What is a GPO?
Everything You Need to Know
What is a Group Purchasing Organization (GPO)?
Group purchasing organizations are entities that get better pricing on supplies and equipment for the companies that make up their membership. By using the combined buying power of a group of companies, GPOs can buy large amounts of supplies while negotiating steep discounts with suppliers.
Buying supplies in bulk has traditionally been a way for companies to avoid high overhead since suppliers are willing to give discounts for large orders. With a GPO, the GPO combines the buying power of multiple companies to purchase even larger orders. This leads to larger discounts and benefits the members of the GPO as a whole.
How Does a GPO Work?
A GPO creates and manages contracts for indirect supplies, items, and services. They don’t directly buy or sell any of the items or services themselves; they negotiate the rates and discounts that suppliers give their members. Indirect items and services are defined as things that are essential to running a business but aren’t directly related to the company’s goods or services.
For example, while a manufacturing company might sell steel pipes, they still need paper to print out orders, notes, and designs. They need paper to run their business, but it isn’t directly related to the steel beams they sell. Indirect services can include things like marketing services and IT support.
These GPOs also create and manage relationships between suppliers, members, and the GPO itself. As more members join the GPO, the collective buying power of the group increases. This allows the Group Purchasing Organization to constantly renegotiate contracts with suppliers and get their members better pricing.
You might be wondering why the supplier would be willing to offer such large discounts. This is because Group Purchasing Organizations benefit the suppliers, even if they are negotiating lower prices.
GPOs lower the cost of getting new business for suppliers by bringing them multiple buyers at once. This means that these suppliers don’t have to spend as much money on things like marketing and advertising. It also allows these suppliers to capture large parts of the market. If they are able to sell their products through GPOs, they can sell to a large group of companies without having to worry about the competition.
This leads to lower margins for both the suppliers and the companies, increasing profits and creating a symbiotic relationship.
What Industries Use GPOs?
The truth is that GPOs are involved in many of today’s biggest industries, saving them billions of dollars each year. Any industry that has tons of companies that use the same materials, supplies, or equipment are prime targets for GPOs.
GPOs are heavily involved in the following industries:
- Food & Hospitality
- Small Business
Even the non-profit industry has started to use GPOs to keep their overhead down. This is very important for non-profits as they need to spend as much of their budget on helping others as possible.
Non-profits use GPOs to buy services like consulting services, grant writing services, and to receive access to networking events.
By gaining membership in a GPO, these companies can significantly cut their overhead costs and increase profits. The larger the GPO, the more likely it is that they can offer better discounts.
The only industries that don’t utilize GPOs are industries that are highly concentrated or don’t have many companies. For example, if an industry only has a handful of companies, a GPO wouldn’t be as effective. With only a handful of companies, their collective buying power would be limited.
Types of GPOs
Although all GPOs have the same basic design, there are different types of GPOs that serve different functions for different industries.
A vertical GPO serves members and companies in a specific industry that requires specific supplies and services. The healthcare industry and the industrial manufacturing industries are perfect examples of industries where vertical GPOs would participate.
For example, in the healthcare industry, there is a shared need amongst different companies for specific medical supplies like syringes, bandages, and lab equipment. A vertical GPO specializing in healthcare could supply all of these industry-specific items to these companies at a discounted rate.
A horizontal GPO serves a cross-section of companies from different industries. They supply non-strategic items or items that are not as important to the operation of the business as others. These would include uniform services, office supplies, pest services, and any outside labor, like contractors or temporary employees.
For example, a horizontal GPO could serve members in the non-profit industry and members in the publishing industry by supplying services and items they both use, such as office supplies, telecom services, or IT support.
How Are GPOs Funded?
GPOs are funded in two ways, by membership fees and administrative fees. When members join the GPO, they are usually required to pay a membership fee. Membership fees are usually a one-time payment or a bi-annual payment.
Members are often required to pay administrative fees to the GPO as well. These administrative fees are charged whenever a member utilizes a contract held by the GPO. Suppliers may also have to pay administrative fees, depending on the structure and operation of the GPO.
The cost of these administrative fees is variable. Some GPOs charge a flat fee for each transaction, while others charge a percentage of the spend going through the contract. Whether the GPO charges a flat fee or a percentage depends on the structure of the GPO and the amount being spent.
The important thing to note is that no matter what fees are being charged, the pricing structure and policies of the GPO are always completely transparent to their members.
How Do GPOs Help Businesses?
The obvious benefit for members of a GPO is the ability to buy large amounts of indirect supplies in a way that is cheap and convenient. But there are other benefits for members of GPO that aren’t immediately apparent.
Save Time and Money
When companies join a GPO, they aren’t just getting cheaper items and services. They are saving themselves time, which in turn saves money. Procurement teams don’t have to waste time looking for suppliers or negotiating prices. They can focus their valuable time on direct spending and improving your business, not looking for a cheap deal on office supplies.
This cuts your internal costs as well as your overhead, which frees up capital to increase employee wages or invest in other projects.
Network and Connect
The membership base of a GPO is usually made up of a large number of companies. These companies can be in the same industry or in many different industries, but they all get the chance to network with each other. This gives them a great opportunity to develop relationships with other members in the GPO and expand their business.
This creates an entity where the members are working together, offering consulting, connections, and other services to each other. This makes it easier for members of the GPO to succeed individually and together.
Better Data Equals Better Buying
GPOs don’t only use the combined buying power of their members; they use their combined knowledge too. GPOs often collect data surrounding the buying patterns of its members. This allows them to better predict the amount of spend on each contract and better negotiate their contracts.
But it doesn’t just serve the GPO; they also supply their members with this data. That data allows members to more easily predict their buying habits and cuts down on overhead.