To manage overhead costs associated with running the business, companies will often hire employees dedicated to ensuring that capital is spent efficiently. At its core, this is the role of a procurement department.
At the risk of over-simplifying, there are three basic ways that a procurement department manages spend and reduces cost.
- Implementing strategic sourcing and spend evaluation practices to eliminate both historic weaknesses and inefficient buying practices.
- Capitalizing on market trends by conducting market research to reveal areas that can be leveraged to improve contract terms.
- Compressing supplier margins during contract negotiation with the goal of reducing costs and maintaining quality.
How does a GPO add value?
This is the point at which a GPO becomes most important. After going through these three steps, savings margins are largely reduced. Joining a group purchasing organization allows procurement to once again make effective cost saving strides.
A GPO gathers members who are interested in buying similar products. With the group’s spend volume as a leverage point, the GPO negotiates contracts with suppliers to obtain preferable prices and contract terms.
By using a GPO’s agreement, a company saves the time and resources it would use sourcing its own and consequently accesses the savings more quickly.
How do I choose a GPO?
Because all GPOs provide access to leveraged agreements, the level of contract management is the differentiator. An advanced GPO manages the lifecycle of supplier contracts by:
- Monitoring changing buying patterns in the market
- Continually seeking opportunities for improvement and potential savings
- Ensuring that the terms of the contract are being followed
- Reviewing and auditing price files
- Implementing a thorough supplier relationship management program
These activities require an extensive time investment when performed correctly, and being part of a GPO removes that time expenditure from member companies.
Additionally, the most sophisticated GPOs have partner-based relationships with their suppliers that focus on the total value of the contract instead of simply offering the lowest price.