The ultimate guide to group purchasing organizations

Many small and medium-sized business owners consider joining a group purchasing organization (GPO) at some point, especially as they grow and face more complex procurement needs. As their businesses expand, they may need to purchase more supplies to keep up with demand but struggle to find ways to cut costs. They might pay the same price per item even at larger order quantities simply because they lack the purchasing power of large-scale companies.

GPOs can help organizations cut costs and maintain stability during times of disruption. However, there's a lot to consider before taking the leap.

What is a group purchasing organization?

A group purchasing organization is an entity that combines the purchasing power of multiple businesses to obtain better pricing from suppliers. It acts as an intermediary between organizations and vendors to help companies secure group discounts and more favorable contract terms than they would be able to get on their own.

While organizations of any size can take advantage of group purchasing organizations' pre-negotiated contracts with top suppliers, the approach tends to be most beneficial for small and medium-sized businesses (SMBs) that don't typically have access to deals related to purchasing volume.

GPOs are different from buying groups, which are created when businesses combine their purchasing power to buy the same product at bulk prices. An example of group buying would be multiple schools within the same district coming together to purchase supplies and equipment for their classrooms.

The history of GPOs

Group purchasing organizations were first introduced in the healthcare industry to help hospitals combat rising expenses resulting from advances in care and falling reimbursements. The first group purchasing organization, The Hospital Bureau of New York, was created in 1910.

The number of GPOs grew slowly until 1962, when records showed 10 in operation. Medicare and Medicaid stimulated their popularity, and by 2003, the U.S. Government Accountability Office reported that experts estimated there were hundreds of GPOs in operation. The model was so successful that it spread to other industries facing rising costs like manufacturing and industrials.

Types of GPOs

There are two main types of group purchasing organizations: horizontal GPOs and vertical GPOs.

Horizontal GPOs

Horizontal GPOs are procurement groups that serve a variety of industries and diverse businesses. These entities often provide collective buying power for indirect spend categories, such as office supplies, IT equipment, MRO supplies and services, and fleet management.

Vertical GPOs

Unlike horizontal GPOs, vertical GPOs focus on a particular industry and help businesses in that sector leverage collective buying power to achieve lower prices. These groups concentrate on specialized products and services relevant to their field.

Examples of industries where vertical GPOs are common include healthcare and manufacturing and industrials.

How does a GPO work?

A GPO acts as a bridge between buyers and suppliers. It's created when multiple businesses come together to aggregate their purchasing power and negotiate better terms with vendors.

Here are a few traditional steps a GPO might take to secure better deals for its member companies.

1. Identify shared needs
   Organizations recognize that they purchase similar goods and services and could benefit from negotiating contracts together. They decide to create a GPO to approach suppliers about possible discounts.
2. Form the GPO
   Once organizations agree to work together, they formalize a GPO as a legal entity, usually a nonprofit or cooperative. The member companies agree on how they will run the entity and manage its activities.
3. Negotiate GPO contracts
   The GPO begins negotiating with suppliers. The goal is to achieve the most favorable pricing, contract terms, and conditions, helping improve GPO members' spend management.
4. Make the contracts available
   Pre-negotiated contracts are made available to GPO members, who can choose whether to purchase from them. If certain items or services are not yet covered in the GPO portfolio, members can often request new contracts to meet their needs.
5. Maintain the GPO
   The GPO’s operations remain ongoing. The entity is typically responsible for managing supplier relationships, monitoring contract performance, and providing support or additional services to its members.

How do GPOs make money?

Group purchasing organizations primarily earn revenue through fees collected from members and/or suppliers. Some common fees GPOs might charge include the following:

• Membership fees: A GPO may charge its members a one-time membership fee, an annual fee, or a percentage of a member's purchases for participating in the group.
• Supplier fees: GPOs might pass fees on to suppliers in the form of administrative fees or contract fees, which may involve a percentage of the supplier's sales or a set fee for managing its contracts.
• A combination: Some GPOs charge a combination of member and supplier fees to reduce the burden on any single party.

Benefits of GPOs

GPOs bring a wide variety of benefits to small and medium-sized businesses, including the following:

• Cost savings: Organizations that utilize GPOs often save 10-25% annually across various spending categories by tapping into collective buying power and volume discounts.
• Access to market insights: GPOs have access to industry data that can help businesses make more informed purchasing decisions.
• Reduced risk: GPOs often vet their suppliers to verify they meet specific quality and standards, which can reduce risks for members.
• A streamlined procurement process: GPOs can help simplify and standardize procurement processes, leading to greater efficiency.
• Time and resource savings: Pre-negotiated contracts can save organizations a significant amount of time and resources, freeing up procurement teams to focus on higher-value work, like procurement strategy planning.
• Expanded services: Some GPOs offer additional services to members, such as consulting, auditing, and data analysis.

Disadvantages of GPOs

While GPOs come with certain benefits for small to medium-sized businesses, they also have drawbacks. A few disadvantages to consider include:

• Minimum order sizes: GPOs may require bulk orders with minimum quantities that small and medium-sized businesses have trouble meeting. This could lead to extra storage costs for excess inventory.
• Purchasing limitations: Businesses may experience a loss of control as they face restrictions on suppliers and product choices, which significantly limit their options.
• Inflexible delivery schedules: Member companies may not get to set their delivery preferences, which can lead to delivery schedules that don't align with their business needs.
• Loss of bargaining power: By joining a GPO, businesses may give up some of their negotiation power. They can get stuck paying fixed prices that might not be the most competitive option.
• Membership costs: Membership fees can become a financial burden for small and medium-sized businesses as an additional procurement expense.
• Lack of transparency: Some GPOs may not be transparent about their negotiation practices or revenue streams, which can make it challenging for businesses to assess the true value of their GPO membership.

What you should know about GPOs

Group purchasing organizations can deliver real value, and they work well for plenty of businesses. Like any purchasing model, though, they come with trade-offs worth understanding before you commit. Here are a few factors to weigh if you're considering joining one:

GPOs may recommend spending more than necessary

Because GPOs rely on volume purchases, they may recommend buying more than you need when conducting member audits for contract adherence. To combat this, be sure to check their audit recommendations against membership requirements to confirm what is actually necessary.

GPOs can't help you with shadow spend

Signing up for a GPO is one thing, having employees follow the requirements is another. Evaluating compliance to internal buying policies and monitoring for off-contract spending can be time-consuming, especially if you don’t have a centralized purchasing solution to automate this.

Your returns could get smaller over time

If your company is on a high-growth trajectory, you may notice your returns getting smaller. This is because your ability to negotiate independently grows with your business, so you won't benefit as much as you did when you were smaller.

How to assess whether a GPO is worth it

There are a lot of factors that go into determining whether a GPO membership is worthwhile for your business. When assessing a potential GPO partnership, consider the following:

• Cost savings: Compare the GPO's discounts and contract terms for the items you need to other GPOs.
• Benefits: Research whether the GPO offers additional benefits, such as free shipping, access to consultants, or loyalty programs.
• Fees: Look into the membership fees, including how they're structured and how they compare to other GPOs.
• Spend requirements: Evaluate whether the GPO has minimum spending requirements that are higher than your company's normal spend.
• Reputation: Consider the GPO's reputation, including any industry accolades and/or reviews.
• Industry needs: Determine whether the GPO caters to your specific industry and purchasing needs.

Weighing these factors can help you decide whether a GPO makes sense for your business.

Savings with GPOs vs. procurement platforms

Joining a group purchasing organization can benefit smaller businesses, though it can also come with trade-offs like minimum spend requirements, a narrower set of product and service options, and less room to negotiate on your own terms.

A buying solution like Amazon Business offers a different path to many of the same savings, with capabilities that scale as your company grows. Organizations can access spend management tools, a wide selection of suppliers, and products with bulk pricing and quantity discounts.

The two models suit different needs. Some organizations rely on GPOs for specialized purchasing agreements, while others turn to Amazon Business for flexibility, real-time price comparisons, custom offers through managed spend deals, and integration with procurement systems. Depending on what your business requires, you can use either approach on its own or combine the two to strengthen your procurement.

GPOs and procurement solutions can work together

Many organizations use both, drawing on a GPO for certain contracted agreements while relying on a procurement solution like Amazon Business for purchasing across indirect categories, including office supplies, facilities, and operational needs.

Amazon Business gives procurement teams access to competitive pricing across millions of products, along with custom offers and managed spend deals for category-level volume, multi-user account controls, approval workflows, and analytics, without requiring a GPO membership or contract commitment. For organizations that need broad category coverage with full spend visibility, it delivers business-only pricing and a familiar shopping experience.

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