INTERNATIONAL COOPERATIVE PURCHASING How can it be achieved?
Performed for:
Coppa Consultancy & Rijksuniversiteit Groningen
First supervisor Rijksuniversiteit Groningen:
Prof. Dr. D.J.F. Kamann
Co-assessor Rijksuniversiteit Groningen:
Drs. D.F.F.R. Maccow
Supervisor Coppa Consultancy:
Drs. J.H. Meijer
Student:
L.J.M. Tackenkamp Student number. 1576666 Master Business Administration
Operations and Supply Chains Profile Production and Distribution
Arnhem, 30 September 2007
MANAGEMENT SUMMARY
This research has been conducted for Coppa consultancy. They have noticed that the prices for medical supplies are lower in other European countries, especially in Germany. The suppliers that are active on the healthcare market are in most cases global suppliers. For every country they have set national prices, but there are in several cases large price differences between countries. For Dutch hospitals it is impossible to do business with the German offices of a supplier, because the suppliers do not allow this. Therefore, Coppa consultancy decided to research the possibilities for international cooperative purchasing. So that maybe in the future Dutch hospitals can benefit of lower prices by cooperating with for example German hospitals. The goal of this research was to research the possibilities for international cooperative purchasing and to develop a step-by-step plan for achieving this.
In this thesis an analysis of the Dutch and German hospital networks was performed. The reasons for these network analyses are to research and find the causes for the large price differences for medical supplies between Germany and the Netherlands. Before these analyses are performed a literature review is executed. In this literature review international cooperative purchasing is examined from a theoretical perspective. First of all international cooperative purchasing is defined, several forms of cooperative purchasing are introduced and the reasons for and against cooperation are described.
Second, there is also a framework introduced for the achievement of international cooperative purchasing. Finally some network literature is studied and this literature is used for the description of the Dutch and German hospital networks.
The network analyses are performed by using the structure-conduct-performance paradigm. There are several causes identified that explain the price differences between the Netherlands and Germany. On the German market there are large professional purchasing groups active. These purchasing groups share several assets and have a large buying volume and thanks to this large volume they have bargaining power. According to transaction cost economics these German purchasing groups share several assets, the frequency of their activities is very high and therefore is the uncertainty in these cooperation’s low. In the Dutch network there are also purchasing groups active. However, the level of cooperation is much lower compared to Germany.
The presence of these purchasing groups in the German hospital network influence the prices the suppliers set for the German market. Most German hospitals participate in a purchasing group.
Compared with the Netherlands the average size of a German hospital is much smaller. This is an explanation for the fact that German hospitals are purchasing more cooperative. From a resource based view can be concluded that German hospitals have a small size and by cooperative purchasing they can obtain more market power.
The German purchasing groups negotiate for several products every year with their suppliers so the are fully exploiting the benefits of a competitive market. In the Netherlands most hospitals agree on contracts with a longer term. In the Dutch network there are also purchasing groups active. However, the level of cooperation is much lower compared to Germany.
In the Netherlands and in Germany was a new compensation system introduced. The goal of both systems is to increase the transparency of the costs in the healthcare and stimulate competition.
However, in Germany this new compensation system influenced the pressure on costs heavily, more hospitals decided to work with qualitative good but cheaper products. This trend was not notified in the Netherlands.
The German purchasing groups that were interviewed declared that there are possibilities for Dutch hospitals to join these groups. Some of these purchasing groups already have international experience, because they have members from Austria or Italy. These foreign members are not supplied by the German suppliers. The Austrian suppliers deliver the products to the Austrian hospitals, however against the same price level and the same conditions as in Germany. This construction can also be a possibility for the Dutch hospitals. The suppliers see the German purchasing groups as serious partners and therefore they were capable of obtaining these conditions for their foreign participants. The only question was how a Dutch hospital finds the right purchasing group for cooperation. In this thesis is a four step plan introduced for the achievement of international cooperative purchasing. In the first two steps the hospitals must formulate a cooperation strategy. It is very important to investigate the possibilities of international cooperative purchasing thoroughly. Participation in a purchasing group can affect the organization and it is not easy to quit the participation. In the third step, a partner will be selected and in the final step the cooperation is made operational.
It can be concluded that there are possibilities for international cooperative purchasing. One way for achieving this is joining a German purchasing group. This can not be easily achieved, while the suppliers are probably not very cooperative. The cross-cultural differences between the Netherlands and Germany can also cause some problems. International cooperative purchasing is an underexposed subject that can be very interesting for hospitals. Achieving international cooperative purchasing is probable a difficult process that can not be achieved easily. This process needs time, but joining a German purchasing group can be a way for Dutch hospitals to lower the costs. Some hospitals probably do not have the time, capacity or knowledge to explore the possibilities. Coppa consultancy can take an active role in helping Dutch hospitals achieving international cooperative purchasing
ACKNOWLEDGMENTS
Arnhem, October 2007
After six months of research and writing my master thesis is finished. The final phase of this process is writing my acknowledgments. The time passed by very fast. Sometimes, I had some difficult moments, but there were a few people who kept me motivated and on the right track. I want to thank those people for supporting me during this process.
First, I want to thank my supervisor Dirk Jan Kamann for the pleasant cooperation. We had several good discussions about my research. These discussions kept my sharp and made me aware of other perspectives. Second, I would like to my co-assessor Delano Maccow. He had some critical notes on my research proposal and these notes helped my by performing my research.
I also would like to thank Jeroen Meijer of Coppa Consultancy. He has a lot of experience of the Dutch health care and this was very helpful during my research. He checked my thesis several times and suggested some improvements. I also want to thank my colleagues of Coppa Consultancy.
Everybody was very helpful and I have had a great time. Furthermore, I would like to thank Coppa Consultancy for giving me the possibility of performing this research. I want to express thanks to my aunt Wilma Papen for correcting my thesis on grammar and writing mistakes. She also made commends on things that were not clear and that was very useful for me.
Last but not least I want to thank my family and friends for their constant support!
Linda Tackenkamp
CONTENT
CHAPTER 1 THE ORGANIZATION 8
CHAPTER 2 RESEARCH OUTLINE 9
2.1INTRODUCTION 9
2.2MOTIVE 9
2.3PROBLEM STATEMENT 11
2.3.1OBJECTIVE 12
2.3.3RESEARCH QUESTIONS 12
2.3.4RESEARCH JUSTIFICATION 13
2.3.5CONDITIONS AND RESTRICTIONS 14
CHAPTER 3 LITERATURE REVIEW 16
3.1INTRODUCTION 16
3.2INTERNATIONAL COOPERATIVE PURCHASING 16
3.2.1COOPERATIVE PURCHASING 16
3.2.2INTERNATIONAL COOPERATIVE PURCHASING 17
3.2.3WHY WORKING TOGETHER? 18
3.2.4REASONS IN FAVOUR OF INTERNATIONAL COOPERATIVE PURCHASING 19
3.2.5REASONS AGAINST INTERNATIONAL COOPERATIVE PURCHASING 19
3.2.6FORMS OF COOPERATIVE PURCHASING 20
3.3THEORIES FOR ACHIEVING COOPERATIVE PURCHASING 22
3.3.1FRAMEWORK FOR COOPERATION 24
3.4STRUCTURE –CONDUCT –PERFORMANCE PARADIGM 28
CHAPTER 4 METHODOLOGY 30
4.1INTRODUCTION 30
4.2QUALITY CRITERIA 30
4.2.1VALIDITY 30
4.2.2RELIABILITY 31
4.3CASE SELECTION 31
4.4DATA COLLECTION 32
4.5DATA ANALYSES 33
4.6REPORTING 33
CHAPTER 5 NETWORKS ANALYSES 34
5.1INTRODUCTION 34
5.2THE NETHERLANDS 34
5.2.1BASIC CONDITIONS AND THE GOVERNMENT POLICY 34
5.2.2STRUCTURE 35
5.2.3CONDUCT 37
5.2.4PERFORMANCE 37
5.3GERMANY 38
5.3.1BASIC CONDITIONS 38
5.3.2STRUCTURE 38
5.3.3CONDUCT 40
5.3.4PERFORMANCE 41
5.3.5GERMAN PURCHASING GROUPS 41
5.4DIFFERENCES BETWEEN THE GERMAN AND DUTCH NETWORKS 45
CHAPTER 6 STEP-BY-STEP PLAN 48
6.1INTRODUCTION 48
6.2POSSIBILITIES FOR INTERNATIONAL COOPERATIVE PURCHASING 48 6.3THE ACHIEVEMENT OF INTERNATIONAL COOPERATIVE PURCHASING 50
6.3.1STEP 1STRATEGIC DECISION 51
6.3.2.STEP 2CONFIGURATION OF A PURCHASING GROUP 51
6.3.3STEP 3PARTNER SELECTION 52
6.3.4STEP 4MANAGING A PURCHASING GROUP 53
CHAPTER 7 CONCLUSIONS AND RECOMMENDATIONS 54
7.1LITERATURE REVIEW 54
7.2NETWORKS ANALYSES 54
7.3POSSIBILITIES FOR INTERNATIONAL COOPERATIVE PURCHASING 56
7.4STEP-BY-STEP PLAN 57
DISCUSSION 59
BIBLIOGRAPHY 61
ARTICLES, PUBLICATIONS AND OTHER REPORTS 61
BOOKS 63
WEBSITES 63
APPENDIX 1 INTERPELLATION QUESTIONS 65
APPENDIX 2 DUTCH PURCHASING GROUPS 68
CHAPTER 1 THE ORGANIZATION
Coppa consultancy placed a vacancy for this assignment on their website and that was the starting point for this research. In this first chapter the principal of this research will be introduced, so it becomes clear in what kind of business the company is operating.
Coppa Consultancy
The foundation for Coppa was laid in 1998 by Marco Plasier and Bas Bouwman during their study.
They wanted to set up a consultancy agency that specializes in purchasing, logistics and collaboration.
During their studies they had skilled themselves in these three specialties. Their motivation for setting up their own business was to have the freedom to do the things that they liked and to execute the things that they perceive as important. As from the start their goal was to develop the authority on the area of purchasing, logistic and collaboration. In the first years they worked for different kind of companies, for example in the automotive industry, ICT and telecom sector. For Coppa it was important to obtain more work experience, as to become a serious and important player. From 2000 Coppa started to grow, not only the number of assignments, but also the first employees were hired.
In 2000 Coppa acquired their first assignment in the healthcare; they had to restore the purchasing and logistic processes of a hospital. During this assignment they noticed that in the healthcare sector were various possibilities for improvements. Another important benefit of the healthcare is that the sector is not sensitive for tendency. From 2001 Coppa decided to focus on two business units, namely the healthcare and the (chemical) industry. For these two units, several tools were developed. At that moment eight people worked for the company. Nowadays approximately thirty-five people work for Coppa. In 2006 a new business unit was set up, namely business services, they work for insurance and pension companies. The mission up to 2010 is to become an agency which employs 70 to 100 consultants are working for.
Healthcare
From its establishment the business unit healthcare gained a lot experience in this sector. For approximately fifty hospitals Coppa has executed assignments. Besides hospitals, Coppa works for other healthcare institutions for example nursing homes, health agencies and home care organizations.
The areas of expertise of Coppa are purchasing, logistic and collaboration. Examples for assignments on the area of purchasing are saving programs, setting up sourcing strategies and solutions for ICT problems. Redesigning distribution centers, optimizing internal processes and measuring supplier performance are examples of logistical assignments. On the area of collaboration Coppa executed several assignments for example supervising the cooperation between the purchasing departments of hospitals.
CHAPTER 2 RESEARCH OUTLINE
2.1 Introduction
In this chapter the framework of this research will be outlined. Elements of this chapter are the motive for this research, the problem statement and the conditions of this research. The method of de Leeuw (2005) is used as set up of this research outline.
In the previous chapter Coppa consultancy is briefly introduced. This research is executed for the business unit, healthcare of the company. As already mentioned Coppa holds several hospitals and other healthcare organizations as their clients. The last years they have gained a lot of experience in this sector, by doing assignments and by fulfilling interim jobs. For a consultancy agency it is important to watch trends and to anticipate these trends. A current trend is the focus on international purchasing in the healthcare. Nowadays hospitals purchase most of their products nationally.
However, it is noticed that some products are up to fifty percent cheaper in for example Germany.
Especially for medical supplies the differences in price are enormous.
2.2 Motive
In the previous paragraph is already mentioned that it is important for Coppa to watch and anticipate trends in their market. It is noticed that the prices for some medical supplies in Germany are sometimes up to fifty percent cheaper in Germany. There has been attention for this fact, because in the Dutch Lower house some questions are asked to the minister of health about these prices differences (See appendix 1 for interpellation questions). In June 2007 the Volkskrant also paid attention to these price differences. The title of this article was: Dutch healthcare suffers false competition’. The main issue of this article was that the pharmaceutical industry abuses the rules of competition and therefore the healthcare becomes more expensive in the Netherlands.
On the German market are large purchasing groups are active, for example groups with more than hundred participating hospitals. These purchasing groups employ the benefits of economies of scale and this can be a cause for these price differences. In the Netherlands there are no purchasing groups of this scale active. Coppa (2006) has investigated these price differences for a Dutch hospital. They compared the purchase prices of the Dutch hospital with the purchase prices of a German purchasing group. Some items were identical, so the comparison could be easily realized. For other products there was not a completely identical item, but a comparable product available. The results of these price comparisons are presented in the following table (2.1).
From this table it becomes clear that there are large price differences between Dutch hospitals and German purchasing groups. Dutch hospitals can obtain large savings if they successfully join in a purchasing group.
Table 2.1: Comparison Dutch and German prices
Dutch hospital
German
purchasing group Saving in € Percentage (%) Identical product
€ 3.537.626,83 € 3.007.533,08 € 530.093,75 15 Comparable
product € 1.893.656,65 € 1.046.139,05 € 847.517,60 45
Total € 5.431.283,48 € 4.053.672,13 € 1.377.611,35 25 Source: Coppa 2006
Reasons against international purchasing
In the research ‘Globalization of Dutch Healthcare’ (Coppa 2006) several reasons are introduced why Dutch hospitals are not purchasing internationally. In this research there is made a distinction between rational and emotional reasons. Examples of rational reasons are the following:
• Some hospitals are focused on their internal organization and are not focused on external processes.
• Other hospitals prefer regional contacts in stead of international contacts
• Some hospitals think that it is impossible to purchase items outside the Netherlands, because suppliers will protect their own national markets
In the research there are also examples of emotional reasons against international purchasing presented, namely:
• For some hospitals the step to buy international is too big, they see it as a ‘scary enterprise’
• Some hospitals think that the suppliers are large and powerful companies and they do not want that they buy international.
• An other reason that is mentioned is that the specialists of the hospitals do not want that their products are bought abroad
• They do not speak their languages well and see this as a problem.
Still, there are hospitals how are interested in international purchasing. In the research of Coppa (2006) this was investigated. They informed if the hospitals have a vision, strategy and a plan for realizing international purchasing. The results of this research are presented in the following table (2.2).
Table 2.2: Image of Dutch hospitals about international purchasing
No vision, no strategy, no plan 55 percent
A vision, but no strategy or plan 23 percent
A vision and a strategy, but no plan 9 percent
A vision, a strategy and a plan 5 percent
Plan is set in action 3 percent
Plan is fully operational 5 percent
Source: Coppa 2006
From this research becomes clear that there are only a few hospitals that purchase international. There is also a large part that is not yet interested in international purchasing, still this can be changed if they see the benefits. It is already mentioned that the prices for medical supplies in Germany are significant lower than in the Netherlands. If Dutch hospitals want to benefit of these lower prices, they must participate in purchasing groups. With participation in these groups they can exploit the benefits of larger buying power.
Currently Coppa and insurance company Uvit are investigating if it is possible to purchase pacemakers in foreign countries of the same quality level but against lower prices. They are doing this, because they want to let Dutch hospitals profit of the lower prices in for example Germany. They want to attract attention for the price differences on the European market between health supplies. They are also lobbying at the Dutch government and European institutions to make them aware of the current practices of the suppliers, because those practices are not fair.
Coppa have set up this research, because they want to know if there are possibilities for Dutch hospitals to join German purchasing groups. This can be a solution for Dutch hospitals to let them profit of lower prices. They also want to know, when it is possible to join a German purchasing group, how do you realize such cooperation?
2.3 Problem statement
According to de Leeuw (2005) a problem statement is a careful representation of the questions one attempts to answer by doing research, the reasons why the answers are important and the preconditions of the research. The problem statement describes ‘what we want to know and why’ or in a more managerial way, ‘what we want to produce and what for’. The problem statement links the specific problem in a practical situation with the existing theory. According to de Leeuw (2005) the problem statement consists of three elements, namely an objective, the research questions and the preconditions. For the quality of the problem statement it is important to meet some requirements, namely relevance, the ability to research and efficiency (de Leeuw 2005).
Relevance is determined by careful examination what the true value of this research is when it is finished (de Leeuw 2005). In this case the relevance of the research is straightforward, namely it will
become clear if it is possible to set up cooperation between Dutch and German hospitals and how that can be achieved.
The ability to research raises the question whether you are capable to produce a reliable product within the conditions (de Leeuw 2005). In the following paragraph the conditions will be introduced. Looking at these conditions it can be concluded that there are no unrealistic requirements set up for this research and that it should be possible to fulfill this qualification.
The third and final qualification is efficiency. This is the question whether there is a reasonable relation between the costs and the benefits (de Leeuw 2005). The results of the pre-research that was performed by Coppa showed that large savings can be obtained. The goal of this research is to show how cooperation between Dutch hospitals and German purchasing groups can be realized. The research is efficient, because the results of the research can lead to savings.
The problem statement is an important element of the research because it gives direction to the research. It is formulated in an agreement with Coppa consultancy and the Rijksuniversiteit Groningen. In the following paragraphs the objective, research questions and conditions will be introduced.
2.3.1 Objective
The objective is an element of the problem statement. In the objective is fixed for whom the research is executed, what the outcome of the research should be and why this is important (de Leeuw 2005).
The relevance of the research must become clear from the objective. As already mentioned Coppa gave commission for this research. The focus of this research is on exploring the possibilities for international cooperative purchasing in the healthcare sector, so Dutch hospitals can profit of the lower German purchase prices in the future. For this research an objective has been formulated.
The objective of this research is to develop a step-by-step plan for Dutch hospitals to achieve international cooperative purchasing.
This step-by-step plan is written for Coppa consultancy, so they can present this plan as a service to their customers. This is more the practical relevance of this research. Coppa Consultancy gave commission for this research; however there is another stakeholder in this research, namely the Rijksuniversiteit Groningen. They are interested in the academic relevance of this research. Several articles have been published on cooperative purchasing; however all these articles are focused on national cooperation. There is little written about international cooperative purchasing. The academic relevance for the university lies in the fact of how international cooperation can be established.
2.3.3 Research questions
De Leeuw (2005) describes that the main research question must be linked with the objective of the research, but it must be formulated in terms of accessible for research. Another element that de Leeuw
(2005) mentioned is that the research question must connect with the theoretical framework of the research. The main research question set up for this research is as follows:
How can international cooperative purchasing between Dutch and German hospitals be achieved, so that Dutch hospitals can profit of the lower German purchase prices?
This main research question is the starting point for the other research questions. These research questions are necessary to give an answer to the main question. Firstly, it is necessary to explain international cooperative purchasing as to give this thesis an academic basis. Therefore, the first and second research questions are proposed. Before cooperation between Germany and the Netherlands can be achieved, the networks in both countries must be mapped. Research question three is proposed to find an academic basis for the achievement of this network analyses. Research question four and five must explain how the German and Dutch network is structured in practice. The differences between these networks are also very important, therefore research question seven is proposed.
Finally, a step-by-step plan for the achievement of international cooperative purchasing must be drawn, so the seventh research question is set up. In the following paragraph will be described which sources are used and how these sources are opened up. The research questions are as follows:
1. What does international cooperative purchasing imply and which forms of cooperative purchasing do exist?
2. Which models exist in the theory to achieve international cooperative purchasing?
3. On the basis of which theory can the Dutch and German purchasing network be mapped?
4. How is the Dutch purchasing network for hospitals structured and which stakeholders are there?
5. How is the German purchasing network for hospitals structured and which stakeholders are there?
6. What are the differences between the Dutch and the German purchasing networks for hospitals?
7. Which steps must be taken when a Dutch hospital wants to cooperate successfully with a German hospital?
2.3.4 Research justification
To give an answer to the first three research questions a literature review is performed. This literature review contains several aspects, firstly explaining international cooperative purchasing. Secondly, a theoretical framework for the achievement of cooperative purchasing is introduced. Finally, some literature about network analyses will be introduced.
The analyzed literature will be applied in practice, so as to answer the last four research questions. To obtain information from practice, some case studies are performed. These case studies were required to be able to analyze the purchasing situations in Germany and the Netherlands and a recommendation for the route to achieve international cooperative purchasing could be given. As a result the step-by- step plan for the achievement of international cooperative purchasing will be both academically grounded and provide a practical framework for implementation.
As already mentioned some case studies will be performed to obtain information for this research.
Leonard-Barton (1990) defines a case study as follows:
‘A case study is a history of a past or current phenomenon, drawn from multiple sources of evidence.
It can include data from direct observation and systematic interviewing as well as from public and private archives. In fact, any fact relevant to the stream of events describing the phenomenon is a potential datum in a case study, since context is important.’
Voss et al. (2002) mentioned that case studies are suitable for research, when exploration is needed to develop research ideas and questions. Therefore, case studies are a useful method for this research, while this research has an explorative character. There is no information about the reasons for the price differences between Germany and the Netherlands and there is no study performed in exploring the possibilities of international cooperative purchasing.
There are a few case studies performed in Germany and in the Netherlands. These case studies must clarify the purchasing process for hospitals in Germany and in the Netherlands, so the differences and similarities can be explained. Moreover, the results of the studies must make clear if there are possibilities for international cooperative purchasing and how this can be achieved. This information is going to be obtained by interviewing German purchasing groups. There are only a few case studies performed, because the fewer the case studies, the greater the opportunity for depth of observations (Voss et al. 2002). The methodology of the empirical research will be explained extensively in chapter four.
2.3.5 Conditions and restrictions
De Leeuw (2005) describes that the conditions and restrictions set the boundaries for the research results and methods. Elements of these conditions are the requirements that Coppa consultancy and the Rijksuniversiteit Groningen have for the process of this research and the results. The following five conditions and requirements are set up for this research.
This research is completely focused on international cooperative purchasing between Dutch and German hospitals. Germany is selected for this research because after a pre-research that Coppa carried out appeared that the purchase prices for medical supplies are significant lower. Furthermore the choice is geographical. When in the future cooperation is going to be established Germany is the best option. This analysis includes no other countries because of the fact that the research would have become too extensive.
In the pre-research that Coppa has carried out, prices of several items that hospitals purchase are compared. It is too extensive to research the possibilities for international cooperative purchasing for all kind of items. There is decided to focus on the medical supplies, for example pacemakers and implants. These medical supplies are in some cases strategic items for hospitals, these items have a high value and there are not so many suppliers. That is why it is important for these items to realize cooperation.
The objective of this research is to develop a step-by-step plan for reaching international cooperative purchasing. The plan must be set up in such a way that it is applicable in the healthcare sector. This is an important condition for this research.
Coppa has set up a contract for this research and this term ends in the middle of October. At the end of this period the research and the thesis must be finished. The timeframe for this research was five months, therefore it was impossible to get in contact with more purchasing groups in Germany.
It is decided that the results of the research will be presented in this thesis. The Rijksuniversiteit Groningen set as condition that the thesis contains a literature review, Coppa is also interested in this review.
CHAPTER 3 LITERATURE REVIEW
3.1 Introduction
The focus of this chapter will be on the theories and models that will be used in this thesis. The most important theories that are the foundations for this research will be described and visualized. In this research the depicted theories will be the guiding principles for the network analyses and the model for international cooperative purchasing.
3.2 International cooperative purchasing
The main question of this research -which is described in the previous chapter- contains several definitions. In the following paragraphs will be explained what international cooperative purchasing means. There are several articles published about cooperative purchasing and purchasing groups, but, these articles are all focused on national networks. First will be explained what cooperative purchasing and purchasing groups stand for, subsequently international cooperative purchasing will be described.
3.2.1 Cooperative purchasing
In 1984 Cleverly and Nutt noted that relatively few has been published about cooperative purchasing.
However the absence of literature has not retarded the formation of group purchasing organizations. In the following two decennia several articles were published about cooperative purchasing. Still, several aspects of cooperative purchasing are not researched. Schotanus and Telgen (2007) described in their article which gabs still exist in literature, for example, on communication and innovation. Rozemeijer (2000) also makes a statement about these gabs. He mentioned that both in literature and in practice there is still limited knowledge on how to realize sustainable purchasing synergy on a corporate level (Rozemeijer 2000). This research is not focused on corporations but on the healthcare sector, nevertheless there is no straightforward approach found for realizing cooperative purchasing.
In literature are several synonyms for cooperative purchasing. Essig (2000) made in his article an overview of the synonyms that are used in academic articles for cooperative purchasing. For example, group purchasing; purchasing synergy, purchasing alliances, buying groups, consortium buying, joint purchasing and pooled purchasing (Essig 2000). The differences in definitions can be explained because the written articles are applicable in different industries. One of the definitions that Essig (2000) mentioned was purchasing synergy. Rozemeijer (2000) defines purchasing synergy by: ‘The value that is added when two or more business units join their forces and/or share resources, information, and/or knowledge in the area of purchasing’. For this research this definition is not suitable, because it is more focused on intra-company purchasing. The focus of this research is on inter-organization purchasing. Schotanus and Telgen (2007) gave in their article a definition for cooperative purchasing:
‘Cooperative purchasing is defined as the cooperation between two or more organizations in a purchasing group in one or more steps of the purchasing process by sharing and/ or bundling their purchasing volumes, information and/or resources.’
In this definition it becomes clear what cooperative purchasing includes and it is applicable for inter- organizations purchasing. Exploring what is meant by cooperative purchasing is important, because this helps understanding what this research is aiming for. In the definition of cooperative purchasing is a new definition introduced, namely purchasing group. Schotanus and Telgen (2007) have also defined a purchasing group:
‘A purchasing group is defined as an organization in which cooperative purchasing processes take place. A purchasing group consists of dependent or independent organizations that share and/or bundle together in order to achieve mutually compatible goals that they could not achieve easily alone.’
Nollet and Beaulieu also proposed a definition for purchasing group, namely a formal and virtual structure which makes the consolidation of purchases for many organizations possible (Nollet and Beaulieu 2003). The definition of Schotanus and Telgen (2007) will be used during this research, because it is more recent. Still, the subject of this research is international cooperative purchasing. The literature that is published about cooperative purchasing is focused nationally. In the following paragraph will be explained what international cooperative purchasing stand for.
3.2.2 International cooperative purchasing
The difference between international cooperative purchasing and (national) cooperative purchasing is that the partners in the purchasing group are settled in different countries. Therefore there are some matters that the organizations must pay attention to. International cooperative purchasing can be difficult, because there are probably differences between languages, procedures and culture between Germany and the Netherlands (Jost et al. 2005). During the literature analyses an article about international purchasing alliances was found. Ellram (1992) defines alliances as follows:
‘A formal, long-term relationship between two or more firms, which links some aspects of the firm’s business toward a common end and includes sharing of information and the risks and the rewards of the relationship.’
This definition of alliances can be compared with the definitions of cooperative purchasing and purchasing group from Schotanus and Telgen (2007). The similarities are that they both focus on a relationships or cooperation between two or more firms. They mention both the same goal of this relationship, namely sharing information, resources, risks of volume. Because of these similarities the literature of alliances can be used for this research. Essig (2000) mentioned in his article that there are several synonyms for cooperative purchasing and purchasing groups. One of those synonyms is purchasing alliances.
Ellram (1992) makes a remark about international purchasing alliances by saying: ‘International alliances deal with relationships where firms are headquartered in different countries’ (Ellram 1992).
Therefore can be concluded that the definition of cooperative purchasing that will be used in this research from Schotanus and Telgen (2007) needs an addition so it becomes fully applicable in this research:
‘International cooperative purchasing is defined as the cooperation between two or more organizations in a purchasing group in one or more steps of the purchasing process by sharing and/
or bundling their purchasing volumes, information and/or resources. The organizations can be located in different countries’
3.2.3 Why working together?
Why should organizations work together? This question can be answered from three economic theories, namely the Transaction Cost Economics (TCE) (Williamson 1979) and the Resource Based View (RBV) (Wernerfelt 1984) and Neo-Institutionalism (Dimaggio and Powell 1983). First the TCE will be described. This paradigm puts that an organization must think at every chain or facet about what would be the cheapest or most optimal organizational form for that specific situation (Kamann 1999). Transaction cost economics would say that when the total transaction costs of the actors involved are lower when they work together, they would choose for cooperation (Kamann et al. 2004).
There can be distinguished three characteristics that determine the transaction cost paradigm, namely asset specific, uncertainty and frequency (Kamann 1999).
The RBV is focused on the firm’s strengths (Slack and Lewis 2002). For organizations it is difficult to chance the external market, it is difficult to influence this, therefore, organizations must focus on the development of their resources and capabilities. From a resource-based view organizations are cooperating, when none of the participating actors has the strategic assets considered to be of importance, for example, scale in production or market power, together they do have them (Wernerfelt 1984). The participating actors are able to focus on their own core competences, when they externalize their strategic assets (Kamann et al. 2004).
From a neo-institutionalism perspective is mentioned that actors work together because it is the thing to do these days in purchasing management (Dimaggio and Powell 1983). The three economic theories support cooperative purchasing, still, not everybody is purchasing together. There are three explanations why firms are not cooperating. First, Kamann et al. (2004) stated that large and powerful companies do not have –nor feel – the need to go together, they expect that especially the smaller actors feel the need to organize market power and scale effects. Second, it is not easy to achieve successful cooperation, while it is very important to build in trust in the relationship, but this is not very easily to achieve (Vangen and Huxham 2003). Only relationships with full commitment on all sides endure long enough to create value for the partners (Kanter, 1994). The third and final explanation for why firms are not always cooperating is that there are cultural differences. In this thesis especially the cross-cultural differences are important, these differences between cultures can make it difficult to successful cooperate. In paragraph 3.3.1 will be described which cross-cultural differences there are between the Netherlands and Germany.
3.2.4 Reasons in favor of international cooperative purchasing
Several authors have mentioned reasons why organizations should join a purchasing group and what the advantages and disadvantages for organizations could be. These reasons and benefits will be described in this paragraph. By joining a purchasing group cost savings can be obtained (Aylesworth 2003; Essig 2000; Johnson 1999; Jost et al. 2005; Nollet and Beaulieu 2005; Schotanus and Telgen 2007). However, there can be cost saving obtained in several ways and there are not only financial benefits or reasons for joining a purchasing group. An organization which is interested in cooperative purchasing should not only aim for cost reduction, while cost savings as the only reason for entering a purchasing group seldom seem to provide the basis for a productive and sustained cooperation (Kanter 1994). It is necessary to make a remark, while joining a purchasing group is not proven to be efficient.
Schotanus and Telgen (2007) noticed that this is a gab in literature.
According to the definition of international cooperative purchasing, three important elements can be shared in a purchasing group, namely the sharing of information, resources and volume. These three elements can be the motivation for hospitals to join a purchasing group. The sharing of information for example can include sharing market- and product information, best practices and the jointly formulation of specifications, contracts and purchasing conditions (Schotanus et al. 2004). Members of purchasing groups can reduce the administrative costs, because the negotiation is performed by only one organization (Essig 2000; Nollet and Beaulieu 2005).
With the sharing of resources is meant jointly filling in the planning of employees and other resources (Schotanus et al. 2004). Sharing of resources can create value simply by exposing one set of people to another (Rozemeijer 2000).
Price reductions, improved purchasing conditions and increased purchasing power can be obtained by sharing volume (Schotanus et al. 2004). The members of purchasing groups can obtain better conditions, because they have additional power in their negotiation with suppliers (Nollet and Beaulieu 2005; Doucette 1997). In several articles is mentioned that achieving economies of scale by leveraging collective volumes is an important benefit (Aylesworth 2003; Essig 2000; Johnson 1999;
Jost et al. 2005; Kamann et al. 2004; Nollet and Beaulieu 2005; Rozemeijer 2000; Schotanus and Telgen 2007).
3.2.5 Reasons against international cooperative purchasing
In chapter two there are reasons presented why hospitals are not interested in international cooperative purchasing, this was investigated by Coppa (2006). During the literature analyses more reasons against joining a purchasing group are found, namely:
• The coordination of the purchase process becomes more complex when large numbers of people are involved and the scope of the project enlarges; (Aylesworth 2003; Schotanus et al. 2004)
• Control diminish and the chance exist that current specifications and suppliers must be released;
(Aylesworth 2003;Schotanus et al. 2004)
• By the large number of people involved and the necessary appointments, the flexibility, independence and the power to react rapidly on changes in the market diminishes; (Aylesworth 2003;Schotanus et al. 2004)
• Resistance of suppliers against cooperative purchasing; (Schotanus et al. 2004)
• Fear for sharing sensitive information and ‘parasites’ that profit on a disproportionate way of the profits and charges of cooperative purchasing; (Schotanus et al. 2004)
• The internal resistance and differences between possible partners in size, commitment or experience are too large to obtain successful cooperative purchasing; (Schotanus et al. 2004)
Every hospital must decide for itself whether the advantages are larger than the disadvantages.
However, not every hospital wants to reach the same level of cooperation, there are differences in intensity and there can be large differences in the characteristics of the purchasing group. In the following paragraph will be described which forms of cooperative purchasing exist.
3.2.6 Forms of cooperative purchasing
Several forms of cooperative purchasing can be distinguished. In this paragraph these different forms will be introduced. The form of structure of the purchasing group determines the success. The fit between members is relatively easy to achieve in the public sector, but it is the variance between structures that may shift the consortium in different directions (Aylesworth 2003).
Nollet and Beaulieu (2005) explained two types of purchasing groups. First, there is the co-operative structure, where the purchases to be performed by the group are distributed among members. Second, there is the third-party structure, which is a distinct organization negotiating and writing contracts according to a mandate given by the members (Nollet and Beaulieu 2005). Leenders and Fearon (1997) note two variations of purchasing cooperatives, joint buying and formal contractual arrangement where several groups agree to fund a separate cooperation agency. These two variations of Leenders and Fearon (1997) are comparable to the two types of Nollet and Beaulieu (2005).
Aylesworth (2005) has differentiated five structural models of cooperative purchasing. The first is the local network, where one or more institutions join together to obtain better pricing, share information and in some cases, share resources (Aylesworth 2005). The second is volunteer confederation, this is the most common model of collaboration noted in the study whereby purchasing managers carry out competitive sourcing based on needs defined by the participating institutions (Aylesworth 2005). The third model that Aylesworth (2005) noted is the regional purchasing agency; this agency provides services to government bodies by a centralized authority. The member-owned service bureau is the fourth model that is mentioned by Aylesworth (2005), this occurs when two or more institutions create a separate entity to provide services to the participating organizations. The final model that is noted by Aylesworth is the for-profit enterprise, whereby the firm is an agent for the clients by negotiating price and services bases on the same aggregate demand and charges a commission for its services. After pre-research appeared that there are no purchasing groups active in the Netherlands or in Germany that are working on a for-profit basis.
Kamann, Van Der Vaart and De Vries (2004) have described in their paper ‘Joint purchasing: theorie and practice’ three different forms of cooperation. The first form is the cooperative; the characteristics of this form are counterbalancing power of large suppliers and obtain scale effects (Kamann et al.
2004). The second form that they have distinguished is the consortia. These consortia are established for jointly acquiring a contract to develop, design and construct a product or sometimes consortia come together to take-over a company. The third form that the authors have distinguished in the long- term joint purchasing consortia with involved actors (Kamann et al. 2004). These consortia come together with a distinctive purchasing goal, have a medium- to long term time perspective and do not externalize the purchasing activity to a separate entity but remain involved (Kamann et al. 2004).
Schotanus and Telgen (2007) have also depicted five forms of cooperative purchasing. These forms are more applicable for this research, while they distinguish between the term of the cooperation, the influence of the members on the group activities and the number of different group activities.
Schotanus and Telgen (2007) distinguish piggy-backing groups, third-party groups, lead buying groups, project groups and programme groups. For these forms they have set up a high-way matrix, in this matrix the characteristics of the different cooperative purchasing forms are presented. This matrix has two axes, namely the influence by all members on group activities and the number of different group activities. The matrix is added to this thesis as figure 3.1.
Figure 3.1: Organizational forms of cooperative purchasing
Source: Schotanus and Telgen (2007)
This matrix is useful for this research, while it can be used for describing the existing German purchasing groups. An additional benefit of this model is that every form is more advanced than the previous. The simplest form is piggy backing, for example the total gains of the members are low and the influences of all the members are low (Schotanus and Telgen 2007). The most extensive form is the programme group, within this form the commitment of the members is high, the total gains for all members are high and the expected life span of the group is long (Schotanus and Telgen 2007). The typology of Schotanus and Telgen (2007) and the three forms of cooperation of Kamann et al. (2004) will be used in this thesis, because these forms are most applicable for the description of the Dutch and German situation.
3.3 Theories for achieving cooperative purchasing
After describing what cooperative purchasing is by mentioning the advantages and disadvantages and the different forms of cooperative purchasing, it is not clear how international cooperative purchasing can be achieved. The aim of this study is to set up a step-by-step plan for Dutch hospitals who want to join German purchasing organizations. In literature there is no straightforward step-by-step plan published for the achievement of international cooperative purchasing. There are studies performed which investigate the development of cooperative purchasing and purchasing groups, for example D’Aunno and Zuckerman (1987), Johnson (1999) and Nollet and Beaulieu (2003). Still, these studies do not describe how international cooperative purchasing can be achieved, but describe the evolution or the life cycle of cooperative purchasing. Ford (1980) described that the development of relationships and setting up cooperation depend on four criteria, namely experience, uncertainty, distance and commitment. It is not easy to set up cooperation between independent organizations. This process of developing such a change between the organizations and finally setting up cooperation depends on the experience the organizations have with each other (Ford 1980). The reduction in uncertainty, decrease in the distances in the relationship and the growth of commitment (Ford 1980).
However, these factors describe that it is not easy to set up cooperation, but these factors do not describe how to do this.
By defining international cooperative purchasing, a definition of alliance management is used.
Therefore, during this research literature about the formation of alliances is studied, because there is an absence of literature about the formation or achievement of international cooperative purchasing. It showed that there are in literature of strategic alliance management frameworks developed for the formation of alliances. Two of these models are selected, because they have a clear structure and consist of a step-by-step plan for the achievement of strategic alliances. The first model is developed by Spekman et al. (1998) and consists of seven steps. The authors have conceptualized cooperating as a process over time and that it consists of several phases of a life cycle. This life cycle is showed in the table (3.1) below:
Table 3.1: Life cycle of cooperation
Anticipation Engagement Valuation Coordination Investment Stabilization Decision
Characteris- tics of a life cycle stage
Pre-alliance Competitive needs and motivation
emerge
High energy Complementarity
Congruence Strategic potential
Financial focus Business
cases Analysis
Internal selling
Operational focus
Task orientation Division of
labor Parallel activity
Hard choices Committing
Resource reallocation Broadening
scope
High interdepen-
dence Maintenance Assessment of
relative worth and contribution
Where now?
Key business activity
Partner search
Partner identification
Valuation Initiating
Coordination Interfacing
Expansion Growth
Adjustment Re- evaluation Role of
alliance manager
Visionary Strategic sponsor Advocate Networker Facilitator Manager Mediator
Source: Spekman et al. 1998
The table shows the seven steps of the model for the formation of cooperation. In the table the characteristics of the several phases can be found. The model starts with partner search, continuous with the identification of potential partners, setting up business cases, commitment to the alliance and finishes with evaluation. The other model that is derived from strategic alliance management is developed by Bronder and Pritzl (1992). This conceptual framework for cooperation is added below in figure 3.2. in the framework of Bronder and Pritzl (1992) there are two important decisions that have to be made before the third phase, partner selection begins. The first phase includes an analysis of the current situation, identifying the strategic cooperation potential and evaluating the value drivers. In the
Figure 3.2: Conceptual framework for cooperation
Source 1 Bronder and Pritzl 1992
