Supply chain coordination with information sharing: The informational advantage of GPOs

Highlights

• We model a supply chain with a GPO and two heterogeneous and competing manufacturers.

• We consider differentiated signal precisions and partial information sharing.

• We identify three determinants of supply chain inefficiency under group purchasing.

• Information sharing from only one manufacturer may be optimal for the supply chain.

• Perfect coordination is achieved in both quantity competition and information sharing.

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.

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, Schwarz, & Uhan, 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 Health Industry Group Purchasing Association (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 & 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.

In fact, the existence of GPOs adds another layer to supply chains. When a GPO and its members maximize their individual profits, the resulting incentive misalignment leads to the well-known double marginalization (Li, Li, & Cai, 2013). As double marginalization damages the supply chain, GPOs have a big challenge to justify their existence. In face of the survival challenges and the increasingly uncertain environment, some GPOs have evolved as informational intermediaries, more strategic than mere group purchasing operators.

On the one hand, demand forecasting is a significant work for every party in a supply chain. From a broader perspective, the accuracy of one party's demand forecast is important for not only itself but also the other parties, because the quality of its forecast often affects the performance of the entire supply chain, including horizontal competitors as well as vertical partners (Chen, 2003, Syntetos et al., 2016). It is obvious that a GPO can add value to a supply chain by pooling the dispersed forecast information from its members.

On the other hand, GPOs are often concerned with the potential conflict of interest when they source for competing buyers. In 2013, three of the main automobile rivals, Renault, Nissan and AVTOVAZ jointly established a common purchasing organization in Russia, which would allow the members to generate significant savings thanks to increased volumes and better pricing with suppliers (Renault-Nissan Alliance, 2013). Therefore, there arises another opportunity for GPOs to moderate the downstream competition by providing superior contractual coordination mechanisms.

Motivated by the above phenomena, we focus on the potential impacts of GPOs on supply chains in an informational perspective without any transactional benefits. Our study considers group purchasing in a supply chain consisting of one GPO and two competing manufacturers. Each manufacturer has some private forecast information about the uncertain demand and is allowed to share partial information with the GPO. We have three main goals. First, we identify the determinants of supply chain inefficiency and examine the effects of information sharing on them. Second, with a common wholesale price contract, we check whether the GPO can add value to the supply chain, and investigate the impact of information sharing on the supply chain. Finally, we establish a forecast-sharing-based compensation contracting scheme. Under this scheme, we demonstrate that the GPO can gain the informational advantage in both facilitating information sharing and coordinating production quantities, which also provides a new explanation for the existence of GPOs and their rapid growth.

The remainder of this paper is organized as follows. Section 2 contains a brief literature review. Section 3 describes the model setting and the information structure. Based on the benchmark analysis in Section 4, we study group purchasing and information sharing with wholesale price contracts in Section 5. Then, in Section 6, we propose a forecast-sharing-based compensation contracting scheme for supply chain coordination. A numerical study is presented in Section 7. Finally, Section 8 offers the conclusions of this paper. All proofs of our results are provided in Appendix A.