The Perils of Group Purchasing in a Competing Supply Chain

Group Purchasing Organizations (GPOs) are well-known intermediary firms that play an important role in some supply chains. An important question that arises regarding GPOs is whether a GPO that benefits from group buying discounts always benefits Original Equipment Manufacturers (OEMs) under market competition. In other words, does the role of a GPO always result in a win-win outcome for OEMs and GPOs? In response, a bargaining framework has been used to investigate the procurement strategies of competing OEMs. The incorporation of a GPO in a two-tier supply chain consisting of two competing OEMs with a common supplier that has a quantity discount menu is analyzed. The result shows that low-purchasing cost for GPOs may harm OEMs from a cost-benefit perspective. This unintuitive result can be explained by different impacts that a GPO has on the purchasing process. Although a GPO can enlarge the size of trade surplus, it has important influence on the size of the slice of the pie (profit sharing). Moreover, the procurement strategy of an OEM in equilibrium depends on not only the bargaining power, but also the competing OEM. Interestingly, unlike a weak OEM, a strong one may not prefer procuring through GPO. (C) 2019 Sharif University of Technology. All rights reserved.