Minimum cost network design in strategic alliances

Strategic alliances are established between firms to improve their competitiveness in markets and generally appear in the form of joint ventures. Such collaborative efforts require centralized planning, and the survival of the alliance largely depends on the success of joint planning processes. In this regard, we investigate the opportunities that centralized collaboration can offer to firms when designing their service networks. Apart from the classical fixed and variable costs associated with the network design, we also consider transaction costs induced by the formation of the alliance, which can broadly be defined as cost components related to the coordination and monitoring of the people, efforts and resources. We concentrate on bilateral alliances and develop alternative models for solving their associated network design problem. We also adopt a state-of-the-art heuristic to solve large-scale instances. Our findings confirm that accounting for the transaction cost in network design is vital for the alliance. These transaction costs can be high enough to even render the collaboration unattractive. Hence, careful data collection and model treatment are required before deciding whether to form an alliance.