If you run a small or medium-sized business, have you ever considered joining a Group Purchasing Organization (GPO)? As you look for ways to cut costs and improve operations, participating in a GPO could be a strategic move worth exploring. In this comprehensive guide, I‘ll explain what GPOs are, their biggest pros and cons, tips for selecting one, and key factors to weigh when deciding if a GPO is right for your company.
What is a GPO and How Can It Help Your Business?
A Group Purchasing Organization (GPO) leverages the collective purchasing power of member businesses to negotiate discounted pricing and improved contract terms with suppliers. By aggregating the spending of many companies, a GPO can secure better deals and discounts – often 10-15% or more below what members could obtain on their own.
Here‘s a quick overview of how GPOs work:
- Businesses join the GPO as members by paying an annual fee
- The GPO combines the purchasing volumes of all members
- This aggregated demand incentivizes suppliers to offer lower prices and favorable terms
- GPO negotiates and manages contracts with suppliers on behalf of all members
- Members place orders directly with suppliers at specially discounted GPO rates
In essence, GPOs level the playing field so small and mid-sized companies can access the attractive pricing and terms typically only available to giant corporations with huge purchasing power.
Key Benefits of Joining a GPO
Now, let‘s explore some of the biggest benefits your company can gain by joining a GPO:
1. Substantial Cost Savings
Without a doubt, the main appeal of GPOs is the opportunity for meaningful cost savings. GPO members typically save between 10-18% on procurement costs by accessing discounted pricing and vendor rebates.
These savings apply across a wide range of indirect goods and services, including:
- Raw materials, components, and packaging
- MRO supplies – maintenance, repair, and operations
- Office products, furniture, and equipment
- Telecom services and equipment
- Shipping, logistics, and distribution
- Energy contracts with utilities
- Business services like waste management
For example, a 350 bed hospital in California saved 22% on orthopedic implants by using Novation GPO contracts. That equated to over $350,000 in annual savings [1].
The more you spend in a certain product category, the greater your potential savings by aggregating volume through a GPO.
2. Access to Leading Suppliers and Broader Product Selection
GPOs maintain extensive supplier networks and leverage their member volume to induce vendors to offer favorable terms. This opens up new sourcing options and gives you access to leading suppliers that you may not be able to access cost-effectively on your own.
GPO contracting also gives you access to a broader range of products and services. For example, MedAssets provides members with access to over 70 trusted medical-surgical supply vendors through their contracts [2].
More supplier and product choices increase your options without sacrificing the discounts of aggregated volume.
3. Lower Administrative Costs and Staff Time Savings
Procuring goods and services directly can become very time and labor intensive, especially the tasks of:
- Researching options and identifying suppliers
- Comparing vendors and negotiating prices/terms
- Processing orders and managing billing
- Monitoring supplier performance and contract compliance
By consolidating these procurement activities through a GPO, your administrative costs decrease substantially. The GPO staff handles the tedious purchasing tasks, allowing you to better utilize your own resources on higher-value business functions.
4. Quality Assurance and Risk Mitigation
Established GPOs thoroughly vet potential suppliers, assess product/service quality, and ensure members receive full contractual terms and support. This provides a degree of quality assurance and risk mitigation around suppliers.
For example, Premier Inc. puts all medical devices and products through a rigorous safety and efficacy review process before contracting [3]. This provides peace of mind to hospital buyers.
By leveraging the GPO‘s supplier expertise, you can source goods and services with greater confidence.
Key Drawbacks and Considerations of Joining a GPO
While the benefits can be substantial, signing on with a GPO does come with some potential drawbacks to weigh:
1. Loss of Control Over Supplier Selection
Joining a GPO means you cede some control over selecting suppliers and products to the GPO itself. The contracts are negotiated collectively, so individual members lose flexibility to pick their preferred vendor or customize terms.
You‘ll need to choose from the portfolio of suppliers and contracts pre-negotiated by the GPO, which may not match your ideal selection.
2. Minimum Order Quantities Can Be Problematic
To secure deep discounts, suppliers often impose minimum order quantities (MOQs) as part of GPO contracts. This may present challenges if your purchasing volumes or storage capacity are limited.
Before joining, analyze spend by category to ensure you can realistically meet contract MOQs. Otherwise, for categories with lower volumes, you may not achieve expected savings.
3. Membership and Administrative Fees Apply to Some GPOs
Though many GPOs are non-profits focused solely on delivering savings to members, some do charge administrative fees or require equity investments to join. These range from a few thousand dollars per year to over $100,000 for the largest GPOs.
Be sure to clarify any membership costs upfront so there are no surprises. Also consider ROI – a $5K fee is negligible if it enables $100K in savings.
4. Potential Contract Compliance Issues
To fully achieve the forecasted savings, you must adhere closely to the negotiated GPO contracts and resist side deals with sales reps. But lack of purchasing discipline can undermine benefits.
Before joining, assess your organization‘s buying culture and willingness to comply. Maverick buying tendencies could diminish the value of GPO membership.
5. One-Size-Fits-All Approach May Not Suit Your Needs
GPOs aim to meet the common needs of a group of members through their centralized contracts. However, this umbrella approach may not suit companies with very unique procurement needs or specifications.
If your requirements differ greatly from others in your industry, the GPO contracts may not deliver their full value.
6 Factors to Consider When Choosing a GPO
Okay, so you‘ve weighed the key pros and cons. Next, let‘s explore the criteria for selecting the right GPO for your business:
1. Industry Focus
Vertical GPOs that specialize in a certain industry or niche often deliver greater value. For example, if you run a hospital, join a healthcare GPO rather than generalized one.
2. Services and Support
Look for a GPO that provides robust analytics on savings, benchmarks your performance versus peers, and offers stellar customer service. These services enhance the value.
3. Cost Structure
Carefully clarify membership fees, required capital investments, ad hoc service fees, and any other costs. The ROI should far outweigh the expenses.
4. Contract Terms
Review contract terms closely before committing. Involve key stakeholders to ensure agreements align with internal needs and standards.
5. Peer Recommendations
Solicit feedback from industry colleagues on their experiences with different GPOs. This input can help narrow your selection.
6. Start Small
Consider piloting the GPO in just 1-2 spending categories before fully transitioning procurement. This allows you to test benefits before wholesale commitment.
Can a GPO Deliver Real Value for Your Company?
GPOs can provide big benefits, including meaningful cost reduction, process improvements, and risk mitigation. However, the advantages may be diminished if the GPO‘s offering isn‘t well-aligned to your needs and buying practices.
Carefully weigh the pros and cons, conduct due diligence, analyze your current procurement spending and processes, and evaluate options. For many businesses, joining a specialized GPO delivers compelling ROI through discounted pricing, rebates, and administrative efficiencies. But assess the fit properly before jumping in.
With the right GPO relationship, you can strengthen purchasing power, reduce expenses, and refocus internal resources on key business goals. Just be sure to choose your partner carefully!
