Maosen Zhou^a,b*, Bin Dan^a,c, Songxuan Ma^a, Xumei Zhang^a

^a School of Economics and Business Administration, Chongqing University, Chongqing 400044, PR China

^b Research Institute of Business Analytics and Supply Chain Management, College of Management, Shenzhen University, Shenzhen 518060, PR China

^c Research Center of Business Administration and Economic Development, Chongqing University, Chongqing 400044, PR China

Abstract: This paper explores the potential of group purchasing organizations (GPOs) in facilitating information sharing and coordinating horizontal competition. We consider a supply chain composed of one GPO and two manufacturers competing in quantity. The GPO sources and prices a common component for the manufacturers. Each manufacturer has some private information about the uncertain demand, and can choose a part to share with the GPO. Through benchmark analysis, we identify the manufacturers’ horizontal competition and information incompletion as two determinants of supply chain inefficiency under individual purchasing. Then, we investigate the impacts of the GPO on the supply chain with wholesale price contracts and show that double marginalization induced by the GPO is another determinant of inefficiency. For this, both manufacturers have no incentive to share information and group purchasing damages the supply chain. We also show that under group purchasing, information sharing partially from the lower-precision manufacturer rather than both can benefit the supply chain. Next, we present a forecast-sharing-based compensation contracting scheme, under which, the GPO can make perfect supply chain coordination in both quantities and information sharing, and all members in the supply chain can reach win-win results. Finally, we illustrate the GPO’s informational advantage by numerical examples.

Keywords: supply chain management; purchasing; information sharing; coordination; quantity competition

1. Introduction

This paper is inspired by the phenomenal growth of group purchasing organizations (GPOs) that source products or services on behalf of their purchasing members. The members can realize economies of scale by aggregating their purchasing volume. During the last few decades, group purchasing has been widely used in different forms (Anand and Aron, 2003; Schotanus, 2007). The group purchasing operators, most popularly known as GPOs, have become an important part of supply chains. In America, there are more than 600 healthcare GPOs, and about 98 percent of hospitals purchase through GPOs (Hu et al., 2012). Besides, GPOs are prevalent in many other industries, such as the Foodbuy in food service, the Prime Advantage in manufacturing, the Independent Grocers Alliance (IGA) in grocery industry and the Star Alliance in aircraft industry, etc. (see HIGPA, 2011; Dana, 2012). With the advances in information technology and the reductions in barriers to trade, Internet-enabled group purchasing has gained increasing popularity in aggregating more deliberate scale of demand, which makes the impact of GPOs more significant on worldwide supply chains.

In many cases, group purchasing is superior to individual purchasing in transactional aspects regarding total purchasing cost saving. However, in some cases, GPOs may not reduce the purchasing cost (Hu and Schwarz, 2011). In fact, small and intensive GPOs do not always flourish and premature endings occur (Schotanus, 2007). Therefore, it becomes an interesting question that whether and how GPOs can add substantial value to supply chains for survival, if they no longer have any transactional benefit. This paper is to address this question through analytical modeling, and to illustrate a new, previously unidentified advantage of GPOs.