Businesses in hospitality, education, manufacturing, and healthcare often pay high retail prices for essential materials. If you’re one of them, joining a group purchasing organization (GPO) is a great way to save some money.
By partnering with other businesses, GPOs can help boost your buying power, strike better deals, secure discounts, and streamline the procurement process. It’s a smart way to lower operating expenses and strengthen your team’s purchasing strategy.
However, if you’re new to the idea, you may wonder, “What is a group purchasing organization?” What are the benefits of joining one? Is there a drawback to being a GPO member?
This guide explains everything you need to know about GPOs, including how they work, their advantages, potential drawbacks, key types, and common misconceptions.
How Does a GPO Work?
A group purchasing organization works by pooling the collective buying power of multiple small and mid-sized companies. With these aggregate demands, GPOs can negotiate reasonable prices and favourable contract terms.
For example, if ten hospitals each need 1,000 surgical masks, the GPO can purchase 10,000 masks in bulk from the supplier on their behalf.
Leveraging collective demand, they bargain with manufacturers, suppliers, and vendors to acquire goods at pre-negotiated prices, flexible payment terms, and other benefits, such as logistics support and monthly rebates.
Volume-based pricing is key here. Traditional vertical GPOs employ a centralized purchasing system and often already have a network of reliable suppliers.
The expenses of retail pricing skyrocket as your business grows, straining your working capital. GPOs promise a cost-saving potential to help optimize your cash flow and stay ahead of increasing operating expenses.
Apart from the opportunity to cut costs, many GPOs offer valuable member-only services and programs, including electronic invoicing, market/trend analysis, budgeting tools, and cost-saving reports that your company can utilize.
Overall, GPOs can be a game-changer for small to mid-sized businesses, allowing them access to affordable prices, competitive offers, and industry experts to help boost their revenue.
Memberships on GPOs can be free, subscription-based, or may require the purchase of a certain amount of goods through the organization. Other GPOs may also charge administrative fees.
Types of Group Purchasing Organizations
There are several types of buying groups across different sectors. They have varying membership structures and purchasing objectives. Here are some examples of the most prominent group purchasing organizations.
Vertical GPOs
Vertical GPOs serve one specific market segment or sector. Their scope is narrow (vertical), and as such, they’re typically privy to custom arrangements and tailored contracts suitable for their members.
Some common vertical GPOs are:
- Foodservice or Grocery GPOs: Specialized in food and beverage businesses, such as restaurants, cafes, hotels, and other foodservice operations. Groupex is a food service GPO.
- Healthcare GPOs: Group purchasing organizations are prevalent in the healthcare industry. Hospitals, clinics, and other providers become members to acquire favourable deals on crucial medical supplies and equipment.
- Hospitality GPOs: Focused on the hospitality market, hotels, resorts, restaurants, and casinos can benefit from these GPOs to procure furniture, electronics, and other guest-related supplies.
- Education and Public Institutions: Institutions, universities, and libraries may partner to procure essential supplies and services, such as textbooks and teaching materials.
- Industrial and Manufacturing GPOs: Designed for manufacturing companies, these entities streamline the procurement of raw materials, components, and industrial services.
Apart from these common group purchasing organizations, there are also legal GPOs that serve law firms and non-profit buying groups for community-based initiatives.
Horizontal GPOs
Unlike their counterparts, horizontal GPOs work with multiple vendors and businesses across different industries and sectors. While they don’t specialize in specific goods and services, they can help draft contracts for broader or indirect spending categories.
These entities can work with companies of all types and sizes, assisting in products, services, technologies, and facilities. Office supplies, IT services, and facility maintenance are standard offerings in horizontal groups.
Smaller enterprises may find them suitable for their volume-purchasing needs, though it’s worth noting that you may not get as specialized a selection and benefits as those of vertical GPOs.
Master Purchasing Organizations (MPOs)
Master purchasing organizations are often established by one large organization to aggregate purchases in its divisions and subsidiaries.
By standardizing procurement procedures, the mother company can maximize its internal buyer power and align contracts in all related entities.
Ownerships vs Strategy-Based Models
Lastly, group purchasing organizations can also be differentiated by who owns them and for what purpose. Some buying groups are for-profit, owned and operated by private companies.
Some are structured as non-profit, common in membership GPOs, which allow members to have a say in their governance and goals. Other entities combine the two models in a hybrid structure.
What Are the Benefits of Joining a GPO?
There are several benefits to joining a group purchasing organization, regardless of the size or type of your enterprise. If you’re considering joining one, here are some of the benefits you can expect.
Access to Lower Prices
According to a recent report by the Healthcare Supply Chain Association (HSCA), GPOs help save over $34.1 billion annually in the healthcare sector. They further expect these cooperative entities to generate $456.6 billion in savings within this decade.
This is one of the primary appeals of GPO memberships. With cooperative buying power, reduced administrative costs, and access to bulk discounts, members can unlock a savings potential that would otherwise be inaccessible.
Companies typically save around 15% to 20% by cooperating with a group purchasing entity. However, keep in mind that your ROI may vary depending on how much you spend, as well as the relevant fees involved.
Streamlined Procurement
Another major benefit to becoming a GPO member is the considerably faster procurement procedures. With GPOs handling supplier discussions and negotiations on your behalf, your team can focus on things that matter more in your operations.
No more spending precious time and resources comparing vendors, meeting with suppliers, or haggling over contract terms.
Through pre-negotiated arrangements, you can eliminate the nuisance of intricate internal reviews and lengthy legal negotiations.
Wider Selection of Products and Services
Curating suppliers and comparing prices manually and independently is a time-consuming process. To solve this, buying groups work with pre-vetted vendors and contracts, ensuring smoother and reliable transactions.
Not only can GPOs save your team time and money, but they also connect you to a wider selection of products and services beyond your normal options. Smaller and mid-sized companies can hugely benefit from this extensive supplier network.
Expert Support and Business Insight
Bringing specialized knowledge and expertise to the table, vertical GPOs like Groupex guide their members by providing useful insights on marketing trends, best practices, and inventory management.
This helps companies make better decisions, not only over their purchases and procurement strategies, but also on how to stay ahead of the competition.
Considerations and Drawbacks of a GPO
While subscribing to a GPO membership comes with significant benefits to your team, there are some considerations and limitations you should be aware of.
One crucial consideration is a GPO’s flexibility in its vendor or product selections.
As these organizations enter into contracts with specific suppliers, their members may be limited to procuring from these approved vendors. This goes even if they found alternative vendors that better match their preferences.
Similar issues could arise for businesses with specialized needs. GPOs are designed to cater to the entire group, which can narrow some members’ options.
For instance, if your GPO arrangement doesn’t cover a specific item necessary for your business operations, you may have to purchase outside the contract, losing its discounted benefits.
Before signing up, be sure to review your GPO’s contract carefully. If it negatively affects your outside purchases, fails to secure competitive pricing, or doesn’t include the supplies you need, membership could weaken your buying power.
Finally, smaller companies may find membership fees and other obligations associated with buying groups more costly than they can manage.
Common Misconceptions About GPOs
Despite their advantages, misunderstandings about buying groups can make some businesses doubtful and cautious. Among these misconceptions are:
- GPOs benefit only the suppliers: While it’s true that vendors partner with GPOs to gain access to a larger pool of customers, the advantages to the same customers are equally substantial.
- GPOs are expensive with little ROI potential: Many buying groups offer affordable membership and administrative fees, which can generate savings quickly.
- GPOs only help small or niche companies: In reality, businesses of all types and sizes can benefit from the cost-saving potential and efficiency buying groups provide their members.
- GPOs are only good for price discounts: There’s more to GPOs than discounts. Many buying groups offer account support, spend visibility, valuable resources, and expert marketing insights.
- GPOs deal with low-quality products: GPO contracts are structured for cost savings while maintaining quality standards. Some arrangements allow small and mid-sized businesses to acquire premium items at reasonable rates.
How Do GPOs Make Money?
Most buying groups earn their keep by serving as intermediary entities between the vendors and their members. For-profit GPOs typically have a different revenue model than non-profit groups.
For-profit buying groups generally make money through administrative fees shouldered by the vendors. The rates are often based on the price of the items purchased by the members. Healthcare GPOs, for example, charge 1% to 2% for their services.
In addition to vendor payments, buying groups may also collect membership or participation fees from their members. Membership fees can be a one-time payment or an annual charge. Some contracts may waive membership fees if a member meets a certain threshold.
When researching and choosing a GPO, ensure that its pricing structure is transparent. What they expect from you, as a member, should align with the value their services provide.
Examples of Group Purchasing Organizations
Buying groups are prominent in the healthcare and foodservice/hospitality sectors.
Premier is a US-based healthcare GPO with members and services extending internationally. This buying group has worked with countless healthcare providers and pharmaceutical companies for decades.
Una is a horizontal GPO serving numerous industries, from education, healthcare, and non-profits. Founded in 2012, they continue to provide procurement solutions to their growing members.
Based in Amsterdam, AMS (Alliance of Supermarkets) is a non-profit supermarket buying group with collaborators that include Europe’s top retailers.
For the foodservice sector, Groupex is a trusted foodservice buying group based in Canada serving over 3,000 members. Connecting independent operators with over 300 major brand suppliers and service providers, offering thousands of money-saving initiatives.
Bottom Line
Ultimately, GPOs can be a strategic partner in lowering costs, improving operational efficiency, gaining access to premium vendors, and enhancing the quality of your services. While there are considerations, advantages typically outweigh potential drawbacks.
Are you ready to spend and purchase smarter? Join Groupex today and start benefiting from our exclusive discounts and services!