A GPO, or group purchasing organization, is a buying group that facilitates many different businesses or organizations joining together to purchase products or services, which enables them to benefit from discounted or group rates. Group purchasing organizations are also sometimes called buying groups or collective buying groups. GPOs represent hundreds of businesses when negotiating contracts with suppliers, so they are able to offer greater efficiency and lower costs to their participants by leveraging their combined purchasing power.
Corporations and businesses use many different products and services in their operations, spanning from IT and office supplies to shipping and distribution. The purchasing game is all based on volume and negotiating power, so the need for these products and services are smaller than that of a larger organization, they often end up paying more than a large company would simply because of spend volume. However, corporations and businesses can also realize cost savings on their purchases by participating in group purchasing and increasing their buying power.
History of GPOs:
The first healthcare GPO was established in 1910 by the Hospital Bureau of New York. For many decades, healthcare GPOs grew slowly in number, to only 10 in 1962. Medicare and Medicaid stimulated growth in the number of GPOs to 40 in 1974. That number tripled between 1974 and 1977. The institution of the Medicare Prospective Payment System (PPS) in 1983 focused greater scrutiny on costs and fostered further rapid GPO expansion. By then the GPO model had really started to gain momentum and the creation and use of them in other verticals such as business, hospitality and non-profits evolved rapidly.
While there are many group purchasing collectives, there are two primary kinds of GPOs
Vertical market GPOs
Vertical market GPOs provide services within a niche segment or industry, and are often formed through management or association groups to serve their member companies. This type of GPO is commonly found in healthcare, hospitality, and nonprofit markets.
Horizontal market GPOs
Horizontal market GPOs serve organizations spanning all markets and industries.
Not all group-purchasing organizations operate in the same way. Some GPOs collect fees from member companies for participation and some GPOs collect fees from the suppliers. Some organizations do both and collect fees from both members and suppliers. Some GPOs require that participants maintain a certain level of purchasing volume, whereas with others participation is completely voluntary.
Medium and large-sized businesses use many different products and services in their operations, spanning from IT, office supplies to shipping and small parcel distribution commonly described as indirect spend. But because their volume for these products and services are smaller than that of a larger organization, they often end up paying more than a much larger company would simply because a larger organization typically purchases at a higher volume and can negotiate better rates. However, business today has changed. Businesses of all shapes and sizes can and are competing on an equal playing field when it comes to indirect spend options. They too can experience real cost savings on their purchases by participating in a GPO and thereby increasing their buying power.