How useful is commonality? Inventory and production decisions to maximize survival probability in start-ups

This paper deals with component commonality in start-up manufacturing firms. We present a two-product Markov decision model that examines the implications of the inventory and production strategies for the survival probability of the firm. The advantage of using component commonality is studied for varying costs, demand correlations and order replenishment lead times. Optimal policies are derived, and minimum stock levels for survival are obtained. Moreover, we state the conditions under which simplified production decisions can be made. It is shown that commonality is not only useful as a way of dealing with demand uncertainty, but that its increased use is preferred for strongly substitutable products, and shorter replenishment lead times.