A recent study by The Hackett Group defines a group purchasing organization (GPO) as “an entity that is created to leverage the purchasing power of a group of businesses in order to obtain discounts from suppliers based on the collective buying power of its members.”
What exactly does that mean?
For the sake of simplicity, let’s examine the GPOs that focus on indirect spend in the enterprise space. Indirect spend is a term that describes any expenditures a company has that are required for running the business (office supplies, temporary labor, industrial supplies, etc.), but that aren’t directly related to the company’s product or service.
How a group purchasing organization works
The GPO model works by creating and managing contracts for indirect services or commodities between and relationships among three parties: itself, its members and suppliers.
The GPO creates a membership base comprised of companies seeking to channel spend in certain areas through agreements sourced by the GPO. The combined spend of these companies and the acquisition of multiple customers at once creates leverage. That leverage is what motivates suppliers to offer their best pricing and service levels to the GPO.
Historically, companies have used GPOs to achieve quick access to cost savings. This traditional view of GPOs – although still true – falls short of recognizing the sustainable value that a modern GPO provides. Savings diminish over time, so a modern GPO constantly looks for ways to bring more value through enhancing their agreements and supplier performance.
Equipped with the committed spend, the GPO sources an agreement with a supplier that provides better pricing and contract terms than the member companies could achieve on their own. Generally, the suppliers forgo margin opportunities because there’s a reduced cost of acquiring new business with the GPO’s membership.
Commodity-based spend areas such as office products or safety supplies are obvious choices to benefit from the leverage of combined spend. However, sophisticated GPOs can increase procurement’s spend influence in areas like HR services and IT.
As members use the GPO’s agreements, the GPO manages the contracts. As more members join and more spend goes through the agreements, the GPO and supplier can negotiate deeper discounts and/or improved terms and conditions.
GPOs with an eye on the future cultivate intentional relationships with their suppliers. They mitigate risk and create a path to continuous improvement by engaging with multiple people and levels across the supplier’s organization.
How is a group purchasing organization funded?
A GPO is typically funded by membership fees, administrative fees, or a combination of the two.
The membership fee can be a one-time payment upon joining the GPO, or it can be an annual dues-based payment. Some GPOs waive membership fees if the member participates on a certain number of agreements or if they surpass a spend threshold.
Administrative fees are paid to the GPO by the suppliers. Regardless of whether the fee is a flat rate or based on spend passing through the agreement, the GPO’s funding structure should be transparent to its members.
Is working with a GPO a good option for your company?
Depending on the specific needs of your company, a GPO may or may not be a viable resource for your procurement department. Read “Is a GPO right for me?” to find out.
Want to know what the analysts say? The Hackett Group's study on GPOs states that failing to use a GPO means you're leaving savings opportunities on the table.