Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Purchasing Group — Everything You Should Know
Key takeaways
- 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.
You may have a hint of what purchasing group is due to its name. However, many people still do not know how it works and why organizations do this.
In this article, we will discuss what a purchasing group is. We will check how it differs from purchasing organizations. Additionally, we will also examine the advantages of purchasing groups.
After reading this article, you will have a deeper knowledge of what a purchasing group is. You will know its advantages that will help you develop your company more. So without further delay, let’s now delve into the world of purchasing groups.
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What is a Purchasing Group?
From the word itself, 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, they should pay the supplier’s full price because they are limited to buying certain materials.
However, by joining with other organizations to purchase the materials, the supplier will give them access to a bulk discount due to the 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 will 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 negotiate with their selected supplier which will save time for the other members.
Whatis 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 its business.
Group purchasing organizations help their members to 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 their transactions.
Nonetheless, group purchasing organizations serve as an agent to their members. It provides an effective resolution and issues escalation through its supplier account teams.
DifferenceBetween 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 takes care of the acquisition of goods or services for different departments.
Advantagesof 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 scale of economies. 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 it ranges 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 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 out 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 centralization of 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?
It is a group of organizations that have joined together to scale economies and improve their purchasing power through bulk buying with suppliers.
What is a group purchasing organization?
It 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.
