Impact of non-homogenous distributor's preferred allocation on shortages in hospitals

Purpose – Hospitals procure high volumes of medical supplies through large distributors in order to leverage economies of scale. However, when shortages hit, hospitals incur high penalty costs by purchasing from secondary markets. In this paper, the authors counter the hospital's typical purchasing strategy that a collaborative relationship with a large, Tier I medical supply distributor is beneficial under all conditions. The paper finds that during shortages the more beneficial strategy is for the hospital to add a medium-sized, Tier II distributor who offers a transactional relationship and is willing to provide a “preferred allocation” in return for a pre-committed annual purchase contract. The paper aims to discuss these issues. Design/methodology/approach – The authors assume availability of order volume to be a stochastic process and formulate the problem as a two-stage stochastic programming model, with optimal allocation in the second stage. The authors analyze the first-stage objective function ...