While not as prevalent today as in the past, there has been tension between group purchasing organizations (GPOs) and distributors over the years. A good deal of the tension was the result of a misunderstanding as to the roles each plays in the supply chain. For instance, many distributors believed — and may still believe — that they are in competition with GPOs.
While I cannot speak for all GPOs and all situations, in the professional cleaning industry and in scores of other industries, that is not the case. In fact, instead of competing, distributors often can benefit from their association with GPOs. This is because the distributor remains a key element in the supply chain: the manufactured products are distributed and sold by the distributor and the distributor receives their typical fees and commissions for providing these services.
What Is a GPO?
A group purchasing organization helps its members realize savings on scores of different products and supplies by aggregating member purchasing power. The GPO negotiates discounts from manufacturers and suppliers, which are then passed on to members.
The first GPOs date back to the early 1900s and served the healthcare industry. Today, healthcare still has more GPOs than any other industry sector. According to various studies, from 85 percent to more than 90 percent of all medical facilities in the United States are members of a GPO, and many are members of more than one GPO. These healthcare facilities are purchasing everything from toilet paper to medical supplies through GPO networks.*
The key reason these healthcare facilities have signed up with GPOs is the same reason most organizations join GPOs, and that is to save money. The savings can be significant and tend to be even more significant the larger — and the greater the purchasing needs — of the GPO members. For instance, according to a 2011 report from the Healthcare Supply Chain Association, “GPO enabled hospitals [have] saved up to $33 billion each year through lower priced products [purchased through GPOs].”**
While healthcare is still prominent, many other industry sectors have also embraced GPOs. Among them are foodservice and grocery; industrial manufacturing, especially manufacturers purchasing raw materials; farming; and now cleaning. The following identifies the essential components of a GPO:
- GPOs do not purchase products in large volumes in exchange for price reductions that are then marketed to GPO members (buyers). (That would be a more like a buying group, not a GPO.)
- GPOs do not market a manufacturer’s or organization’s products. They are not marketing organizations. Manufacturers decide to work with GPOs because they see it as another profit center that can benefit them and their distributors.
- Most B2B GPOs make money by receiving a percentage of the purchase price of each sale, along with membership and administrative fees charged to GPO members. These charges do not impact commissions paid to the distributor.
- GPOs do not distribute products to their members. Delivery of goods or services is between the GPO member and the distributor…and this is where the distributor comes in directly.
In fact, most GPOs know they cannot be successful without having a strong relationship with distributors. According to Steve Tackett, vice president of national accounts with Amerinet, a GPO that works with the healthcare industry, “Our big allies in all this are the distributors, given the fact that they have more ‘feet on the street’ [calling on end-customers] than we do.” However, it’s a two-way street. One way distributors benefit from GPOs is that GPOs can bring in buyers for one product who then purchase other items from the distributor. And because most GPOs work with larger organizations — for instance, most of our members are large cleaning contractors with sales over $2 million annually — very often these larger customers also become larger buyers of a distributor’s products when compared to a non-GPO member.
Another benefit is that very often manufacturers essentially beta test new products with GPO members. This provides the distributor with firsthand knowledge of new technologies entering the industry that may benefit many of their other non-GPO customers.
The Unifying Value
As we can see, the feelings of competition and wariness distributors may have had about GPOs are essentially uncalled for. For the most part, work with GPO members is a profitable association for the distributor if for no other reason than it’s bringing the customer into the store. And in today’s world, with all the buying opportunities customers have, anything that brings people into the store is a value that cannot be underestimated.
Terry Sambrowski is the executive director of the National Service Alliance, LLC, one of the largest group purchasing organizations for the professional cleaning and related industries. She can be reached through her organization’s website at www.nansa.org
*Some studies now report that every hospital in America is a member of at least one GPO.
** "The Impact of Group Purchasing Organizations on Healthcare-Product Supply Chains," by Joice Hu, Leroy B. Schwarz, and Nelson A. Uhan, HealthCare Supply Chain Association, May 2011.