Historically within the purchasing landscape, procurement professionals often had to employ a do-it-yourself approach when it came to leveraging their supply chain and establishing efficient strategies for cost reduction and spend management. This can often put a tremendous amount of pressure on an organization’s procurement department as they are tasked with managing a countless number of spend categories among other activities. Even for larger procurement departments, managing these tasks on a daily basis can require a lot of resources and bandwidth some organizations simply do not have. As a response to these challenges, many businesses have been adopting strategies such as using a group purchasing organization (GPO) to increase purchasing efficiencies and generate value.
As its name may imply, a group purchasing organization is essentially a consolidated purchasing group leveraged by organizations to use their collective buying power to both negotiate better pricing and gain economies of scale on their purchases. These entities (usually business) will often aggregate their purchases orders together, with an intention of capitalizing on the benefits such a purchasing approach provides. GPOs are essentially structured around membership, with the core purpose of reducing purchasing related risks and cost, while maximizing return on investment (ROI) for the members.
By aggregating their resources, members of GPOs perform as a single, well-resourced and more powerful purchasing block. This purchasing power significantly enhance their bidding capacity, which in turn gives them a bigger say when negotiating prices, contractual terms and conditions with suppliers. In the current source-to-pay landscape we have typically seen GPOs can be divided into two main structures:
This is where a group of organizations conduct purchases as a single entity for the benefit of all members in the group.
This is where an independent body (often a procurement our sourcing consultant) is brought into source, negotiate and/or contract suppliers on behalf of the group of purchasing organizations.
With the myriad of benefits Group Purchasing Organizations provide, there has been a clear shift in incorporating them into organization's procurement strategies. While the value of a GPO can depend on the respective organization's business objectives, the following benefits typically remain constant across programs:
Bulk Purchase Discounts & Efficiency Gains:
It is easier to negotiate for a bigger discount when purchasing larger (bulk) quantities, thereby driving the cost price down than would be the case with smaller volumes. In addition, GPO programs help their members identify the lowest cost for goods and identify best practices to increase the overall value proposition. According to a study collected and reported by Dobson DaVanzo & Associates, interviewees reported that since partnering with a GPO program, they were able to gain unique insight into clinical “best practices” with one respondent in the healthcare industry reporting that his hospital had ‘implemented 238 unique initiatives across a range of areas to optimize their supply chain operations, achieving $15.7 million in annualized savings to date and increased overall inpatient satisfaction.’
Increased Economies of Scale & Cost Savings:
For perspective, consider an organization purchasing goods to be delivered via freight. It is cheaper to transport 30 tons of supplies at once as a single load than it is to transport separate loads of 10 tons each. Purchasing in bulk, allows the buyer(s) to move or deliver the whole consignment at once, in the process reducing transit risks and costs usually associated with cargo transportation.
Higher Return on Investment:
The significant savings organizations realize through group purchasing organizations, for example, bulk purchase discount and economies of scale, have a direct impact on the bottom line and resulting in higher return on investment. GPOs are the best option especially for small and medium sized businesses, who often lack the liquidity and capacity to compete with larger and well-resourced companies.
Be as it may, it is vital that one carefully vet and evaluates a potential GPO to make sure it is a viable fit before taking membership.