How Do Group Purchasing Organizations (GPOs) Work?

Group purchasing organizations (GPOs) have existed for a long time to help businesses interested in buying similar products or services gain leverage through combined purchasing power. This leverage ultimately generates preferable prices and contract terms, saves time and frees up internal procurement resources.

Although the first GPO was established in 1910 by the Hospital Bureau of New York, today, many other industries are teaming up to create GPOs that bring in these valuable benefits. This includes industries, such as hospitality, electrical, plumbing, nonprofit, and industrial manufacturing. Whether you company is a part of a GPO or not, you may be wondering how do they work?

 

Group purchasing organizations create and manage contracts for indirect and direct services or commodities, while also helping to manage relationships between the GPO itself, its members and its suppliers. How GPO services work can be outlined in three steps.

 

1. Membership, Leverage and Savings Grow

These GPOs create a membership base comprised of companies seeking to channel spend using the GPO's agreements. The combined spend of these companies – and the gaining of multiple customers at once – creates leverage. That leverage is what motivates suppliers to offer their best pricing and service levels to the GPO.

 

2. Better Pricing and Contract Terms Are Produced

GPOs are able to source agreements with the right suppliers – or those that can provide better pricing and contract terms than GPO members can achieve on their own. Suppliers typically forgo margin opportunities because GPO membership reduces the costs associated with acquiring new business.

 

3. Continuous Improvement Further Mitigates Risk

As members continue to use GPO agreements, contracts are constantly managed by the GPO. As more members join and more spend flows through the agreements, these GPOs can negotiate even deeper discounts and/or improved terms and conditions with suppliers. By this point, the GPO can further mitigate risk and create a path toward continuous improvement by engaging with multiple people at multiple levels throughout supplier organizations.

 

 

Overall Group purchasing organizations offer many benefits to their members to help gain quality products and services from vendors. But the only way to really know for if a GPO Is right for your company is to continue to educate yourself.

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