The Perils of Group Purchasing in a Competing Supply Chain

Abstract

Group purchasing organizations (GPOs) are well-known intermediary firms that play an important role in some supply chains. An important question that arises regarding the GPOs, is whether a GPO that benefits from group buying discounts, always benefit the OEMs in the presence of market competition. In other words, does a GPO always lead to a win-win outcome for OEMs and the GPO? To answer this question, a bargaining framework has been used to investigate competing OEMs' procurement's strategies. The entrance of a GPO in a two tier supply chain that consists of two competing OEMs with a common supplier that has a quantity discount menu is analyzed. The result shows that low purchasing cost GPO may harm OEMs in a cost-benefit perspective. This unintuitive result can be explained by different impacts that a GPO has in purchasing process. Although, it can enlarge the size of trade surplus; but, it has an important influence on the size of the slice of the pie (profit sharing). Moreover, an OEM's procurement strategy in equilibrium not just only depends on his bargaining power; but also depends on his competitor OEM. Interestingly, a strong OEM may not prefer procuring through GPO, as well as a weak OEM does.