Strategic decisions to join group purchasing organizations

Abstract

Group purchasing organizations (GPOs) aim to aggregate the purchasing requirements of many buyers and utilize economies of scale to save costs and obtain quantity discounts from suppliers. This paper extends the application of GPOs to the chain stores industry. A new retailer is going to enter the market and faces decisions on joining chain stores (as a GPO) or independently working with a supplier, product pricing, and serving different segments of the market (i.e., informed and uninformed customers). When joining the GPO, a membership fee must be paid to the GPO. The supplier offers a quantity discount schedule that depends on the contract administration fee paid to the GPO. Using nonlinear programming, the optimal decision-making policy is established in a closed-form format. The results show that all decisions are significantly affected by the proportion of informed customers in the market. Accordingly, when the proportion of the informed customers is less than a threshold, not joining the GPO is a great choice for the retailer. When this proportion is growing, the retailer is advised to join the GPO as soon as possible. Our findings indicate that, in the presence of rapid growth of information technologies which leads to an increase in people’s awareness of the market, GPOs play a strategic role in the chain stores industry nowadays. We demonstrate that GPOs not only provide many benefits for customers and retailers but also other players in the group purchasing chain would also profit.