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

Qiaohai (Joice) Hu (), Leroy B. Schwarz () and Nelson A. Uhan ()
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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

Manufacturing & Service Operations Management, 2012, vol. 14, issue 1, 7-23

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.

Keywords: supply-chain management; healthcare products; group purchasing organizations (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:14:y:2012:i:1:p:7-23

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