 1 ; the maximum tolerated negotiation rounds are N m = 50 ; each round’s proposal number M m = 5. The model parameters can be adjusted in accordance with the actual situation of the enterprise, this paper just gives an example. 4 Numerical example 4.2 Results analysis According to the formula (2) and (3), the retailer’s expected transaction value is ( p, EOQ) = (7,320) , and 4.1 Parameter information In order to verify the effectiveness of the win-win negotiation algorithm, it is assumed that the market demand expectations D = 1000 , the variance of the normal distribution σ = 80 , market sales price w = 12 ; π r * = 4756.88 . Meanwhile, the optimal production batch of the manufacturer is n = 5 and the expected transaction value is ( p, EPQ) = (9,548) and * π m = 4989.61 . Simulated the consultation process which is proposed in this paper by using Matlab2012a. In - 565 - the 30th round, the partners make a final agreement, and the value is(8.36,358). In the process of applying the negotiation algorithm, we set an array recording the actual maximum profit that the retailer achieves and the expected profit and the minimum acceptable profit changes in each round. These changes are shown in Fig2. 5000 4500 Profit 4000 3500 4000 3800 actual maximum profit excepted profit minimum acceptable profit 3000 3600 2500 Profit 3400 3200 3000 5 10 15 Negotiation rounds 20 25 30 Fig.3 The profit changes of manufacturer 2800 2600 actual maximum profit expected profit minimum acceptable profit 2400 2200 0 0 5 10 15 Negotiation Rounds 20 25 30 Fig.2 The profit changes of retailer From Fig.2, we can see that in the 30th negotiation round, the retailer’s expected profit is lower than the actual maximum profit he can achieve from the manufacturer’s proposals, and then the deal is done. For further research, we analyzed each curve separately: (1) From the curve of minimum acceptable profit: In the first seven rounds, the minimum acceptable profit doesn’t change. The reason is that the manufacturer’s proposal in the first seven rounds didn’t exceed the initial boundary value that the retailer persists. But, the acceptable minimum value of the retailer is growing, which reflects the “greedy psychology” of negotiator who expect the profit the higher the better. In addition, we have to notice that the minimum acceptable profit value is always lower than the actual maximum profit. Because updating the minimum acceptable profit is the latest stage in negotiation process and the updated value is used in the next negotiation round; (2) From the curve of expected profit value, we can see that the curve is in a downward trend. Also, in the first seven rounds, the curve presented obvious “concave”, which is accordance with the description of anxious transaction type strategy. However, in the latter, the concave trend is becoming blurred, and the updating boundary value is the reason; (3) From the curve of actual maximum profit, an obvious phenomenon can be found. The actual maximum profit value is higher in the latter round than the previous one, which satisfy the requirement of Pareto improvement. Similarly to the way of retailer’s record, there are also three curves for manufacturer to record the changes of actual maximum profit that the manufacturer achieves, expected profit and the minimum acceptable profit in the interactive process. These changes are shown in Fig3. From Fig.3, we can see that in the 30th negotiation round, the retailer accepts the proposal that the manufacturer made. Therefore, there are only 29 records. Analyze the three curves separately as follows: 1) from the curve of minimum acceptable profit: In the first six rounds, the minimum acceptable profit doesn’t change. The reason is the same as retailer. What’s more, the manufacturer has a “greedy psychology” too. The curve is exhibiting a growing trend after the six rounds; 2) the manufacturer chooses the stable transaction type as his concession strategy. Therefore, in the first six rounds, the curve is showing a clear “linear downward” trend. As the minimum tolerance boundary changes, the curve presents intermittent decline, which fits the description of stable transaction type strategy; 3) the actual maximum profit curve is also growing as the negotiation going, which meets the Pareto improved condition. In conclusion, the retailer and the manufacturer are on the equal status, and they both have the “greedy psychology” in the negotiation process. In addition, the negotiation process is the result of expected profit of both partners decreased step by step. The concession magnitude is determined by the negotiator’s attitude, and the obtained profit in each round is higher than the last round the opponent’s proposal makes him achieve. Those are in line with the actual business situation. 4.3 Mode comparative analysis Compared with the current mainstream research on Stackelberg mode and centralized decision-making mode, the profit that the buyer, the seller and the whole supply chain achieve is shown in Tab.1. From the Tab.1, we can see that the deal can’t be done in Stackelberg coordination mode. Because the retailer got profit value is less than the minimum acceptable boundary. Generally, in this situation, the partners will negotiate with the other. Otherwise, they will neither get the benefit. In addition, the biggest drawback of the Stackelberg mode is the constraint of the status, whose range of application is narrow. While the centralized decision-making mode is an ideal running state: both sides will fully share the information and they - 566 - Coordination mode Tab.1 Profit analysis in different modes profit Manufacturer Retailer Supply chain Stackelberg Centralized decision-making Collaborative planning based on negotiation 4622.75 Negotiation 4450.5 overall profit depends on the negotiating capacity. However, the enterprises in the supply chain are rational and selfish. Achieving the complete information and all the parties make decision for the whole supply chain’s profit is almost impossible in real life. So, in the negotiation mode, the status between supplier and demander is relatively equal and they make a deal under asymmetric information conditions and the whole supply chain profit is close to the centralized decision-making mode. All of those are in accordance with the practice and the enforce ability is higher. Furthermore, the negotiating attitude depends on personal preference with a certain degree of autonomy. The different attitudes the partners choose may lead to a failed result, which complies with the reality. Above all, this simulation research has a very important practical significance. 5 Conclusions In this paper, a lot sizing order model is founded and we propose a win-win negotiation algorithm. In the collaborative planning mode based on negotiation, the relationship between supplier and demander is equal. Also, this mode doesn’t need the complete information. It breaks the restriction of status between the seller and buyer in Stackelberg mode and is more practice than the centralized decision-making mode. Through the numerical example, the profit reduction process and a “greedy psychology” are described in the negotiation, which simulates the realistic negotiation circumstance better. 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