Assessing the benefits of horizontal cooperation using a location-inventory model

Horizontal cooperation consists in the collaboration of companies that work at the same level of the supply chain. The literature discusses several real-life cases and experimental studies of horizontal cooperation, showing that these partnerships generate savings. In this paper, to evaluate these savings, we present a location-inventory model, formulated as a conic quadratic mixed integer program, which minimizes facility opening, transportation, cycle inventory, ordering and safety stock costs. This model enables us to assess the synergy value and the evolution of the cost components, comparing the costs of stand-alone companies and horizontal partnerships. In order to better understand the impact of markets and partners characteristics on the synergy value, we conduct a large set of numerical experiments, varying several key parameters (vehicles’ capacity, facility opening cost, inventory holding cost, order cost, demand variability and distances), aiming to offer valuable managerial insights for companies wishing to collaborate. We find that indeed horizontal cooperation can lead to significant savings, with an average coalition gain of 22.5%. Moreover, collaboration is particularly profitable for companies with high facility opening costs and low order costs, carrying small (compared to the vehicle capacity) and inexpensive (low unit holding cost) products in a market with a low demand variability.