Modelling and analysis of a network organization for cooperation of manufacturers on production capacity

Abstract

We present an analytical model to analyze the operation of aproductive cooperation network where producers cooperate onproduction capacity. Producers have limited capacity and haveaccess to subcontractors at a higher cost. A single-unit auction-based allocation mechanism is proposed to allocate anarriving order based on the producers' cost structures and theircurrent loads to maximize the total profit. We show that when thecosts are private information, producers are willing to cooperatein order to increase their expected profit. Furthermore, it isshown that there is an equilibrium where producers bid theiractual costs. The cooperation can also generate extra profit tocover a part of its operating expenses with this allocationmechanism. A continuous-time Markov chain model is utilized toevaluate the performance of the allocation mechanism whereproducers submit their myopic best response bids. The cooperationcase is also compared with the no-cooperation case and also withthe centralized operation of producers.