OMNIA Partners Blog

What Is a Group Purchasing Organization (GPO)?

Posted by Ara Arslanian on May 12, 2016

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.

  1. Implementing strategic sourcing and spend evaluation practices to eliminate both historic weaknesses and inefficient buying practices.
  2. Capitalizing on market trends by conducting market research to reveal areas that can be leveraged to improve contract terms.
  3. 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.

Ready for the next step?

First, let us help you decide “Is a GPO Right for Me?” and then check out “What Kind of GPO is Right for Me?” to learn about the three types of GPOs.

Topics: Group Purchasing Organization, Procurement

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