Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Group Purchasing Organizations — Everything A Procurement Professional Should Know
Key takeaways
- A group purchasing organization (GPO) is an organization that leverages its collective power.
- Group Purchasing Organizations help their members by taking advantage of discounts through volume buying.
- GPOs help negotiate for lower prices due to the volume of purchases.
Not all of us are familiar with the terms of procurement, especially those who are new in this field. But don’t worry, we are here to guide you in walking and unraveling the world of procurement.
For this article, we will learn about group purchasing organizations. We are going to define and understand what it is for in procurement.
You will have the general idea which will allow you to be well-versed in procurement after finishing this article.
before you start reading this article, I have created a free-to-download editable procurement strategy template. It’s a PowerPoint file you can use to create your own strategy. I even created a video where I’ll explain how you can use this template.
What are Group Purchasing Organizations?
A group purchasing organization (GPO) is an organization that leverages its collective power. It does this to acquire discounts on the goods and services they need to operate its business. This is used in many industries to purchase materials but is common in grocery and healthcare industries.
Group purchasing organizations help their members take advantage of discounts acquired through volume buying. It received discounts without buying more than what it needed.
Most of the time, it exists to make money. Their profit comes from two sources which are participation fees and supplier-funded.
A participation fee is directly charged to members for the access model. On the other hand, supplier-funded pays the GPO a periodic fee depending on the aggregate spending and their transactions.
Notably, group purchasing organizations serve as agent to their members. It provides an effective resolution and issues escalation through its supplier account teams.
How Does a Group Purchasing Organization Work?
A group purchasing organization’s function is to accumulate the purchase of common goods or services across multiple buyers. This creates a purchasing power beyond what any company can have. Group purchasing organization acts as a third party to suppliers and buyers.
A group purchasing organization’s ability to create greater value increases as its member grows. It does not always charge a fee for members to join. Some are free for members and derive their profit from their supplier partners.
Most of the time, it drives value through the reduction of costs. However, some just simply offer a competitive purchase price.
Importance of Group Purchasing Organizations
As we discussed earlier, a group purchasing organization (GPO) leverages its collective power to negotiate discounts on materials and services from suppliers.
GPOs are crucial, especially for small businesses that do not have much buying power, as they can negotiate lower prices due to the volume of purchases they can make through their collective power.
By using GPO, businesses can streamline their procurement processes and lower the burden associated with purchasing card. Also, GPOs provide a platform for businesses to collaborate and share valuable information about purchasing practices and supplier performance.
Moreover, GPOs are effective for businesses to reduce their costs, improve their processes, and gain access to a wider range of materials and services.
Types of Group Purchasing Organizations
Group Purchasing Organizations are classified into different types. Each of them serves a definite purpose and can benefit businesses in various ways.
Let’s explore three types of GPOs:
1. Horizontal GPOs
These GPOs serve organizations that span all industries and markets. It also works with all kinds of businesses. Horizontal GPOs offer assistance on goods and services, especially indirect spending.
Horizontal GPOs purchase lots of the same goods or services to create their products and operate their businesses.
2. Vertical GPOs
Vertical GPOs focus on a specific industry. It is created as a way for association groups to benefit their member companies.
An example of this is those who serve the healthcare industry. Small to mid-sized healthcare businesses join together to reduce the costs of the materials.
3. Master Buyer GPOs
Master Buyer GPOs work by granting the purchasing power of multinational corporations to its members. It has agreements with numerous suppliers that allow its members to use the agreements to purchase their materials.
Benefits of Group Purchasing Organization
Aside from huge discounts, GPOs can give you and your company several advantages. Group Purchasing Organizations can give you the following benefits:
1. Access to high-quality products and services
A group purchasing organization members can gain access to quality materials or services that have been thoroughly assessed by it. Also, businesses can share their best practices and information by collaborating with other members.
A group purchasing organization brings together a group of professionals in different industries who have the same goals. This allows its members to share sourcing tips and experiences in procurement.
2. Makes it easier to recover from supply chain disruption
No one, not even the best supply chain risk management can eradicate the possibility of supply chain disruption.
This is where group purchasing organization becomes beneficial. Being a member of GPO can give you immediate access to information that you need to find another supplier.
Working with a GPO lessens the risk of disruption in the supply chain. Because it brings together a group of professionals whom you can quickly ask for materials or services.
You can find a second supplier when your main supplier is incapable of meeting your demand due to an emergency.
3. Reduce costs
The GPO’s main focus is to get members the most products but cost less without compromising the quality. As GPOs leverage their collective power, they can acquire discounts from their suppliers.
GPOs provide bulk purchasing power by creating a larger community and negotiating contracts for products and services. This allows the members of GPOs to cut their overall costs due to bulk buying.
Group purchasing organization also monitors the market condition and looks out for scarce products. This allows its members to gain access to stable prices and protect them from price hikes.
Examples of Group Purchasing Organization
As aforementioned, GPOs are usually present in the healthcare and grocery industries. Here are three examples of Group Purchasing Organizations that work across the globe:
1. Premier
Premier is focused on the healthcare industry. It has a long history of joining the department of health and human services. Premier strives to deliver more for health systems. It also aims to optimize the supply chain, integrate pharmacy, and maximize value-based care.
2. Vizient
Vizient also deals with the healthcare industry. It helps its members improve and strengthen their market by aligning their cost, quality, and performance. It aims to improve the areas of healthcare such as pharmacy, supply chain, strategic growth, and operations and quality.
3. Una
Una works with all businesses and industries. It strives to empower organizations through increased buying power, comprehensive savings solutions, and superior service for members. It partners with the best suppliers in the market to provide its members access to cost-efficient products and services.
4. AMS
AMS is a supermarket buying group that is based in Amsterdam. It is a non-profit alliance that works alongside the top 9 European retailers. It has become trusted in the retail industry for its 25 years of experience in international sourcing.
AMS aims to deliver the best price and quality to stay competitive in the industry. It allows its retailers to offer its shoppers a great value for their money
Conclusion
Group Purchasing Organizations or GPOs are organizations that leverage their collective power. They usually do this so they can get discounts on goods and services when volume buying which is mostly common in grocery and healthcare industries.
Further, group purchasing organizations act as a third party to suppliers and buyers, and function by accumulating purchases of common goods and services across several suppliers.
So, GPOs are important, especially for small businesses that do not have strong buying power. With that, businesses are also able to streamline their procurement processes because GPOs provide them with a platform where they can easily collaborate and share valuable information about purchasing practices and supplier performance.
Moreover, there are lots of group purchasing organizations all around the world. Some of the most famous ones are Premier, Vizient, Una, and AMS.
Frequentlyasked questions
What is a group purchasing organization?
A group purchasing organization partners with members to have collective power.
How does it help businesses?
It helps businesses through bulk buying which allows them to save more.
Are memberships free?
This depends on the group purchasing organization that you want to join. Some group purchasing organizations offer free memberships.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
