A Group Purchasing Organization (GPO) is an entity formed to combine the purchasing power of a number of companies in order to secure supplier incentives. GPOs operate mainly for one basic but persuasive reason; to assist companies interested in purchasing related goods in gaining purchasing power by group purchasing. Companies who use GPO arrangements, i.e., GPO participants, benefit from better pricing and deal terms, as it saves valuable time and frees up internal procurement capacity.
While a purchasing organization benefits companies employing services, vendors, too, benefit from this process. GPOs operate to support vendors or the network of businesses that provide products and services to member businesses. They benefit vendors by providing them with a single point of contact. GPO benefits for suppliers include increased market share, increased access to customer information and data, and improved customer relationships.
GPOs are an integral part of a consumer entry plan for medical device and pharmaceutical companies. The availability and competitive role of a product with healthcare provider organizations can be almost entirely dependent on its standing with one or more GPOs, based on the item.
This dependence has been uncovered in several studies that focused on GPO and its effect on the healthcare industry. One such study found GPOs to have saved close to $55 million dollars annually for the healthcare system. Similarly, former FTC Chair Jon Leibowitz’s analysis also found GPO’s cost savings for vendors to average between 10% and 18%.
Industries That Use GPOs the Most
GPOs are used in the healthcare, hospitality, food service, electrical, plumbing, nonprofit, and industrial manufacturing industries. This is because these markets have a substantial number of small to mid-sized enterprises. GPOs pool all of these companies’ spending, resulting in a higher overall amount invested. Over time, the sectors using GPOs have increased and can be divided into three categories, as follows.
1. A vertical market
In a vertical market, GPO concentrates on a single market or sector. Small to mid-sized community centers or hospitals, for example, have banded together to save money in the healthcare sector.
Some sectors in the vertical market are:
- Healthcare GPO
This type of GPO aids in the promotion of high-quality healthcare and the sustainable management of costs for a variety of providers. A GPO pools its members’ bargaining power for assorted products and services and negotiates agreements with retailers so that members can purchase at group prices and conditions if they so choose.
- GPO for food service or grocery
Foodservice or retail GPO focuses solely on the $600 billion foodservice industry, providing food and food-related sourcing, contract negotiation, and supply chain services for multi-unit foodservice operators.
- Legal GPO
A law firm purchasing group is committed to lowering legal costs by bringing together a group of best-in-class vendors designed to meet all the main sourcing needs of law firms of all sizes.
- Hospitality GPO
A Hospitality GPO focuses on addressing supply and procurement problems for hotels and vacation rentals. They do so by combining demand for products and services used to customize and store guest units as well as manage hospitality businesses. This results in substantial cost savings for its members on furniture, appliances, hardware, utilities, home goods, bathroom, and bedroom and bath products.
- Industrial Production GPO
By aggregating demand for goods and services used in the processing and marketing chain and providing deep savings on commodities, services, and parts to its participants by rebates, concessions, and preferred pricing, a manufacturer’s GPO succeeds in resolving procurement and sourcing issues.
2. A horizontal market
A horizontal GPO helps businesses in a variety of fields, while a vertical GPO helps businesses in specific industries, such as health care, food service, legal, dairy, and agricultural development. GPO’s members come from a number of industries, but they buy a lot of the same goods and services to produce their products and run their companies.
GPO is able to reduce acquisition costs by consolidating purchasing control and defining arrangements to obtain desired prices, terms, and quality standards. The collective purchasing force of the member customer organizations lets them save money on categories like temporary labor facilities, office materials, office and packaging supplies, and more. The GPO’s buying power encourages member companies to save money.
3. Master Buyer
One chief purchasing company with large contracts and suppliers encouraging other organizations to buy those contracts is known as a master buyer. Since Tier 1 and Tier 2 suppliers have access to the price contracts that major car manufacturers have signed with vendors, the automotive industry is a prime real-world example of this concept.
How Does a GPO Work?
GPO contracts for goods and services are created and managed by purchasing groups first. They then take it a step further by establishing and maintaining business relationships among the GPO, group members, and suppliers. In this situation, the participants are businesses that want to channel their spending into the GPO.
When a participant requires service, the GPO seeks out arrangements with appropriate vendors. It prioritizes opportunities for participants to obtain fair offers and contract terms, and vendors often forego higher margins in exchange for greater access to organizations that use (or may need) their services. GPOs are in charge of buying contracts and may order new services as the number of members grows.
A GPO becomes a true partner to your business, offering a partnership built on trust. They also offer an understanding of your specific needs and desires, outstanding support, connectivity, openness, and, of course, significant cost savings from your chosen vendors. These are also some factors you will need to consider when choosing a GPO.
How Does a GPO Get Its Money?
A GPO is usually financed by membership dues, administration costs, or a combination of the two. A membership fee is a one-time charge made when an individual joins the GPO. The subscription fee can also be set up as an annual dues-based charge. GPOs may suspend membership dues if a member meets a certain limit.
The payments GPOs allocate to these entities are known as “administrative fees” or “admin fees.” This amount is related to the sales price of the item being acquired by the client. The fee is calculated as a percentage of the sales price, with a standard range of 1.2 to 2.3 percent. Members are often charged by GPOs for accessing their facilities.
Administrative payments are often paid by suppliers to GPOs. A GPO’s funding arrangement is still open to its participants, regardless of whether the cost is a flat rate or variable based on the spending. To access the joint participation and profit from the leverage, GPOs don’t demand a joining fee, a minimum order, or a spend requirement.
GPOs don’t take ownership of a commodity from a retailer or another supplier, nor do they warehouse it and send it when a client requests it. Instead, they orchestrate competitive price discounts and related logistical activities. To take advantage of differing degrees of discounts, stock selection, and other factors, most healthcare organizations use more than one GPO to import supplies.
Benefits of Joining a GPO
As mentioned above, a GPO helps its member organizations save time and money on buying necessary supplies. Given below are some other benefits of joining a GPO:
- Savings at the item level
The most common misunderstanding regarding GPOs is that, by implication, they deliver better pricing due to aggregated quantities. Although a single organization can save money on its own, it is nothing compared to the savings available from entering a GPO. GPOs pool the purchasing power of other firms to obtain greater discounts, resulting in item-level prices that other independent companies can’t beat.
- Category management
GPOs provide category management, which assists in identifying and realizing savings over the course of a contract. A GPO will keep its members up to date on a new product range or service enhancements. They do so by conducting frequent feedback with vendors on new products and services and approaches the service provider may be taking.
- Reduced purchasing risk and high-quality service
When it comes to maintaining members, GPOs strive for durability; as a result, the pressure to support the member is immense. Working with suppliers who are simply the “lowest cost” option and provide little overall value can be detrimental to a GPO’s reputation. Therefore, GPOs subject potential suppliers to a thorough vetting process that ensures the trustworthiness of the supplier, resulting in lower purchasing risk for members.
- Free membership
Many, but not all, GPOs offer free memberships. Free memberships benefit not only the member but also the GPO. Supply partners are willing to extend discounted rates and extra levels of service in exchange for access to a GPO with a large network of members. Therefore, when looking for a GPO, look for one that allows you to become a member without additional cost.
- Diverse services
Depending on which GPO you enter, there are several other resources available. Supply chain consultancy, e-commerce solutions, benchmarking, compliance campaigns, sales optimization, and technology audits are only a few of the resources available. Materials management consultancy, materials management contracting, and revenue management is some less traditional services that member organizations can enjoy.
GPOs help organizations save money by bringing together the purchasing needs of several businesses. By doing this, they increase the collective purchasing power to ensure better price and discount deals. Sectors, including the healthcare industry, benefit greatly from a GPO’s services, as they get to save money, time, and effort in buying necessary supplies.