What is a GPO?
A GPO or Group Purchasing Organization, also called a co-op, purchasing group, consortium, collective, coalition, or leveraged procurement group, exist to leverage their members’ combined purchasing power to obtain maximum discounts from suppliers for all its members. The group’s collective buying power far exceeds what any one company can generate on its own and hence they can save by being part of the GPO.
Why is a GPO essential?
A GPO helps a company focus on its core business and portfolio rather than the indirect products and services required to keep the company running smoothly.
A GPO combines its members’ purchasing power for assorted products and services and negotiates agreements with suppliers and manufacturers so that members can purchase at group prices and conditions if they so choose. With GPOs, savings can be delivered in two different ways. First, discounts and rebates are pre-negotiated instant savings. Second, producers are given the option of privately negotiating better prices with a pre-approved list of suppliers.
Here are some quick facts about GPOs:
- GPOs aren’t just for healthcare organizations.
During the 1980s and 1990s, the federal government and healthcare organizations formed GPOs to lower the costs and generate efficiencies in their purchasing systems. Hospitals and independent nursing homes could consolidate their purchasing power with other facilities to create contracts with medical and other suppliers. Those same practices have scattered into other organizations. Today, many other industries are planning to develop GPOs that bring in these valuable benefits.
- Save money and time
On average, GPOs save businesses between 10-25 percent. This savings happens not just through reduced prices negotiated into the purchasing contracts, but also by regulating the purchasing process. Rather than proceeding through a complex negotiation process with multiple suppliers and hiring employees to monitor those contracts, a GPO handles this process for you. The suppliers are generally paid administrative fees and are built into the discounted price, so it’s an even sweeter deal than your Costco membership.
- Know upfront what your savings are
If you remember what you purchased in the past year, the GPO can let you know your potential cost savings. The GPO will take your purchasing report and provide you a breakdown of the discounted price and your assumed cost savings. You can then take that analysis and decide to join.
- Control your purchasing
GPOs do not purchase products or make purchasing decisions for you. You’ll have complete control over what you are buying and when. You will just have the purchasing power of a Group Purchasing Organization behind you. Then, you can dedicate your time to the more profit-friendly aspects of your business and forget about constantly looking for the best deal on your supplies.
- Get the attention of big-name suppliers
Small and mid-sized companies don’t have the clout needed to get aggressive pricing from well-known suppliers. With a GPO, small companies purchase as a group to get the same competitive prices of a larger company. As you join up with other companies, your combined purchasing power will attract those coveted suppliers.
Types of GPOs
Generally, there are three main types of GPOs:
- Vertical – Market GPO
- Horizontal – Market GPO
- Master Buyer
1. Vertical – Market GPO
A vertical GPO helps businesses and organizations in a certain sector or market segment.
There are 6 different kinds of vertical market GPOs, discussed below.
- Healthcare GPO
A healthcare GPO helps promote high-quality healthcare and the efficient management of costs for a range of providers. GPOs usually subsidize health equipment, nutrition, pharmacy, and testing facilities. Few major GPOs have broadened their contract portfolios to include discounts on office equipment and other non-medical facilities.
An “administrative” fee is how a GPO earns a profit. When supplying goods to their member hospitals, GPOs will charge an “administrative” fee of up to 3.0% of all sales volume to the suppliers for whom they have negotiated a deal. These fees do not influence the final price. They’re used to pay for the GPO’s daily operations. If there is a surplus, it is returned to the GPO owners; thus, GPO owners save money on the products they purchase by community contracts while still earning distributions from the GPO. General GPO members can also obtain some fee sharing as part of their member arrangement, but this procedure is no longer the norm; thus, the primary benefit to a GPO member is accessibility to steep discount pricing.
GPOs say that their services help healthcare providers raise their profit margins. Their participants benefit from value-added services such as clinical support, benchmarking results, supply chain support, and extensive portfolios of products and services to satisfy specific needs.
GPOs have various strategies for securing vendors’ discounts, ranging from demanding exclusivity to requiring enforcement and granting sole-source contracts. Pricing is one-way GPOs can attract new members or persuade other GPO members to move when the healthcare market gets crowded with them.
- Food Service or Grocery GPO
Food service or grocery GPO primarily focuses on the $600 billion foodservice industry, covering multi-unit foodservice operators’ food and food-related sourcing, contract negotiation, and supply chain services. Supplier/manufacturing arrangements and purchasing plans are used to conduct these deals. Fresh vegetables, frozen food products, chilled and processed meats, sweets and snacks, cheese and bakery, dry goods, disposables, and drinks are all things that can be bought at a grocery store.
- Hospitality GPO
A Hospitality GPO aims at addressing manufacturing and sourcing conflicts for hotels and holiday rentals by combining demand for products and services used to furnish and store guest units and manage hospitality companies, resulting in substantial cost savings for its participants on furniture, equipment, electronics, applications, home goods, kitchen, and bed and bath products.
- Industrial Manufacturing GPO
Through aggregating demand for goods and services used in the manufacturing and distribution chain and providing deep savings on raw materials, services, and parts to its participants by rebates, concessions, and preferred pricing, a manufacturer’s GPO succeeds in resolving procurement and sourcing issues. The combined purchasing force allows producers to save money on sales and compete more efficiently among the world’s biggest manufacturers.
- Legal GPO
A law firm purchasing alliance is committed to lowering legal costs by bringing together a group of best-in-class suppliers to meet all law firms’ primary sourcing needs of all sizes. Members save money automatically thanks to pre-negotiated deals and rebates. And law firms are given the option of privately discussing competitive prices with a pre-approved list of suppliers.
- Non-Profit GPO
Non-profit GPOs are similar to traditional GPOs, but they comprise a board of nonprofit, community-based organizations that collaborate to reduce costs.
Many major healthcare GPOs are moving into the nonprofit market by establishing divisions to support, for example, nonprofits in the human services industry, often in partnership with nonprofit hospitals.
2. Horizontal-Market GPO
A horizontal GPO helps organizations across a wide range of sectors. In contrast, a vertical GPO helps organizations in particular industries, such as health care, food service, legal, dairy, and industrial production. Members of the horizontal market GPO come from several sectors, but they buy a lot of the same goods and services to develop their products and operate their businesses. OMNIA Partners is an example of a horizontal-market GPO.
- Non-Strategic Horizontal Market GPO
An indirect horizontal spends through consolidating purchasing authority and defining arrangements to reach preference price, conditions, and quality requirements. The GPO manages to reduce procurement costs by aggregating demands for non-strategic or indirect cost deliveries and services used by the diverse horizontal business continuum of member client organizations.
The resulting secure data aggregation force saves money for pursuing categories of temporary labor facilities, office goods, security supplies, work equipment, packing items, uniform, and laundry service, pest control, and expedited shipping of parcels by usually small and prominent members of our client company. The GPO purchase initiative’s consolidation also helps member customers save on lower operating costs. According to the SpendMatters report, 15-20% of fortune 1000 buyers are buying consortia, and 85% of the time, in the groups in which they use a cooperative model, they see 10 percent + savings.
Independent Buyers Ltd, which runs schemes for numerous trade unions, is the largest of the UK’s indirect purchase communities. Service standards, prices, and terminology are favored by the GPO’s vendors since their net sales costs are smaller, and the additional volume is generally aligned with a very big buyer.
Each Member Client makes direct savings from a horizontal GPO on sales to the GPO contract provider because of high-class contracts in which all members get the same price and service.
3. Master Buyer
When one chief buying organization has considerable contracts in place with vendors and allows additional companies to buy those contracts, the organization is said to be a Master Buyer. The automobile industry is a classic real-world example of the Master Buyer model because Tier 1 and Tier 2 suppliers can access the pricing contracts of large automotive manufacturers who have negotiated with vendors.