Centralized versus decentralized decision-making for recycled material flows

Abstract

A reverse logistics system is a network of transportation logistics and processing functions that collect, consolidate, refurbish, and demanufacture end-of-life products. This paper examines centralized and decentralized models of decision-making for material flows and associated transaction prices in reverse logistics networks. We compare the application of a centralized model for planning reverse production systems, where a single planner is acquainted with all of the system information and has the authority to determine decision variables for the entire system, to a decentralized approach. In the decentralized approach, the entities coordinate between tiers of the system using a parametrized flow function and compete within tiers based on reaching a price equilibrium. We numerically demonstrate the increase in the total net profit of the centralized system relative to the decentralized one. This implies that one may overestimate the system material flows and profit if the system planner utilizes a centralized view to predict behaviors of independent entities in the system and that decentralized contract mechanisms will require careful design to avoid losses in the efficiency and scope of these systems.