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Speciality oils supply chain optimization: from a decoupled to an integrated planning approach


Author Info

  • Guajardo, Mario

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Kylinger, Martin

    (Dept. of Production Economics, Linköping University)

  • Rönnqvist, Mikael

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)


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 nal 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.

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Bibliographic Info

Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2012/3.

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Length: 31 pages
Date of creation: 26 Mar 2012
Date of revision:
Publication status: Published as Guajardo, Mario, Martin Kylinger and Mikael Rönnqvist, 'Speciality oils supply chain optimization: from a decoupled to an integrated planning approach' in European Journal of Operational Research, 2013, pages 540-551.
Handle: RePEc:hhs:nhhfms:2012_003

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Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
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Keywords: Supply chain management; integrated planning; decoupled planning; linear programming; contribution sharing; OR in the oil industry;

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  1. Erenguc, S. Selcuk & Simpson, N. C. & Vakharia, Asoo J., 1999. "Integrated production/distribution planning in supply chains: An invited review," European Journal of Operational Research, Elsevier, vol. 115(2), pages 219-236, June.
  2. Li, Xiuhui & Wang, Qinan, 2007. "Coordination mechanisms of supply chain systems," European Journal of Operational Research, Elsevier, vol. 179(1), pages 1-16, May.
  3. Bredstrom, David & Lundgren, Jan T. & Ronnqvist, Mikael & Carlsson, Dick & Mason, Andrew, 2004. "Supply chain optimization in the pulp mill industry--IP models, column generation and novel constraint branches," European Journal of Operational Research, Elsevier, vol. 156(1), pages 2-22, July.
  4. Frisk, Mikael & Göthe-Lundgren, Maud & Jörnsten, Kurt & Rönnqvist, Mikael, 2006. "Cost allocation in collaborative forest transportation," Discussion Papers 2006/15, Department of Business and Management Science, Norwegian School of Economics.
  5. Feng, Yan & D'Amours, Sophie & Beauregard, Robert, 2008. "The value of sales and operations planning in oriented strand board industry with make-to-order manufacturing system: Cross functional integration under deterministic demand and spot market recourse," International Journal of Production Economics, Elsevier, vol. 115(1), pages 189-209, September.
  6. Al-Othman, Wafa B.E. & Lababidi, Haitham M.S. & Alatiqi, Imad M. & Al-Shayji, Khawla, 2008. "Supply chain optimization of petroleum organization under uncertainty in market demands and prices," European Journal of Operational Research, Elsevier, vol. 189(3), pages 822-840, September.
  7. Charles Audet & Jack Brimberg & Pierre Hansen & Sébastien Le Digabel & Nenad Mladenovi\'{c}, 2004. "Pooling Problem: Alternate Formulations and Solution Methods," Management Science, INFORMS, vol. 50(6), pages 761-776, June.
  8. Ouhimmou, M. & D'Amours, S. & Beauregard, R. & Ait-Kadi, D. & Chauhan, S. Singh, 2008. "Furniture supply chain tactical planning optimization using a time decomposition approach," European Journal of Operational Research, Elsevier, vol. 189(3), pages 952-970, September.
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