Mechanism design for collaborative production-distribution planning with shipment consolidation

This paper considers firms making collaborative production-distribution planning with shipment consolidation to reduce costs. However, the firms have private cost information which they are not willing to disclosure. We develop a computable mechanism based on a decentralized local search heuristic combined with simulated annealing, which allows for not only system optimization but also cost allocation. The mechanism is especially applicable to the firms with private cost information, due to its good incentive properties and budget balance in almost all the cases. Computational experiments indicate that the cost savings are significant for both the system and the individual firm.