Unfair allocation of gains under equal price in cooperative purchasing

Cooperative purchasing is becoming more and more common practice. However, many cooperative initiatives end prematurely or do not flourish. Important reasons indi-cated for these problems are directly or indirectly related to the unfair allocation of gains. The purpose of this paper is to analyse causes of unfairness in current cooperative practices, and in particular unfairness resulting from using the Equal Price allocation concept. I suggest that the unfair effects of this commonly used concept are caused by neglecting a specific part of the added value of cooperative initiative members. Moreover, I prove that when using the Equal Price concept organisations will receive fewer gains if they increase their volume past 38% of the total volume of a cooperative initiative. In case of a constant total volume I prove that Equal Price reaches its maximum pay-off when the volume of an organisation equals 25%. I conclude by emphasizing the importance of cooperative members becoming aware of allocation concept problems. Further research will involve possible solutions to these problems

Cooperative purchasing within the United Nations

To support cooperative purchasing within the United Nations we carried out an empirical study in 2004, mainly to define cooperation forms, and to identify and rank motives and critical factors for cooperation. Important reasons to work together turn out to be lower prices and transaction costs, sharing information, and learning. Reasons not to work together are i.e. lack of opportunity or priority to purchase cooperatively. Most of the literature in the area of critical factors focuses on factors such as trust and support. Based on our study, we also emphasize the importance of choosing the right products and services. Furthermore, we observe what we call the hitchhikers’ dilemma. This dilemma deals with small agencies hitchhiking on contracts from large agencies. For large agen-cies there may be no incentive to allow hitchhiking. For small agencies hitchhiking can be very interesting though. Possible solutions to this problem are savings allocation mechanisms. The paper concludes with suggestions for further research

Horizontal cooperative purchasing

Purchasing in groups is a concept that is becoming increasingly popular in both the private and public sector. Often, the advantages such as lower purchase pricese, learning from each other, and reduced transaction costs outweigh set-up and management costs and drawbacks such as disclosure of sensitive information and the fear of free-riding group members. The concept is not always successful though. Still, it has received relatively little attention in management research.\ud \ud In this thesis, we study the establishment and management of purchasing groups. We define purchasing groups as organizations in which horizontal cooperative purchasing takes place. We define horizontal cooperative purchasing as the operational, tactical, and/or strategic cooperation between two or more organizations in one or more steps of the purchasing process by pooling and/or sharing their purchasing volumes, information, and/or resources

Supplier selection requires full transparency

In this paper, we highlight a number of problems arising with a commonly used supplier selection method: the weighted factor score method. We discuss the behavior of this method with respect to weighting, scaling issues, and relative scoring. Assuming that there is no convex dominance, we formally prove that with the same supplier selection method, we can make any supplier win by judiciously choosing the right parameters of the awarding mechanism. This means that any supplier can win if certain parameters are not published in a request for a proposal. This result applies to both absolute and relative scoring methods. Also, we show that the buyer should fully disclose all details of the awarding mechanism to suppliers in order to get better bids. The practical implications of our results are far reaching for (public) procurement: full transparency and disclosure of all details of weights and awarding schemes is not only required to avoid subjectivity in supplier selection, but it also leads to better bids from suppliers

Implications of a classification of forms of cooperative purchasing

Our main objective is to classify different forms of cooperative purchasing, i.e. purchasing groups. Based on a literature review, empirical findings, and new institutional economics we employ a classification: the highway matrix. In this matrix we distinguish five forms of cooperative purchasing according to the ‘influence by all members on the group activities’ and the ‘number of different group activities’. The classification can serve as a guideline for (potential) purchasing groups when a suitable form needs to be chosen. Managerial implications of a classification include an emphasis on differences in organisational structure and critical factors. Research implications include an emphasis on the importance of using a classification, as different forms of cooperative purchasing imply different models and mechanisms

Effects of full transparency in supplier selection on subjectivity and bid quality

In this paper, we highlight a number of problems arising with a commonly used supplier selection method: the weighted factor score method. We discuss the behaviour of this method with respect to weighting, scaling issues, and relative scoring. Assuming that there is no convex dominance, we formally prove that with the same supplier selection method, we can make any supplier win by judiciously choosing the right parameters of the awarding mechanism. This means that any supplier can win if certain parameters are not published in a request for a proposal. This result applies to both absolute and relative scoring methods. Also, we prove that the buyer should fully disclose all details of the awarding mechanism to suppliers in order to receive better bids. The practical\ud implications of our results are far reaching for procurement, both public and otherwise: full transparency and disclosure of all details regarding weights and awarding schemes is not only required to avoid subjectivity in supplier selection, but it also leads to better bids from suppliers

Buying bundles: the effects of bundle attributes on the value of bundling

We consider the situation in which a buyer has to find the optimal degree of bundling for buying goods and services. From a review of the literature we develop attributes associated with bundling. Each of these attributes has an effect on the value of a bundle. Combined, the attributes determine the value of a bundle. We describe how the various attributes of a bundle contribute to the value of a bundle given the context of the buying situation. Based on interviews, a further analysis of bundle attributes and their effects on the bundle value is provided. The results of this analysis can be used to assist in finding the optimal degree of bundling

How to Solve an Allocation Problem?

Game theory proposes several allocation solutions: we know (a) fairness properties, (b) how to develop (c) methods building on these properties, and (d) how to calculate (e) allocations. We also know how to influence the perceived fairness and realization of allocation solutions. However, we cannot explain properly that theoretically fair allocation methods are rarely used.\ud To obtain more insight into these issues we solved an allocation problem in a purchasing cooperative case study by confronting theory with perceptions. We find large theoretical and perception differences and inconsistencies between and within the five steps from a to e. We note that theoretically fair methods tend to be more complex than theoretically unfair methods. In addition, the allocations of some simple methods are perceived fairer than the allocations of complex methods in our case study. To improve theoretical solutions the focus should be on a and c. To influence perceptions the focus should be on b, c, and d. Finally, all five steps are modeled into comparable fairness measures and a general model. Using this model implies that both theory and perceptions are considered in solving allocation problems

Success factors for managing purchasing groups: an empirical survey

In this article, we identify success factors for managing small and intensive purchasing groups by comparing successful and unsuccessful Dutch purchasing groups in a large-scale survey. Transaction costs economics and social exchange theory are used as theoretical frameworks for our broad empirical investigation. We found that the success factors studied that are related to interorganizational trust, the formality of the group, and uniformity of the group members are not success factors for managing purchasing groups. For our data set, the most important success factors are no enforced participation, sufficient total contribution of efforts, all members contribute knowledge, all members rarely change representatives, fair allocation of savings, and communication. We discuss the academic and practical implications of the success factors found

Unfair allocation of gains under the Equal Price allocation method in purchasing groups

Certain purchasing groups do not flourish. A supposed reason for this is a creeping dissatisfaction among various members of a group with the allocation of the cooperative gains. In this paper, we analyze unfairness resulting from using the commonly used Equal Price (EP) method for allocating gains under the assumption of continuous quantity discounts. We demonstrate that this unfairness is caused by neglecting a particular component of the added value of individual group members. Next, we develop two fairness ratios and tie these to fairness properties from cooperative game theory. The ratios show among other things that being too-big a player in a purchasing group can lead to decreasing gains. They can be used to assess if EP is an unfair method in specific situations. Finally, we discuss measures a purchasing group could consider in order to attenuate perceived unfairness. Thereby, the group may improve its stability and prosperity