Vendor Centric Blog

Understanding the Value of Group Purchasing Organizations

 

Historically, group purchasing organizations (GPOs) have been primarily utilized within the government, healthcare and higher education sectors. As one example, according to the Healthcare Supply Chain Association, 96-98% of hospitals in the U.S. belong to at least one GPO.

 

Over time, group purchasing in these three sectors has become increasingly crowded and GPO's are looking to other industries for potential growth.  Regulations are also changing the landscape of the potential use for GPOs, including the new Uniform Guidance procurement standards that went into effect in January 2017.  Those standards promote the use of ‘intergovernmental and interagency agreements’ which may include the use of group purchasing contracts by the more than 30,000 non-Federal entities who receive grants.

 

Here’s a primer on GPOs, and some of the things to consider as you evaluate the benefits of leveraging them for your organization.
 

Q. What is a Group Purchasing Organization?


Group Purchasing Organizations (GPOs) are created to leverage the collective purchasing strength of their members in order to acquire goods and services at lower prices. GPO's are not resellers, but rather contract negotiators. Members of the GPO are entitled to purchase through these negotiated contracts.


Q. What are the benefits of participating in a GPO?


The primary benefit of a GPO is that members can obtain better pricing on goods and services through the GPO than they could on their own. However, lower prices are not the only benefit.


GPOs provide valuable “soft cost” savings by helping organizations standardize and streamline their purchasing practices. Many are also a resource for procurement related consulting and advice.


Q. Are GPOs open to everyone?


Yes and no. Some GPOs accept all types of organizations, while others choose to focus on the needs of specific industries.


Q. What types of products and services are typically offered through a GPO?


This varies, but there are typically two common models.


Category-Focused GPOs typically offer dozens of categories with varying levels of discounts. These GPOs are built to be everything to everyone.  They can include anything from office supplies, to hotel and car rentals, to software discounts. They are built to have as broad appeal as possible, and are really designed for organizations that do little or no price negotiations on their own.


Compare that to Industry-Focused GPOs, which typically offer fewer and more targeted expense categories.  These GPOs are built to address the most common purchasing needs of an industry; they offer much deeper discounts and usually have a much higher adoption rate. They are viewed by members as a strategic part of purchasing rather than just another 'discount program.'


Q. What is the membership cost and obligation?


This also varies. Some GPOs require an annual membership fee to participate, as well as an annual commitment for spend. Others charge no fee and require no obligation.


Q. How can I be sure that a GPO will save my organization money?

 

That part is tricky. 


Most Category-Focused GPOs simply offer a certain percentage off of list price. For example, "15% off of shipping with FedEx." Calculating your savings here is pretty simple; compare your current discount level with what is being offered through the GPO and see what is better.


Industry-Focused GPOs, on the other hand, provide savings in a variety of ways. This can include deeper discounts off of list price, access to a targeted portfolio of highly-discounted products and services, and special promotions to members based on meeting a collective purchasing volume. Some of these GPOs provide one-on-one consulting with members to help them analyze their current pricing and actually calculate, with real data, the level of savings they can realize. The best way to assess your savings with these GPOs is to work directly with one of their representatives to assess your own, unique situation and get a personalized analysis.


Q. Should I consider a GPO as part of our organization's overall purchasing strategy?


Absolutely. Finding the right GPO in which to participate can be a smart component of your overall procurement strategy. You can drop thousands of dollars in savings to your bottom line, and smooth out procurement processes and perhaps even address some unique regulatory requirements.


But all GPOs are not created equal.  Make sure you are clear about your goals for participating in a GPO, and do the research to find the one that is best suited for your organization.

 

 

 

Tom is Founder & CEO of Vendor Centric, a consulting firm that helps organizations adopt a risk-based approach to vendor management.  Connect with Tom on LinkedIn or drop him a note at trogers@vendorcentric.com.

 

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