Not Your Grandfather's GPO

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


Beyond member pricing, users of GPOs have contract category suggestions for the future. Carter, of Syngenta, says, "Group buying could be the most useful for us in the area of employee benefits. However, this is a newly emerging area for group purchasing organizations, and the current offerings are limited." Syngenta is interested in this area as they are a process manufacturing business and their employment level is relatively low compared to most companies with similar sales. As a result, their weakest "buying position" is in goods and services related to employment levels.

Holliday-Levy advocates the same. "I would like LSN to provide other categories for us to spend through, and they're looking at them right now — for example, security," she says. Her company's interest in the GPO was originally driven by Sigma-Aldrich's current chief financial officer, who was previously vice president of her department. "We got started with LSN on a reverse auction and were able to witness immediate cost savings. It made sense to take it the next step."

Hubbell's Northup also suggests GPOs provide more communication about new initiatives and obtain more frequent feedback from GPO members concerning supplier performance.

Several of those interviewed identified two major predictions for GPOs: GPOs eventually will need to leverage offshore outsourcing for non-core "req-to-pay" functions, including purchase order processing and accounts payable entry. Plus, GPOs must focus on value-added opportunities beyond leveraging spend.

All those interviewed indicated they intend to continue pursuing the opportunities of the GPO to retain sourcing staff attention on more strategic and core functions. "As long as we are being adequately serviced by the GPO, especially if it can offer additional value other than pure price advantage, we'll continue to use the tool," says the strategic sourcing professional who wished to remain anonymous.

Part of why GPOs are now thriving relates to supply management's status within companies trying to protect their margins. Those companies that have recognized the value of total cost management in the mix of overall competitive strategies will always elevate the supply management function. Hackett's Mitchell says world class supply management is inherently a business process outsourcing driver. And organizations like Accenture, Ariba, A.T. Kearney, and IBM have pushed business process outsourcing hard as part of their overall supply management marketing efforts.

Dan Willmer, vice president of Spend Management for Ariba describes a market that demands it. "Six years ago the market for reducing costs was all about auctions and catalog management. Now it's about a customer's true problems and how to protect margins and eliminate unacceptable costs. Spend management outsourcing is much more favorable while organizations keep their core competencies. They don't care to be great at everything they do, just great at what counts."

Celebrating its 10th anniversary, Ariba, which as part of its spend management solutions does consortium buying for its customers, positions itself in the market to make available expert spend management services married with today's technology. Willmer adds: "A variety of ways to save money exists. You just have to understand what you're investing in to help you become an expert spend manager. Today, it's not about one single solution."

Despite a marketplace facilitating greater opportunities for effective spend management, GPOs will always face resistance from entrenched organizations. "The greatest challenge for the group purchasing organization," says Syngenta's Carter, "involves moving the organization to the supplier that the group purchasing organization offers. There is always considerable internal resistance to changing suppliers. Often there are significant switching costs. In many areas, like advertising agency services, there may be competitive considerations to preclude a consortium opportunity, even if it were offered."

Mitchell sees a very interesting future for the GPO. He predicts that the mid-market will use GPOs more and that GPOs will tackle more and more strategic categories. "The more complex spend categories with rising costs are a perfect place for GPOs to harness. But one of the biggest problem GPOs face is that member customers' specific requirements are so different from member to member. However, technology can partially help with this because of some of the flexible e-sourcing tools out there that can model this type of complexity."

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