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

This paper deals with component commonality in start-up manufacturingfirms. We present a two-product Markov decision model that examinesthe implications of the inventory and production strategiesfor the survival probability of the firm. The advantage of usingcomponent commonality is studied for varying costs, demand correlationsand 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 decisionscan be made. It is shown that commonality is not only usefulas a way of dealing with demand uncertainty, but that its increaseduse is preferred for strongly substitutable products, and shorterreplenishment lead times.