A Group Purchasing Organization (GPO) is a group that’s leveraged through multiple businesses interested in buying similar products. There are several other reasons why business would benefit from a GPO such as: preferable prices and contract terms, more internal procurement resources, and additional time on other initiatives. On the other hand, suppliers also benefit from GPO’s because their market share expands, access to industry insights increases, and develop better buyer relationships. It’s hard to believe that companies don’t take part in using GPO’s for benefiting their supply chain.
GPO’s can be broken down into three main types:
Vertical Market: Focused on one industry or vertical (examples: healthcare, food service, automotive, electrical, etc.).
Horizontal Market: GPO members in the horizontal market exist in different industries, but purchase similar goods and services.
Master Buyer: One buying organization contains significant contracts in place with vendors and allows other companies to purchase of those current contracts.
One may ask: How does a GPO work? GPO services can be outlined in three summarized steps:
Step 1: Membership
The GPO membership base consists of companies seeking to channel spend using certain GPO agreements. The collective buying power of these businesses is what creates leverage. The leverage stimulates better pricing, since the supplier market share has expanded.
Step 2: Better Pricing and Contract terms Generated by Leverage
GPO’s achieve their advantages by benefiting both the customer and supplier. Although the profit margins for suppliers may not be as high, the amount of spend in one place sparks extreme interest.
Step 3: Risk Reduction Due to GPO Improvements
GPO’s continuously manage the contracts and negotiate for competitive discounts/ improved terms with suppliers. As more members join, GPO’s are able to leverage the increased spend stream that attracts suppliers.
It’s important to educate yourself on GPOs, as you may be missing out on immense cost savings opportunities. Think about which GPO can benefit your company and decrease specific category spend – I’ll cover all that and more in my next blog.