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. We present 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 for combining the product assortments of the two firms and offering the combined assortment to each firm’s customers. We study both centralized and decentralized cooperations. 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 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. We also prove that assortment based cooperation is always beneficial for two symmetrical firms in both a centralized and a decentralized cooperation. Our numerical experiments reveal that assortment-based cooperation is not always beneficial if the firms are not symmetrical.