Group purchasing organizations (GPOs) are third-party companies that provide contract negotiation and other services to help corporate purchasing teams obtain a variety of products.
GPOs facilitate group purchasing through aggregating demand for a specific product or service, then sourcing volume discounts from manufacturers and distributors in return for giving them exclusive access to a large market of potential customers.
While there are various different advantages to using a GPO that will depend on the industry your company is involved in, there are some main reasons why GPOs are useful in general.
1. Purchasing Power
The main and most obvious reason to use a GPO is because of the sheer purchasing power they hold.
When big GPOs negotiate with manufacturers and distributors, the many small companies that make up their market all get together and bargain for discounts or other special terms.
This means that if your company doesn’t have the volume to negotiate such favorable terms itself, you can still take advantage of them by choosing a group purchasing organization that aligns with your industry.
Having access to scale economy discounts allows your company to have an easier time with budgeting and forecasting, not to mention benefiting from more cost-efficient purchasing.
For instance, many companies offer volume discounts for larger purchases, quantity discounts on smaller ones, no fees or low fees for return services, and other benefits to encourage potential customers to buy more.
2. Lower Prices
Not only is scale economy something to think about when choosing a GPO, but another important factor is the prices they negotiate on behalf of their members.
Going above the standard volume discounts, when there are more business entities acting as a united front through a GPO, you gain a better position for negotiation with your manufacturers and distributors. Obviously, this can have a lot of positive impacts on your company.
It can mean that you can do more with the same amount of money, and if there are ever any financial emergencies your business encounters – there’ll be room in your budget to cover those without a hitch.
For example, if one company requests a 5% discount on an item for 100 purchases, the manufacturer may decide against it.
But if 50 separate businesses were involved with purchasing 100 items each, then that same 5% could be negotiated into a 10% discount on the entire purchase, saving more money for everyone.
3. Economical Transaction Costs
Transaction cost is a term that describes the various costs involved in a business transaction. Also known as sunk costs, they are the expenses involved in putting together a specific deal.
Since transaction costs include search and information costs, negotiating costs, bargaining costs, etc., different rules apply if you want to compare them to fixed or variable costs.
Also, because these costs are very difficult to measure, they are often ignored or overlooked.
However, you should note that incorporating them into your decision-making process can help you avoid taking on unnecessary expenses. Your business’ transaction costs are minimized when making purchases through a group purchasing organization for several reasons.
A reputable GPO already has an established relationship with manufacturers and distributors that allows them to be more efficient when it comes to searching for what you need.
They’re also equipped with specific market knowledge, which helps them determine if a potential purchase is actually worth your while.
4. Core Business Focus Increase
Every company can sort the tasks they do into two groups – core functions and non-core functions.
To put it simply, core functions are those that are directly involved in making your business money, while non-core functions are things that facilitate or support them.
Because much of the legwork has already been done when it comes to purchasing what you need, you can then dedicate more time to focusing on your core business and everything that entails.
This benefit is also something that depends on the industry in question, but in general, it’s easier to cut out inefficiencies when you’re not spending time negotiating terms with suppliers.
The time spent on non-core functions decreases, which leaves you with more time you can spend on developing, improving, and growing your products and services, which is exactly what you want as a business owner.
5. Growing Collaboration Opportunities
Since group purchasing organizations work with corporation teams, coordination is something that comes naturally to them.
This creates new opportunities for businesses to grow by joining forces with companies they might not have considered before.
Also, there are few exercises more valuable than exploring the way a company thinks and operates if you want to improve your business practices or discover new ways of putting together strategies.
By collaborating with them when buying different materials, it opens the doors for you to learn about their best practices, as well as potentially collaborate on different projects in the future as well.
That’s because most of the time, these teams come from the same industries which means that working together can enhance your understanding of the market as a whole.
6. Better Quality Items & Services
When you purchase from a group purchasing organization, the quality of the items or services you receive shouldn’t be an issue because they have already been vetted by your GPO’s team.
To put it simply, when you work with a reputable and proven GPO, there isn’t anything to worry about when it comes to the quality of your purchases.
They have been thoroughly researched and tested in order to ensure that they meet certain standards when it comes to being useful, efficient, reliable, etc., which is exactly what you want for your business.
Reverting back to the point made about enjoying a better negotiating position, you can also expect to receive some items that wouldn’t be available to you when dealing directly with the manufacturer or supplier.
7. Specialized Knowledge
GPOs have a lot of experience in the industries they deal with, which means that they can provide a great deal of knowledge and expertise to help you make better-informed purchasing decisions.
For example, GPOs usually know about the latest products on the market, potential quality problems, or recalls that may or may not have been issued.
They’re always up to date on what’s available and what you can get for your money, which means that they can be a valuable source of information when it comes to finding products or services that meet your needs – no matter the industry in question.
Group purchasing organizations often provide a lot of benefits to the businesses that want to join them. Each business owner has to weigh the pros of joining a GPO for their business specifically, but many people agree that a GPO is a great way to optimize a business.
That’s because group purchasing organizations offer businesses a range of benefits such as lower costs on supplies, more time for core business functions, growing collaboration opportunities, better quality items & services, and specialized knowledge about different products and services.
This makes group purchasing organizations beneficial for many businesses across various industries.