Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Purchasing Group — Explained + Examples
What is a purchasing group?
- A purchasing group is a group of organizations that have joined together to scale economies and improve their purchasing power with suppliers.
- GPOs and purchasing groups both provide numerous other advantages in addition to cost savings.
- GPOs represent the purchasing department, while a purchasing group is a specific team within the department responsible for procuring goods or services for different departments.
What is a Purchasing Group?
A purchasing group is a group of organizations that have joined together to scale economies and improve their purchasing power with suppliers.
Imagine that a procurement department or team is directed to buy materials for the organization. If the organization works alone, it should pay the supplier’s full price because it is limited to buying certain materials.
However, if other organizations purchase the materials together, the supplier will give them access to a bulk discount due to their increased purchasing power.
Cost savings are not the only benefit an organization can get through forming a purchasing group.
In the example above, it would not make sense if all of them were to find a potential supplier. Instead, only one of them will do the work. When the organization finds a supplier, it asks others for their approval.
Furthermore, only one member of the group will need to undergo the negotiation phase with their selected supplier, which will save time for the other members.
To further enhance the benefits of working in a purchasing group, organizations can streamline their procurement processes. To help you implement a more organized approach, I have created a free-to-download editable procurement process: 7 steps template. It’s a PowerPoint file, together with an Excel file, that can help you streamline your procurement process. I even created a video where I’ll explain how you can use this template.
What is a Group Purchasing Organization?
A group purchasing organization (GPO) is an organization that leverages its collective power. Just like purchasing groups, it does this to acquire discounts on the goods and services they need to operate their business.
Group purchasing organizations help their members take advantage of discounts that they acquire through volume buying.
Typically, 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 its transactions.
Nonetheless, group purchasing organizations serve as a purchasing agent to their members. It provides an effective resolution and issues escalation through its supplier account teams.
Difference Between Purchasing Groups and Group Purchasing Organizations
Purchasing groups and group purchasing organizations are similar in intent. However, the difference is that group purchasing is the core business of GPOs.
Group purchasing is the main task of GPOs. This means that group purchasing organization staff have more expertise in bulk purchasing than any single member of a purchasing group.
To simplify their difference, we can look at the group purchasing organization as the purchasing department. On the other hand, the purchasing group is a group of people within it who take care of the acquisition of goods or services for different departments.
Advantages of Purchasing Groups
How can you benefit from purchasing groups? Believe it or not, other than saving costs, purchasing groups give you a lot of benefits and not just financially related. The following are the advantages of purchasing groups:
1. Scale economies
Scale economies are the most obvious advantage of purchasing groups. The volume of purchase demands, such as the number of businesses coming together to purchase supplies, gives each business access to the economies of scale. Thus, this leads to increased purchasing power.
2. Increase negotiation power
By increasing the predicted purchase volume, purchasing groups can negotiate with suppliers to lower the prices of the goods or services they will acquire. The savings are considerable, as they range from 10 to 35 percent.
3. Reduces transaction costs
Organizations can simplify their procurement process by being in a purchasing group. It reduces the cost of their goods and also the transaction costs. This is due to the fact that there will be a reduction in the number of contracts to be prepared, negotiated, and managed.
4. Reduces workload
The purchasing group handles all stages in the life cycle of the procurement contracts on behalf of the other parties in the group. Therefore, the individual businesses benefit from a significant reduction in their workload and are free to focus more on their core business.
5. Improvement in best practices
Organizations that manage the purchasing group allow their network businesses to enhance their results by sharing the best practices.
Most modern organizations that manage purchasing groups utilize industry experts for each product market they handle. These experts continuously search for increasingly more efficient and effective methods to improve the quality and process of the supplier.
6. Positive impact on the financial health of each networked organization
Savings generated by the centralized purchasing in a network of businesses will increase the profits of each company in the network without increasing sales. This is due to the fact that a reduction in purchasing costs can impact the bottom line of the organization.
Conclusion
A purchasing group is a group of organizations that have joined together to scale economies and improve their purchasing power with suppliers.
It is needed so that by joining with other organizations to purchase materials, products, and services, suppliers will give them access to a bulk discount due to an increased purchasing or buying power.
Group purchasing is the main task of GPOs. This means that group purchasing organization staff have more expertise in bulk purchasing than any single member of a purchasing group.
However, a purchasing group is often confused with group purchasing organizations. The former is responsible for the acquisition of goods and services, while GPOs are the purchasing department itself, so it is bigger.
Frequentlyasked questions
What is a purchasing group?
A purchasing group is a group of organizations that have joined together to scale economies and improve their purchasing power with suppliers.
What is a group purchasing organization?
A group purchasing organization is an organization that leverages its collective power.
How can GPO assist purchasing groups?
When purchasing groups are partnering with GPOs, they can access the buying power and the expert team of the GPO.
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.
