Not Your Grandfather's GPO

Supply management executives are discovering fresh value in group purchasing organizations and unlocking new savings through buying consortia


"Never let GPOs be a distraction," says Hackett's Mitchell. "Stick to your knitting and make sure you are getting out of the GPOs the savings and time saved on contract management you expected. Savings is a good trigger for engaging a GPO, but not a panacea."

One way to make sure you succeed in getting everything you want out of your GPO is to see it as an extension of your commodity buying group, suggests Mitchell. "Someone on your team must proactively manage the GPO relationship as you would any other critical supplier relationship," he says.

Ron Watt, second vice president of Trustmark Insurances' Contract Management Office, has several suggestions on getting the most out of your GPO. "Relying on traditional business process management strategies, go into the effort with four key issues outlined," he says.

Watt's four keys are:

  • Know what you want (objectives and deliverables);
  • Define how you're going to measure success (performance measures);
  • Build incentives for suppliers to deliver (penalties or "incentives"); and,
  • Understand what your costs are up front and into the future.

Watt evaluated three group purchasing organizations before picking Corporate United for his company's office supplies contract. "They had better entry costs, allowing us to quickly realize savings. Plus, tapping into the expertise of member companies was a great benefit to us."

Knowing when to use GPOs in the mix of your cost reduction strategies is perhaps the most critical point from the analysts' perspective. Analysts Mitchell, Minahan and Busch reiterate that the GPO's best and most important role exists for non-strategic or non-core but high-cost categories. And, as noted earlier, the GPO must provide services and intelligence that can't be achieved in-house.

Hubbell's Northup gives a pragmatic user's view and highlights several ways a GPO can fit into an organization's strategy. "If an organization is decentralized and does not want to add headcount at the corporate level, a GPO provides an opportunity to leverage spend with minimal additional resource allocation," he says. "If an organization has a reasonable amount of spend in a commodity area, but not enough to fully leverage the spend on its own, the GPO provides the opportunity to combine this spend with similar spend from other companies. Finally, a centralized organization can focus on leveraging the areas of its spend that provide the greatest return and let a GPO handle the less strategic areas of spend."

Adds LSN's Burton: "GPOs are part of a comprehensive approach to managing an organization's indirect spend. Depending on the size, industry and strategic focus certain categories just make sense to let someone else manage. In addition, at the SKU level, group purchasing organizations deliver value through leveraged rates available to their members in categories that are not core to their business."

Corporate United's Clevenger cautions against forcing the GPO into a box and limiting its power. "It is true that matching a sourcing strategy to a category is the most important point when implementing a GPO solution," he says, "but that makes it no different from any sourcing solution. The value of GPOs goes beyond the non-strategic, non-core … high-cost categories. Companies that are utilizing GPOs to manage indirect spend are unlocking value in dozens of smaller-cost categories that have historically gone un-sourced and under-managed. Despite their size, in aggregate the savings [add up to] millions across the enterprise. Furthermore, the GPO is most valuable for its ability to proactively manage agreements, not just for the leverage they provide initially. A GPO that fails to deliver ongoing value is of little to no incremental improvement over managing the category internally."

What Will Be the GPO Future?

When reflecting on GPOs' impact and their role in the market, Tim Minahan gives an insightful overview. "The adoption of GPO services has been accelerated as enterprises look to focus on core competencies — including direct materials procurement — and are more open to outsourcing non-core competencies, such as indirect procurement, to third-parties that can offer greater economies of scale, better performance and improved pricing. In addition, GPOs and other outsourcers often are in a better position to drive compliance due to governance structures that involve C-level executives and business unit heads and that have measurable compliance goals, incentives and penalties attached to them."

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