Prime Advantage Blog

What is a Group Purchasing Organization?

Mike McDonald on Apr 3, 2015 11:04:00 AM

Aristotle May Have Finally Been on to Something

group-purchasing-organizationAs the famous philosopher once said, “The whole is greater than the sum of its parts.” There absolutely couldn’t be a better way to describe the basic function of a Group Purchasing Organization (GPO). And you don’t have to be a student of Greek philosophy or even own a loose fitting robe to understand how this concept plays out in today’s business world.

A GPO is an entity created to leverage the purchasing power of a collection of businesses to obtain reduced pricing from vendors based on the combined volume purchased by the group. The buyers are referred to as “Members” and the vendors are called “Suppliers.” For Members, it’s all about cost savings as well as the many other benefits drawn from being part of a large network. For Suppliers, the advantages come through increased market share and deeper relationships in the customer’s organization.

Where GPOs Exist

GPOs operate in specific industries such as healthcare, hospitality, foodservice, electrical, plumbing, non-profits, and industrial manufacturing. What enables GPOs to thrive in these sectors is the sheer number of small and mid-market companies that occupy the space. Sliding back to Aristotle, there are a lot of firms (the “parts”) that make up the GPO (the “whole”). By combining the spend of these companies, both the Members’ buying power and the Suppliers’ market percentage become greater. However, if an industry is consolidated with only a few market leaders, a GPO may not be as effective.

3 Main Types of GPOs

Vertical Market

A vertical market GPO focuses on one specific industry or vertical. Examples of this are GPOs in the healthcare market where small and mid-sized medical centers or hospitals join to reduce their costs.

Horizontal Market

Members in horizontal market GPOs exist in many different industries, but purchase a lot of the same goods and services to build their products and run their companies. Prime Advantage is a great example of a horizontal market GPO.

Master Buyer

The master buyer model is when one chief buying organization has significant contracts in place with vendors and allows additional companies to buy off of those contracts. The automotive industry is a good illustration of this where tier 1 and tier 2 suppliers access the pricing contracts that the manufacturers such as Ford or Chrysler has negotiated with vendors.

Depending on your industry, if you’re a small or mid-sized organization and feel you could benefit from increased clout with vendor partners, a GPO may be a perfect solution for you to save money, partner with leading suppliers and gain access to valuable industry intelligence.

Way to keep modern businesses humming, Mr. Aristotle!

2015-cfo-survey-report

Topics: Buying Groups and Group Purchasing Organizations

Mike McDonald

Posted by Mike McDonald

Mike is the Executive Vice President of Business Development for Prime Advantage, a Chicago based Group Purchasing Organization for mid-market manufacturers. Responsibilities include managing business development, marketing, and the GPO's Healthcare Cost Containment program. He’s been a featured speaker, published author, and recognized award winner within the supply chain community.

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