In a survey, 88% of executives reported that their GPO memberships helped them secure lower prices. 86% agreed that their GPO benefits their organization with demonstrable cost-savings, and 67% reported seeing savings specifically from fee rebates.
These stats certainly seem impressive. But how do they compare to buying direct? Should you ditch the middleman and contact the supplier yourself?
Read on for a full-on GPO vs. buying direct cost-effectiveness comparison.
What It Means to Buy Direct
To buy direct is to contact the manufacturer or supplier and order from them — there are no distributors, wholesalers, or guying groups involved in your procurement process whatsoever.
We’ll discuss who this procurement method is ideal for in a minute. We’ll also check out how it compares to GPO memberships. But for now, let’s take a look at what a business would have to do to buy direct.
Typically, the procurement team gathers a list of all the products needed for operations (raw materials, software solutions, paper, etc.). Then, the team researches vendors, gets quotes, and compares prices. They might have to negotiate better contracts, too.
Finally, they send in orders regularly based on the sales cycles and demand predictions.
What Is a Group Purchasing Organization (GPO)?
GPOs are basically an intermediary between business owners and vendors. They handle the negotiation burden on the business’s behalf.
Depending on the structure and product range, GPOs may be considered vertical or horizontal. A vertical GPO is industry-specific, with a highly targeted product selection. Think foodservice GPOs.
Meanwhile, horizontal GPOs operate across multiple industries, providing more general procurement needs.
How Do GPOs Work?
In most cases, the GPO attracts small or mid-sized enterprises (SMEs) as group members. And these members usually have more or less similar procurement needs.
The purchasing organization then pools the collective buying power of all members to negotiate better deals from various vendors. Once the GPO settles on a good contract, it approves the vendor and allows its members to order from it at the discounted rate.
What is in it for the GPO itself?
Well, for-profit GPOs can make money in a number of ways. For one, they might charge members a subscription fee. They might collect administrative fees from the suppliers as well.
These fees may be based on the total order value. Alternatively, they may follow a simple flat-rate structure.
But, of course, there are also non-profit GPOs that reinvest 100% of profits back into the industry it serves.
The Real Cost Comparison: GPO vs. Buying Direct
Evaluating cost-effectiveness here can get tricky. Yes, the unit price matters a lot. But so do other variables in the equation.
Let’s take a closer look:
Purchase Pricing
GPOs may have billions in combined purchasing power.
Because GPOs gather purchasing power from a number of memberships, they end up with larger order volumes. And this volume can be used as leverage to ask for more competitive pricing.
This way, even small operators can get the same purchase pricing as the large national chains.
When you buy direct, however, you’re negotiating alone. If the supplier/manufacturer knows you only buy small quantities, they don’t have much incentive to offer you a lower price per unit.
If you’re ever going to get a competitive price from vendors in this case, you’ll have to build and leverage strong supplier partnerships.
Rebates & Cash Back
You shouldn’t evaluate the cost-effectiveness just by looking at the unit pricing and the transaction itself. You could actually be saving money post-purchase, and one way to do that is through rebates.
Receiving rebates is a simple way of gaining money back on the purchases you’re already going to make for your business. Instead of an upfront discount, you pay the full price and receive cash or credit later.
Some vendors offer a percentage rebate, so that a proportion of your purchase is returned later. Others use a flat-rate structure for their rebates. You might even find vendors offering a partial refund on the shipping costs for qualifying products.
Either way, many GPOs send monthly rebate checks, which might just be the financial relief your independent business needs to get by in the face of rising costs.
But there’s one important note here: While a rebate is a fairly passive money-saving solution, you might need to put in a bit of effort if you want to maximize your savings.
Reviewing your monthly rebate statements can help you keep track of the supplies and the returns on each purchase. It’s also wise to identify your top rebate-earning products and look for opportunities to switch from non-qualifying items whenever possible.
That’s where some GPOs have a cost-saving advantage over buying direct.
Certain GPOs employ a dedicated key account consultant for each member. This consultant then keeps an eye on the purchases and rebate statements, looking for insights that may help match the business with the right suppliers. This way, they maximize their rebates without effort.
Administrative Time & Hidden Costs
Whether you choose to buy direct or join GPOs, there’s a chance you’ll face some surprise expenses and costs.
With buying direct tactics, your procurement team has to look for hidden costs carefully. The expenses may be disguised as excess inventory storage, logistics surcharges, regulatory fines, and more.
It’s also worth noting that the hidden costs might be a result of a lack of spend visibility and inefficient procurement processes within your organization.
GPOs, on the other side of the equation, might make money through a subscription-based operation model. However, the reputable GPOs are always transparent about their membership structures and administrative fees.
To make sure you’re not a victim of hidden costs, do your homework on the GPO before joining. Some questions to ask are:
- How does this specific GPO make money?
- What is the detailed fee structure?
- What supplier terms can you expect?
Supplier Access & Range
Compared to buying direct, the cost-efficiency of GPOs is heavily reliant on the product range.
It’s not about the number of approved suppliers/manufacturers as much as it is about how compatible this range is with the business’s needs. The cost-efficiency drops whenever there’s a need-product range mismatch.
Take, for instance, organizations with specialized needs that partner with GPOs that cater to generalized procurement needs. Sooner or later, they’ll have to shop for uncovered products outside the GPO pre-negotiated supplier range, sacrificing the savings and rebates.
But it’s important to remember that not all GPOs lock you into exclusive contracts. Make sure to ask about how the membership will affect your outside purchasing ability and whether there are any purchase-level minimums.
Of course, it’s also wise to check that the approved supplier list gives you access to all (or at least most) of the products you need for your operations.
Consistency of Saving
Don’t chase direct buys with short-term savings so much that you forget to consider the long-term stability. After all, there’s no point in nurturing a buyer-vendor relationship only to switch later because they weren’t a good fit.
Remember that constantly switching suppliers just to jump into a marginally better deal isn’t good for your profit margin. You risk changing the process and forcing your staff to have to readjust every few months.
Price volatility can also eat into your margins, especially if you’re a small business. Not having a buffering layer between you and the manufacturer can really hurt your business and compromise your future operations.
Consistency of the product specifics you receive from one order to the next matters as well.
For instance, changes in the food quality/cut a restaurant receives can force chefs to adjust menus on the fly or spend time fixing the issue and maintaining the same portions. That may lead to unnecessary waste and hurt the restaurant’s margins.
So, no matter which buying approach you choose, you want to make sure that:
- There are quality standards that guarantee consistency.
- The supplier/GPO understands your business needs.
- You can nurture a long-term partnership with mutual accountability with the supplier/GPO.
When Buying Direct Can Make Sense
The buying direct approach can increase your procurement control and flexibility. It can help you save on the markups imposed by distributors. And it’s generally a good move to purchase directly from the manufacturer/ supplier if you can order large volumes.
But in order for this setup to make sense, your organization also needs to be able to handle these large-volume orders. This includes warehousing, managing long inventory turns, and predicting needs for months in advance.
Some business owners also prefer buying direct because their business model relies heavily on custom work. Modifications might be easier if there’s a direct communication channel between you and the manufacturer.
Note that factory-direct purchasing can give you a better grip and visibility of the supply chain, too.
Checking lead times and production schedules becomes easier since you don’t have to wait for a middleman to get back to you. This may give you an edge whenever you need to react to the shifting demands and timelines.
On the flipside, buying direct adds a few more layers of responsibility. You may find yourself in charge of handling the shifting freight conditions and long lead times, for instance.
Who Benefits Most from a GPO?
GPOs were initially created to cater to healthcare providers. Today, however, many businesses in various sectors benefit from joining a group purchasing organization.
GPOs can be particularly beneficial for SMEs that don’t have access to the same volume-based discounts that large chains and corporations get from vendors.
You may benefit from GPO memberships over buying direct if your business:
- Can’t afford large upfront orders.
- Relies on fast restocks or lacks warehouse space.
- Still doesn’t have predictable demand patterns to justify bulk orders.
- Can’t handle logistical issues with freight, compliance, and customs.
Beyond Price: Hidden Value of a GPO
We’ve already covered how GPOs can help small and mid-sized operators compete in the market against large chains without hemorrhaging money left and right. The key is in pooling the group’s purchasing power to unlock competitive pricing.
But there are more perks to joining GPOs than just that. Here are two common ways that the membership can add value to your business:
Valuable Purchasing Insights
Your specialized GPO can serve as an industry liaison, especially if you join one that offers dedicated account consultants to the members. They can help you source all the items needed for your operation and get the biggest bang for your buck.
Many GPOs also offer trend analysis and cost-savings reports as value-added services. You can then use these services to drive your strategic purchasing decisions.
Strong Supplier Relationships
GPOs that have been in business for a while can bring a very valuable addition to the table: An existing vendor-organization relationship that’s been nurtured for years.
Discounts aside, this relationship can translate to better communication.
The supplier network can provide the GPO with early notices of supply chain disturbances, price increases, product shortages, and more. Early notices can, in turn, give members a head start in adjusting their purchasing patterns or exploring alternatives. This can help cut surprise costs.
FAQs
Do I lose control over suppliers if I join a GPO?
It all depends on the GPO you join and how good a fit it is to your procurement needs. The right GPO can be a strategic partner who helps you save money and make better, data-driven purchasing decisions.
If, however, you go with the wrong purchasing partner, you might find the control trade-off to be a deal breaker. And the savings might not be worth it in the end.
What types of businesses benefit most from a GPO?
Small and medium-sized businesses can benefit the most from the GPO’s pooled purchasing power.
Are GPO savings guaranteed?
GPO memberships have a massive savings potential. But the results largely depend on internal compliance. Your staff has to actually use the GPO network of pre-negotiated contracts. If they don’t use approved vendors, you might not see much savings.
