Production, Manufacturing and LogisticsSupply chain coordination with information sharing: The informational advantage of GPOs
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.
Section snippets
Literature review
We study group purchasing based on a supply chain with horizontal competition and information incompletion. The existing studies on group purchasing, information sharing in oligopoly, and supply chain coordination under competition, are most relevant to our work.
Model framework
Consider a supply chain system consisting of one GPO (indexed by g), and two competing manufacturers (indexed by and ). The manufacturers purchase a common component from the GPO, and further make it into imperfect substitutable products through different processes of customization. For convenience, we refer to the GPO as she and each manufacturer as he. All players are risk neutral.
Next, we describe the major components in our model framework.
Benchmark analysis
To understand the impacts of the GPO on the system efficiency, we need to consider two benchmark scenarios in which the supply chain efficiency is not impacted by the GPO. Section 4.1 considers the first-best scenario (FB), where the supply chain is centralized as one entity that aims to optimize system-wide performance. In this scenario, we can derive the first-best benchmark outcome for the decentralized supply chain under both individual purchasing and group purchasing. Section 4.2 considers
Group purchasing and information sharing with wholesale price contracts
We next explore the impacts of the GPO on the system efficiency. Consider that wholesale price contracts are very common in both literature and reality. Our first goal is to show that when group purchasing under a wholesale price contracting scheme (WP scheme), the manufacturers are reluctant to share their information, and group purchasing is hard to benefit the supply chain. In general practice, information sharing is a long-term decision, whereas wholesale pricing is short-term decisions. So
A forecast-sharing-based compensation contracting scheme for coordination
So far, we have shown that horizontal competition, information incompletion and double marginalization are three essential sources of quantity deviations, and the resulting system inefficiency is significant under the WP scheme. This raises the question of whether the GPO can address the inefficiency through contracting, so as to optimize her value of existence. In this section, we propose a compensation contracting scheme (CC scheme) that is based on the forecast information shared by the
Numerical examples
In this section, by conducting several numerical experiments, we illustrate some of the analytical findings in the previous sections and gain more insights. For comparison, we assume , , , as default settings, and consequently we have .
Conclusions
Under the growing pressure of cost saving, GPOs have been evolving beyond the transactional role of group purchasing and increasingly play an informational role in a supply chain. In this paper, we investigate the role of a GPO in a supply chain system with two manufacturers under a setting of horizontal competition and information asymmetry. We first study two benchmark scenarios (centralized decision and individual purchasing) and reveal the inefficiency of individual purchasing. Then, we
Acknowledgments
The authors would like to thank the two anonymous referees for their invaluable suggestions and insightful comments, which have helped to improve the paper significantly. This research was supported in part by Research Grant from National Natural Science Foundation of China (Grant numbers 71272086 and 71572020) and Project Supported by Major Program of the National Social Science Foundation of China (Grant number 15ZDB169).
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