Speciality Oils Supply Chain Optimization: From a Decoupled to an Integrated Planning Approach

European Journal of Operational Research, Volume 229, Issue 2, 1 September 2013, Pages 540-551

NHH Dept. of Finance & Management Science Discussion Paper No. 2012/3

Posted: 27 Mar 2012 Last revised: 17 Jun 2013

See all articles by Mario Guajardo

Mario Guajardo

Norwegian School of Economics (NHH) - Department of Business and Management Science

Martin Kylinger

Linkoping University

M. Rönnqvist

Norwegian School of Economics (NHH) - Department of Finance

Date Written: March 26, 2012

Abstract

We study a problem of tactical planning in a divergent supply chain. It involves decisions regarding production, inventory, internal transportation, sales and distribution to customers. The problem is motivated by the context of a company in the speciality oils industry. The overall objective at tactical level is to maximize contribution and, in order to achieve this, the planning has been divided into two separate problems. The first problem concerns sales where the final sales and distribution planning is decentralized to individual sellers. The second problem concerns production, transportation and inventory planning through refineries, hubs and depots and is managed centrally with the aim of minimizing costs. Due to this decoupling, the solution of the two problems needs to be coordinated in order to achieve the overall objective. In the company, this is pursued through an internal price system aiming at giving the sellers the incentives needed to align their decisions with the overall objective. We propose and discuss linear programming models for the decoupled and integrated planning problems. We present numerical examples to illustrate potential effects of integration and coordination and discuss the advantages and disadvantages of the integrated over the decoupled approach. While the total contribution is higher in the integrated approach, it has also been found that the sellers' contribution can be considerably lower. Therefore, we also suggest contribution sharing rules to achieve that both the company and sellers get a better outcome under the integrated planning.

Keywords: supply chain management, integrated planning, decoupled planning, linear programming, contribution sharing, OR in the oil industry

JEL Classification: C44

Suggested Citation

Guajardo, Mario and Kylinger, Martin and Ronnqvist, Mikael, Speciality Oils Supply Chain Optimization: From a Decoupled to an Integrated Planning Approach (March 26, 2012). European Journal of Operational Research, Volume 229, Issue 2, 1 September 2013, Pages 540-551, NHH Dept. of Finance & Management Science Discussion Paper No. 2012/3, Available at SSRN: https://ssrn.com/abstract=2028883 or http://dx.doi.org/10.2139/ssrn.2028883

Mario Guajardo (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Martin Kylinger

Linkoping University ( email )

Överstegatan 30
Linkoping, 581 83
Sweden

Mikael Ronnqvist

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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