Assortment-based cooperation between two make-to-stock firms

Abstract

Cooperation can potentially improve competitiveness and profitability of firms with limited resources and production capacities. This article presents a continuous-time Markov chain model to study an assortment-based cooperation between two independent firms with limited capacity. An assortment-based cooperation is an agreement to combine the product assortments of two firms and offer the combined assortment to each firm's customers. Both centralized and decentralized cooperations are studied. In a centralized cooperation, firms jointly make replenishment decisions, whereas in the decentralized case, firms operate under independent base stock policies and manage product exchanges through a discount-based contract where each firm supplies its own product to the other firm at a discounted price and at an agreed-upon fill rate. Under this scheme, assortment-based cooperation also mandates each firm to effectively ration their inventories since they have to deal with two different demand streams. The discount-based contract yields the results of the centralized operation by using specific values of the contract parameters. It is shown that assortment-based cooperation is always beneficial for two symmetrical firms in both centralized and decentralized cooperation. Numerical experiments reveal that assortment-based cooperation is not always beneficial if the firms are not symmetrical. [Supplementary materials are available for this article. Go to the publisher's online edition of IIE Transactions for Proofs of all Propositions.]