Group Purchasing Organizations Provide Great Procurement Opportunities
Membership in a Group Purchasing Organization (GPO), as part of your supply chain strategy, can have multiple advantages for your procurement department…and your overall business. You can add to the old ‘safety in numbers’ adage, ‘purchasing power in numbers.’ In a time when procurement managers are dealing with shrinking margins, increased competition, and the need to negotiate more advantageous terms and prices, GPOs (also known as co-ops, buying groups, consortiums, and other terms) give companies of all sizes a chance to compete with their largest competitors.
By aggregating the purchasing power of large groups of customers, a successful GPO is able to negotiate competitive pricing from multiple vendors for a wide variety of products and services. In addition, since all billing is centralized through the GPO, your invoice and payment processes become more efficient and less labor-intensive. Usually one check covers all of your purchases. GPOs are hardly a recent phenomenon. In 1910, the first healthcare GPO was created in New York and healthcare has been a dominant participant in this type of procurement ever since. Today, many different industries are taking advantage of these groups, especially in the food, industrial manufacturing, and legal sectors.
And, although the perception is that smaller businesses would benefit the most from this manner of procurement, a Spend Matters study found that 15-20% of Fortune 1000 companies avail themselves of some form of buying consortium. So why isn’t every business “buying into” a buying group? It seems like a no-brainer. Someone outside of your organization is doing the sourcing, contract management, supplier management, and payments for you, while leveraging the purchasing power of the group to get better pricing than you could get on your own. This is especially true when it comes to indirect spend. Often decentralized and fragmented, these operational expenditures can take a disproportionate amount of time to oversee, affecting the amount of time you need to focus on negotiating your direct spend.
Yet, there are a number of issues that make procurement teams reticent about joining a GPO; among these, a sense that no one can negotiate as well as you and your team; that the supplier base is limited to those vendors the GPO has contracted with; that pricing may not be the same throughout different regions of the country; and that new hardware and software may be needed, which will entail significant IT involvement. Breaking down the barriers For each of the concerns listed above that may cause companies to be overly cautious about joining a GPO, there are easy assurances. First and foremost, before anything else, you need to make sure that the buying group you join has enough members to allow for significant savings. But once you’ve done that, here are the answers to any reservations:
- I can negotiate better on my own – Maybe you’re a great negotiator, but is the best use of your time negotiating and managing contracts with hundreds of different vendors involving myriad products and services? A good GPO has a supply management team with domain expertise in a wide variety of areas and good relationships with many large suppliers. No matter how good you are, it’s going to be hard to compete with the volume buys made by large corporations and buying groups. And when exceptions or disputes arise, the GPO has the responsibility of resolving any issues.
- Supplier base is limited – Since GPOs regularly represent companies across the entire country, they traditionally negotiate contracts with suppliers that have distribution capability that covers that wide a range. That encompasses most major suppliers, and probably involves most of the products and services you need, including office and warehouse supplies, uniforms, MROs, travel, and more. Will there be the one-off you need to handle on your own? Yes, but those should be few and far between.
- Pricing may not be the same for everyone and everywhere – With contract pricing and price file validation, members get consistent pricing every time they purchase from an approved supplier, regardless of where the purchase is made. And this reliability allows procurement specialists to accurately forecast spend.
- New hardware and software are needed, which means high upfront costs – Since members’ ERP systems are connected to the GPO’s technology platform, there is no need for any investment in IT and manpower. You are able to make straight-through purchases with suppliers, just as you always have, except now you don’t have to validate pricing, search for documentation, go through multiple levels of invoice approval, handle disputes, and manage rebates. It’s all done for you. You just place the order and make one payment.
There are two additional benefits to being a member of a GPO. First, their technology platform gives you access to valuable analytics and insight. With the full visibility these platforms provide, you’ll now know what you’re spending, month over month, year over year, and that gives you the ability to forecast. Second, you bid a fond farewell to the inefficiency, inaccuracy, and cost of paper, from purchase orders to payment, you’ll be paper-free.