Cooperative purchasing and preactive inventory sharing – Channel balancing and performance improvement

We consider two competing firms that source from external suppliers and sell partially substitutable products in uncertain and price-sensitive markets. The merger of suppliers puts them in a position to demand better wholesale price terms and force them to seek various initiatives for channel rebalancing. One often observed practice is cooperative purchasing, whereby firms agree to source together. Another one is preactive inventory sharing, which belongs to dual sourcing. Firms trade inventories with each other after revealing market uncertainties but before setting retail prices and serving respective markets. We show that these two operation practices substitute each other to lower the firms’ effective sourcing costs but are complementary in uncertain markets. However, different from cooperative purchasing that tends to restrain the firms’ total order and harm the supplier, preactive inventory sharing will result in more aggregated sales and benefit the supplier. Cooperative purchasing is more effective to improve the profits of the firms. Wherever it is not a feasible strategic option, preactive inventory sharing can take over to claim most of the desired profit gains to the firms. Its effectiveness can be enhanced particularly when the markets are highly volatile or there is economy of scale in production at the supplier.