Introduction to Group Purchasing Organizations (GPOs)
Group Purchasing Organizations (GPOs) offer tremendous and immediate benefits to corporate purchasing teams. While real – and significant – these benefits can often be overlooked and viewed with a measure of caution. Sometimes this is because the value proposition can appear to be “too good to be true,” or simply because the GPO model is not well understood. In fact, GPOs are often an ideal management solution for non-strategic spend categories, and what to look for as you evaluate GPO options.
How GPOs Really Work
The core function of a GPO is to pool the purchase of common goods or services across numerous buyers, creating purchasing power well beyond what any single company could attain. A group purchasing organization operates as a third party between buyers and suppliers, negotiating umbrella agreements that provide members with superior pricing, contract terms, and service levels. As a GPO’s membership grows, so does its ability to drive greater value for its members, while suppliers benefit from increasing volume and deal compliance.
While all group purchasing organizations work on a common spend aggregation principle, not all are cut from the same cloth. Some charge fees to join, while others are free for members and derive their revenue from their supplier partners. Some drive overall value through total cost reduction, whereas others simply offer a competitive purchase price. When evaluating GPO solutions, understand each offering’s total value proposition and how it fits your enterprise needs.
Win-Win-Win with GPOs
Successful GPOs create an ecosystem where all three parties – Buyers, Suppliers, and the GPO – realize significant benefit.
This is the most obvious of the three wins. By combining the buying power of multiple enterprises, each benefit from the collective leverage of the membership. In any collective business model, from health insurance to agricultural co-ops, smaller organizations often gain more, proportionately, than larger entities. While this is often the case, this is not a shared cost model where large companies simply subsidize smaller ones. All parties under this arrangement benefit from the combined spend pie.
At Procure Analytics, we typically deliver double-digit savings – against expertly negotiated contracts – for even our largest Fortune 500 members. But the benefits should go well beyond initial cost reductions. The best GPOs provide enhanced commercial benefits and service levels typically inaccessible to even the largest member companies, as well as year-over-year total cost improvement.
Suppliers perform the most misunderstood role within the model. When the supplier is not an incumbent to the buyer, the benefit is clear in that they gain a new customer. It is more nuanced when there is an existing relationship. In these cases, the supplier typically reduces pricing to GPO member levels and void any existing supply agreement. However, strong GPO models incentivize both GPO and buyer to consolidate volume and drive compliance with the supplier. These provide organic growth and increased market share.
While suppliers benefit from expanded volume, they are constrained in their ability to expand margin. In the traditional company-run sourcing/RFP event, suppliers trade margin on select high-volume RFP items – the ‘loss leader’ approach – then recapture profitability on items outside of the market basket. Over time, suppliers systematically ratchet up margin through periodic price adjustment. In a GPO with dynamic pricing agreements, pricing across the entire catalog is continuously benchmarked and negotiated. Suppliers see their market share grow profitably, but are continuously challenged to provide optimal value.
The GPO Organization
Most commercial GPOs are not non-profits – they exist to make money. Their revenue typically comes from one of two sources. Some charge a participation fee directly to members in a pay for access model. Others are supplier-funded, meaning the supplier partner pays the GPO a periodic fee based on member transactions or aggregate spend. In a handful of cases, there is both a participation fee and a supplier payment. GPOs tend to have low fixed and variable costs. As such, the fee – whether invoiced directly or built into supplier pricing – is modest relative to the savings and total value provided.
All group purchasing organizations provide members with immediate access to leveraged pricing, which alone is of tremendous value. The best organizations go further in providing a true category management solution. This includes tangible resources to drive program implementation and ongoing account support. In this way, GPOs operate as an extension of their members’ procurement teams, driving total cost improvement through complexity reduction and on-going price negotiation.
Importantly, GPOs serve as agents for their members, providing effective issue escalation and resolution through their dedicated supplier account teams and C-level attention. These value levers, combined with robust reporting and tracking of what are frequently low-visibility categories, allow GPOs to apply strategic management to tactical spend areas. This not only maximizes category value, but it also frees members’ procurement resources to focus on more critical priorities.
How GPOs Can Work for You
GPOs provide members with a simple solution for managing non-strategic and tail spend categories, particularly those that are otherwise complex, tactical, and resource-intensive. The model benefits all parties, as the GPO applies consistent pressure on suppliers to optimize value for members, while also ensuring that suppliers are rewarded for their efforts through increased market share.
The better GPOs charge no fees to their members, provide valuable resources and services at no additional cost, and require minimal commitment to participate. Many GPOs provide a robust savings analysis prior to joining and limited volume or term commitments. This is as low risk a proposition as exists in business today. As you explore your spend stack, identify those categories where strong GPO offerings exist and allow them to benchmark your savings potential. You will likely find at least one solution addresses your needs.
Procure Analytics is the leading data-driven group purchasing organization specializing in Maintenance, Repair, and Operations (MRO) and packaging supplies. Leveraging $1B+ in tightly-focused buying power, on-site implementation services, state-of-the-art reporting tools, and a dedicated team of 100+ procurement managers and data analysts, PA drives bottom line savings for member companies. PA’s analytical and reporting tools offer the insight needed to manage MRO and packaging spend – all at no cost to members.