ISyE 6230 Thursday April 27, 2006 Presenters: • Brian Jacobs : “Sharing EPR Across the Supply Chain” • Illenin Kondo : “Game Theory and Network Formation” • Vishal Agrawal : “Customized Pricing for Competitive Situations” • Siao Ly : “Revenue Management for the Aquarium”1Sharing Extended Producer Sharing Extended Producer Responsibility across the Responsibility across the Supply ChainSupply ChainBrian W. Jacobs4/27/06BWJ, 4/27/06 2What is Extended Producer Responsibility (EPR)?• A policy approach in which producers accept significant responsibility (financial and/or physical) for the treatment or disposal of post-consumer products• Assigning such responsibility could:– provide incentives to prevent wastes at source– promote environmentally compatible product design– support the achievement of public recycling and materials management goals2BWJ, 4/27/06 3Why EPR?• Post-consumer waste is an expanding problem (22% growth per person 1980-1997)• Resistance to new landfills and incinerators is increasing (particularly in Europe and Japan)• Treatment and disposal costs are largely borne by society; producers have little incentive to reduce themBWJ, 4/27/06 4EPR Policy Instruments• Product Take-Back• Deposit/refund• Advance disposal fees• Raw material taxes• Producer tax to subsidize waste treatment• Minimum recycled content standards• Leasing or Servicizing3BWJ, 4/27/06 5EPR Milestones• 1988 – Florida minimum recycled content law for newsprint• 1991 – German packaging ordinance• 1997 – US battery recycling act• 1998 – Sweden automobile take-back• 1999 – Netherlands electrical and electronic equipment (EEE) programBWJ, 4/27/06 6Why not just charge the ‘producer’?• “…it should be borne in mind that all actors in the product chain and in society must participate in order to optimize its effects.”• “The challenge for governments is to design their policies and programs so that responsibility is appropriately shared…”• “…the key is to shift sufficient responsibility to those with the greatest potential to trigger the actions needed…”• “EPR seeks to extend responsibility up and down the product chain so that everyone involved has an incentive…”4BWJ, 4/27/06 7Is anyone sharing EPR responsibility?• United Kingdom – collection and recycling of packaging waste– Manufacturing 6%– Converting 9%– Packing/filling 37%– Selling 48%– Total 100%• Is the added administrative burden worthwhile?BWJ, 4/27/06 8Research questions:• In what ways is it advantageous (or not) to allocate take-back costs between parties in the supply chain rather than just the ‘producer’?• If the take-back costs are allocated, what contracts could be used to coordinate the supply chain and incent optimal results?5BWJ, 4/27/06 9Model: 2 Stage Supply ChainRaw Material Suppliere.g. SteelManufacturere.g. Steel FabricatorBWJ, 4/27/06 10Key Model Parameters• Marginal Costs• Raw material extraction (γ1)• Disposal (γ2)• Collection (γ3)• Manufacturing (γ4)• Recycling (k)• Variables• Recycling percentage (I)• Responsibility allocation (e)6BWJ, 4/27/06 11Key Model Assumptions• Manufacturer sells directly to consumers• Returns are not remanufacturable; they either go to the raw material supplier for recycling (if cost beneficial), or to disposal otherwise• Recycling only occurs at the raw material supplier, not the manufacturer• Recycled raw material is perfectly substitutable for virgin raw material• No loss in quantity between supplier, manufacturer, and consumer• All marginal costs (disposal, collection, recycling, manufacturing) are constant• Responsibility percentage e applies only to collection and disposal costsBWJ, 4/27/06 12Objective FunctionsFor a vertically integrated manufacturer with full responsibility for product take-back (e = 1.0), ПT= pq–Cf–q[(γ4+ γ3) + (1 – I)(γ1+ γ2) + Ik]Let c = γ4+ γ3+ (1 – I)(γ1+ γ2) + IkПT= pq–qc –Cf7BWJ, 4/27/06 13Objective FunctionsFor a 2 stage supply chain with full manufacturer responsibility (e = 1.0)ΠS= wq - CfS–q[(1 –I)γ1+ Ik]Let cs= (1 – I)γ1+ IkΠS= wq–qcs–CfSΠM= pq - CfM–q[(w+ γ4+ γ3) + (1 – I)(γ2)]Let cm= γ4+ γ3+ (1 – I)(γ2)ΠM= pq– q(w + cm) – CfMTo maximize profit with recycling, k < γ1,[I = 0 otherwise]BWJ, 4/27/06 14Objective FunctionsFor a 2 stage supply chain w/ shared responsibility (0 < e < 1)ΠS= wq - CfS–q[(1 –I)γ1+ (1 – I)(1 – e)(γ2) + (1 – e)γ3+ Ik]Let cse= (1 – I)γ1+ (1 – I)(1 – e)(γ2) + (1 – e)γ3+ IkΠS= wq–qcse–CfSΠM= pq - CfM–q[(w+ γ4+ eγ3) + (1 – I)(eγ2)]Let cme= γ4+ eγ3+ (1 – I)(eγ2)ΠM= pq– q(w + cme) – CfMTo maximize profit with recycling, k < γ1+ (1-e)γ2 (SUPPLIER HAS MORE INCENTIVE TO RECYCLE)8BWJ, 4/27/06 15(a – c)2/4b - Cf3(a – cs–cm)2/16b - CfS-CfMПTn/a(a – cs–cm)2/16b - CfMΠMn/a(a – cs–cm)2/8b - CfSΠS(a + c)/2(3a + cs+ cm)/4p(a – c)/2b(a – cs–cm)/4bqn/a(a + cs–cm)/2wCentralized SCDecentralized SCParameterBWJ, 4/27/06 16Parameter Impacts• Supply chain parameters q, p, Π are unaffected directly by e since they are a function of total marginal cost (c = cs+ cm)•Since w = (a + cs–cm)/2– w is lowest when manufacturer has full responsibility (e = 1.0)– w is unaffected when e = 0.5– w is highest when supplier has responsibility (e = 0)– High recycling rates decrease this effect since disposal costs are reduced9BWJ, 4/27/06 17Extensions• Use separate parameters e1and e2to allocate costs for collection and disposal independently• Incorporate material losses at each stage of the supply chain• Determine optimal policies for collection and recycling targets14/28/2006 1Game Theory Game Theory & & Network FormationNetwork FormationISyE 6230Illenin Kondo4/28/2006 ISYE 6230 - EDA - Illenin Kondo 2Rationale: Networks do matter in Rationale: Networks do matter in …… Job hunting Trade and exchange of goods Information sharing Networks externalities Social networks OR/MS Æ Different network structures may yield different outcomes24/28/2006 ISYE 6230 - EDA - Illenin Kondo 3Cooperative gamesCooperative games Myerson’s seminal work Myerson (1977) “Graphs and Cooperation in Games” Cooperative GT + Network structure Value allocation in the coalition is a key issue in this setting Myerson – Shapley value: Marginal