(34d) Supply Chains As Coordinated Markets: Economic Properties and Applications to Waste Management

Supply chain modeling, design, and optimization have been the subject of intense research in recent years [1, 2, 3, 4]. Our work focuses upon supply chains comprised of many independent stakeholders, each attempting to strategically optimize their profits. We have developed a framework for these problems which extends interprets supply chains as coordinated markets [5]. Market coordination is a competitive transaction management system governed by a non-profit entity called an independent system operator (ISO). Each supply chain stakeholder in this framework behaves as an independent entity that submits bids to the ISO in a market clearing procedure. This approach builds upon the coordinated market structures developed for electricity generation and distribution [6, 7]. Coordination provides a scalable approach for optimizing supply chains comprising many stakeholders; moreover, such a framework has desirable economic properties related to product prices, incentives, and remuneration that provide insight into the complex market forces acting within supply chains. For instance, a coordinated market interpretation reveals that supply chain allocations and flows are obtained from the primal formulation of the clearing problem (in the physical space) and that there exists an equivalent dual formulation (in the price space) that determines embedded values for such products and flows.

A property of a coordinated market called revenue adequacy governs incentive behavior: stakeholders will not participate in a market that does not offer the necessary incentives. In this case, the allocations will be zero, and the market will be dry. In this work, we capitalize on this property and develop a graph-theoretic methodology for determining and evaluating threshold-level bids activate a market. These "market-activating bids" provide insights on market existence criteria and provide information on how the topological structure of a supply chain network influences remuneration. Moreover, market activating bids provide key information to policy makers that seek to design incentives to accelerate the deployment of markets (e.g., use environmental policy to encourage recycling).

We use our framework to tackle supply chain challenges associated with municipal waste management [8, 9]. A recent paradigm in waste management is the concept of the circular economy, in which materials are recycled through economic activities with the greatest achievable efficiency [10,11]. The concept of circularity is to reduce the waste management burden associated with economic activities and further to decouple these activities from continued resource depletion [12, 13, 14]. We use our framework to analyze the waste circularization problem; specifically, we investigate market forces associated with the diversion of various municipal waste streams from landfills and into recycle pathways that recover valuable resources. By applying our market-activating methodology to this supply chain, we determine the minimum prices required to support the recycling economy and illustrate how those costs can be distributed to consumers in the supply chain. We further establish that attempting to force the recycling market to exist through a quota system will result in economic losses for market stakeholders.

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