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The Impact of Group Purchasing Organizations on Healthcare-Product Supply Chains

Author

Listed:
  • Qiaohai (Joice) Hu

    (Olin School of Business, Washington University in St. Louis, St. Louis, Missouri 63130)

  • Leroy B. Schwarz

    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907)

  • Nelson A. Uhan

    (School of Industrial Engineering, Purdue University, West Lafayette, Indiana 47907)

Abstract

This paper examines the impact of group purchasing organizations (GPOs) on healthcare-product supply chains. The supply chain we study consists of a profit-maximizing manufacturer with a quantity-discount schedule that is nonincreasing in quantity and ensures nondecreasing revenue, a profit-maximizing GPO, a competitive source selling at a fixed unit price, and n providers (e.g., hospitals) with fixed demands for a single product. Each provider seeks to minimize its total purchasing cost (i.e., the cost of the goods plus the provider's own fixed transaction cost). Buying through the GPO offers providers possible cost reductions but may involve a membership fee. Selling through the GPO offers the manufacturer possibly higher volumes, but requires that the manufacturer pay the GPO a contract administration fee (CAF), i.e., a percentage of all revenue contracted through it. Using a game-theoretic model, we examine questions about this supply chain, including how the presence of a GPO affects the providers' total purchasing costs. We also address the controversy about whether Congress should amend the Social Security Act, which, under current law, permits CAFs. Among other things, we conclude that although CAFs affect the distribution of profits between manufacturers and GPOs, they do not affect the providers' total purchasing costs.

Suggested Citation

  • Qiaohai (Joice) Hu & Leroy B. Schwarz & Nelson A. Uhan, 2012. "The Impact of Group Purchasing Organizations on Healthcare-Product Supply Chains," Manufacturing & Service Operations Management, INFORMS, vol. 14(1), pages 7-23, January.
    • Handle: RePEc:inm:ormsom:v:14:y:2012:i:1:p:7-23
    DOI: 10.1287/msom.1110.0355
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    References listed on IDEAS

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    Cited by:

    1. Jurriaan L. Jong & W. C. Benton, 2019. "Dependence and power in healthcare equipment supply chains," Health Care Management Science, Springer, vol. 22(2), pages 336-349, June.
    2. Iacocca, Kathleen & Mahar, Stephen & Daniel Wright, P., 2022. "Strategic horizontal integration for drug cost reduction in the pharmaceutical supply chain," Omega, Elsevier, vol. 108(C).
    3. Grzegorz Zimon & Marek Sobolewski & Grzegorz Lew, 2020. "An Influence of Group Purchasing Organizations on Financial Security of SMEs Operating in the Renewable Energy Sector—Case for Poland," Energies, MDPI, vol. 13(11), pages 1-17, June.
    4. Li, Li & Jiang, Li, 2022. "Saving costs and improving selling through competitor cooperation in sourcing," European Journal of Operational Research, Elsevier, vol. 302(3), pages 970-982.
    5. In, Joonhwan & Bradley, Randy V. & Bichescu, Bogdan C. & Smith, Antoinette L., 2019. "Breaking the chain: GPO changes and hospital supply cost efficiency," International Journal of Production Economics, Elsevier, vol. 218(C), pages 297-307.
    6. Hezarkhani, Behzad & Slikker, Marco & Van Woensel, Tom, 2018. "Collaborative replenishment in the presence of intermediaries," European Journal of Operational Research, Elsevier, vol. 266(1), pages 135-146.
    7. Yang, Yu-Chen & Cheng, Hsing Kenneth & Ding, Chao & Li, Shengli, 2017. "To join or not to join group purchasing organization: A vendor's decision," European Journal of Operational Research, Elsevier, vol. 258(2), pages 581-589.
    8. Oktay Karabağ & Barış Tan, 2018. "Analysis of a group purchasing organization under demand and price uncertainty," Flexible Services and Manufacturing Journal, Springer, vol. 30(4), pages 844-883, December.
    9. Gajanan Panchal & Vipul Jain & Naoufel Cheikhrouhou & Matthias Gurtner, 2017. "Equilibrium analysis in multi-echelon supply chain with multi-dimensional utilities of inertial players," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 16(4), pages 417-436, August.
    10. Jain, Tarun & Hazra, Jishnu, 2017. "Sourcing strategies under agglomeration economies, capacity risks and retail competition," International Journal of Production Economics, Elsevier, vol. 191(C), pages 311-322.
    11. Fang Fang & Harihara Prasad Natarajan, 2020. "Sourcing and Procurement Cost Allocation in Multi‐Division Firms," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 767-787, March.
    12. Jun Zhao, 2022. "Will the community O2O service supply channel benefit the elderly healthcare service supply chain?," Electronic Commerce Research, Springer, vol. 22(4), pages 1617-1650, December.
    13. Yan, Yingchen & Zhao, Ruiqing & Lan, Yanfei, 2017. "Asymmetric retailers with different moving sequences: Group buying vs. individual purchasing," European Journal of Operational Research, Elsevier, vol. 261(3), pages 903-917.
    14. Yu, Yunlong & Xiao, Tiaojun, 2021. "Analysis of cold-chain service outsourcing modes in a fresh agri-product supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 148(C).
    15. Grzegorz Zimon & Robert Dankiewicz, 2020. "Trade Credit Management Strategies in SMEs and the COVID-19 Pandemic—A Case of Poland," Sustainability, MDPI, vol. 12(15), pages 1-16, July.
    16. Vernon N. Hsu & Guoming Lai & Baozhuang Niu & Wenqiang Xiao, 2017. "Leader-Based Collective Bargaining: Cooperation Mechanism and Incentive Analysis," Manufacturing & Service Operations Management, INFORMS, vol. 19(1), pages 72-83, February.
    17. Peng, Wenli & Merckx, Gilles & Chaturvedi, Aadhaar & Chevalier, Philippe, 2022. "Purchasing together or alone? Tradeoffs for information sharing," International Journal of Production Economics, Elsevier, vol. 252(C).
    18. Zhou, Maosen & Dan, Bin & Ma, Songxuan & Zhang, Xumei, 2017. "Supply chain coordination with information sharing: The informational advantage of GPOs," European Journal of Operational Research, Elsevier, vol. 256(3), pages 785-802.
    19. Behzad Hezarkhani & Greys Sošić, 2019. "Who’s Afraid of Strategic Behavior? Mechanisms for Group Purchasing," Production and Operations Management, Production and Operations Management Society, vol. 28(4), pages 933-954, April.
    20. Lin, Jing & Ma, Xin & Talluri, Srinivas & Yang, Cheng-Hu, 2021. "Retail channel management decisions under collusion," European Journal of Operational Research, Elsevier, vol. 294(2), pages 700-710.
    21. Zhou, Yuan & Xie, Jinxing, 2014. "Potentially self-defeating: Group buying in a two-tier supply chain," Omega, Elsevier, vol. 49(C), pages 42-52.
    22. Pinar Keskinocak & Nicos Savva, 2020. "A Review of the Healthcare-Management (Modeling) Literature Published in Manufacturing & Service Operations Management," Manufacturing & Service Operations Management, INFORMS, vol. 22(1), pages 59-72, January.

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