Why a Group Purchasing Organization Might Be Good for Your Business
In an increasingly competitive global business environment, controlling spend has taken on greater importance than ever. However, unless you are a large organization with plenty of purchasing power, you will have limited leverage when it comes to your procurement team due to resource constraints and a lack of expertise in key categories of organizational spend. This can lead to rogue spend as well as pricing and supplier inconsistencies that go straight to bottom-line numbers. So how does a smaller organization get the leverage it needs? That’s where a Group Purchasing Organization (GPO) comes in, proving that there really is strength in numbers.
What is a GPO?
Quite simply, a GPO is an organization created to leverage the purchasing power of a group of businesses (often, but not exclusively industry-specific businesses) to receive discounts, better pricing, and advantageous terms from suppliers. This aggregated buying power gives smaller enterprises greater ability to control their spend. The GPO handles all negotiations with suppliers and, depending on the GPO you select, is responsible for ensuring supplier compliance with government and industry regulations. A best-in-class provider will also centrally manage each step in the transaction process while giving members visibility into each step of the process.
GPOs have long been associated with the healthcare industry (the first healthcare GPO was set up in 1910) but are now available to a wide variety of business verticals. And though GPOs negotiate for core materials, its greatest power is in the indirect spend category; things you use for the day-to-day operations of the business, including office supplies, MRO, IT hardware and software, uniforms, safety supplies, and more. This area of spend is rarely centralized and is often prone to maverick spending, giving procurement little to no visibility into a company’s ongoing cash flow.
It’s obvious why buyers would see the benefits of a GPO; but why would suppliers agree to participate? The prices negotiated may be lower than they might otherwise demand; however, being a GPO-approved supplier gives that business access to buyers they might never have reached in the ordinary conduct of business. It also gives suppliers an outside sales and support network with another layer of account management (free sales and support resources).
GPOs are funded by buyers, suppliers, or both paying administrative fees which can be a percentage of a purchase or a flat rate. Each GPO has its own system and some require a specific participation level for members. The strength that GPOs have in their negotiations often relies on this participation since suppliers are negotiating based on expected revenues.
Look for GPOs that go that extra mile
GPOs should operate as more than just a marketplace. In a marketplace setting, you can access multiple suppliers, products and services. Prices aren’t necessarily negotiated and the relationship is purely a tactical matter of select, buy, and receive. A GPO formulates a strategic relationship with a suppler that is able to extend to the GPO’s members, taking on the burden of continuous account management, so your procurement teams can focus on more strategic, value-added tasks.
Negotiations should be a continuous process so members can rely on getting the best price possible…and that the price is consistent regardless of where a product is purchased. As an example, if your company has locations in multiple states, the price for any product purchased from a GPO-endorsed supplier should be the same, everywhere. Setting your company up to participate should be non-disruptive and easily implemented and the GPO should offer ongoing support
Learn more about GPOs and how they can help gain control over your indirect spend.