Demystifying Group Purchasing Organizations
PurchTips - Edition #109 September 19, 2006
By Charles Dominick, SPSM
Can A GPO Help Your Purchasing Department?
A group purchasing organization (GPO) is "a group that's responsible for sourcing and managing aggregated contracts on behalf of a discrete group of companies," according to David Clevenger, VP of a large GPO, Corporate United. So, instead of a purchasing department sourcing for a category of goods or services to establish a favorable contract with a supplier, joining a GPO will give that purchasing department access to an existing contract with favorable pricing and terms.
Purchasing departments join GPO’s primarily for savings. By combining its spend with that of other companies, a purchasing department gets the buying power and leverage of a much larger organization.
But using a GPO can also help a purchasing department address under-managed and unmanaged categories.
"Most organizations are responsible for buying 150+ different categories and those responsible for indirect procurement simply cannot handle that," says Clevenger. "In managing less strategic categories, like office supplies, office equipment, or safety supplies, (a GPO) allows the internal resources at these organizations to tackle more of those strategic, larger spends."
Also, smaller companies who’ve struggled to get suppliers to correct problems can have more success when their spend is part of a GPO contract. Large GPO’s have “the ability to go up the ladder within those supplier organizations because (large GPO’s) represent such a significant spend. So it's frequently easier for (large GPO’s) to get the attention of senior leadership on the supply side than it is for an individual member."
Using a GPO doesn't necessarily mean totally sacrificing control. When sourcing a new category, some GPO's utilize a steering committee consisting of members' procurement specialists to identify and qualify suppliers and vote on the selected supplier.
Like any investment, an investment in a GPO should produce a satisfactory return on that investment.
To determine your return on investment requires baselining your current spend and comparing it to the pricing available through the GPO. Your actual savings will depend on how well-managed the categories are currently as well as how effective you are at getting end users to channel their spend through the GPO contracts.
If the savings exceeds the investment, a purchasing department can count the net savings towards its goals for the year. And, if the category wasn't going to be addressed due to an already full workload, using a GPO can multiply the success of a purchasing department.
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Want to learn more about today’s topic? Then listen to my podcast interview with David Clevenger! Podcasts are digital audio files that you can listen to on your PC, download to your iPod/MP3 player, or burn to CD. Our Purchasing & Supply Management Podcast SeriesSM is a new way for us to help you succeed!