Modeling and analysis of network organizations for inter-firm cooperation

As competition increases, all firms are searching for new business models to improve their competitiveness and profitability. In situations which do not allow them to achieve these goals on their own, they seek to join forces with other firms.  

Inter-firm cooperation is widely believed to make strategic sense due to possible cost reductions, demand pooling effects, market expansion, capacity utilization benefits and improved flexibility against uncertainty in the business environment. However, there are a number of questions that need to be answered for a successful implementation of a network organization.

In this presentation, four network organization models for cooperation on production capacity, logistics activities, product assortments, and procurement are introduced. Implementation of these cooperation-based business models in different industries in Turkey is also discussed, and the results obtained are reported. 

We will present an analytical model for cooperation on procurement in order to discuss the operation of network organizations in detail. In the model we analyze a supply chain consisting of a set of buyers, suppliers, and a group purchasing organization (GPO) is considered.  

The GPO combines the orders from the buyers to achieve a lower cost. Buyers that are faced with price uncertainty decide how much to buy by using the GPO at the agreed price offered by the GPO in the first period and how much to procure from the market at a lower or higher price in the second period.

Suppliers that are faced with the same price uncertainty as well as the market demand uncertainty decide what capacity to sell to the GPO in the first period, and what capacity to reserve to meet the demand in the second period. The GPO conducts a uniform-price auction to select the suppliers. The GPO decides on the quantity-based pricing scheme that will be offered to the buyers.  

By determining the optimal decisions of the buyers, suppliers, and the GPO, we answer the following questions:

• Do the suppliers and the buyers benefit from working with the GPO?
• How does the uncertainty in demand, the size of the total order the GPO consolidates with respect to the market size, the uncertainty in price influence the decisions, as well as the profits of players?
• What are the characteristics of an environment that make suppliers and buyers choose to work with a GPO?

We show that group purchasing organizations help buyers and suppliers mitigate demand and price risks in an effective way. Furthermore, GPOs can collect a premium by serving as an intermediary between suppliers and buyers.

It is observed that when the conditions for a beneficial cooperation are met, and it is implemented properly, cooperation is an effective competitive strategy. Therefore, cooperation-based business model is presented as a way to improve the competitiveness of firms.