Group Buys: Good for the Supplier and Good for the Buyer

March 26, 2009 — The struggling economy has taken its toll on everyone, and suppliers are no exception. Current economic challenges are forcing medical product manufacturers to search for opportunities to maintain or reduce production costs and lower marketing expenses. As manufacturers tighten their belts and reduce expenses, they need to seek new opportunities to increase revenue in order to stay financially sound.

Group purchasing organizations (GPOs) provide an important resource for manufacturers looking to boost their sales. According to the Health Industry Group Purchasing Association (HIGPA), hospitals make about 72 percent of purchases using GPO contracts. Group purchasing organizations represent a large body of potential customers — in fact, HIGPA notes that between 96 and 98 percent of hospitals use GPO contracts for their purchasing functions.

For example, the GPO where I work, Novation, the leading health care contracting services company of VHA Inc., University HealthSystem Consortium (UHC) and Provista, LLC, has nearly 2,500 member hospitals. In 2007, its projected purchasing volume reached $35 billion. Considering the immense purchasing power of group purchasing organizations, manufacturers should seek ways to tap into their opportunities.

Group buys allow suppliers to utilize the purchasing power of group purchasing organizations and better predict production. Essentially, GPOs coordinate large purchases of capital equipment over a set time period. Capital equipment group buys provide members with additional savings off of list price for major equipment purchases. At the same time, suppliers are able to better plan their production volume, secure sales, lower cost of sales time due to prequalified leads, grow customer base and potentially gain market share.

The Nuts and Bolts of Group Buys

The success of group buys relies on offering the right equipment at the right time to address hospital needs. GPOs work with health care organizations and suppliers to develop timely group buy offerings in order to provide members equipment when they need it at the best price possible. Product categories for group buys are determined through analysis of member capital budget data and through member market research.

Using information on planned member purchases, portfolio executives work closely with equipment suppliers to maximize savings beyond the GPOs contract price during the group buy period. The price offered in a group buy is always competitive, often verified as "best price paid" through data available from third-party resources such as MD Buyline and ECRI Institute. In addition, GPOs like Novation use tools such as Attainia to determine member organization's capital purchasing needs. The end result of these negotiations is a large purchase of capital equipment at a discounted price.

What's Good for the Buyer Can Be Good for the Supplier

One of the primary advantages of group buys is that they provide a mutually beneficial opportunity for suppliers and buyers. Suppliers enjoy sales of a predetermined amount of merchandise, which enables them to better predict what quantities they should produce. They also enjoy strong revenue due to the large quantity of merchandise sold. Group buys are a strategic collaboration between the GPO and supplier which is why it is so successful.

At the same time, the hospitals purchasing the equipment reap the benefits. Due to the volume of merchandise involved in group buys, suppliers can offer discounts, making capital purchases easier on each hospital's bottom line. Aggregate purchases garner benefits for hospitals that they would not otherwise attain on their own. GPOs work with suppliers to capture alternative methods for hospitals to purchase their equipment, such as leasing and financing options. Other hospital values beyond price include total lifecycle costs, such as upgrades and software at no charge, extended service agreements and/or warranties, guaranteed trade-in value, parts/accessories and biomed training at no additional cost.

Consider the case of Skytron, a medical equipment supplier based in Grand Rapids, Mich. Skytron participated in a Novation group buy for operating room lights, columns, booms, tables and accessories between February 1 and April 30, 2008. The group buy was a tremendous success for Skytron, which exceeded its sales goals for the group buy by 26.5 percent. While the group buy was successful for Skytron, it was just as successful for the member hospitals that purchased equipment. In fact, the Skytron group buy saved the involved hospitals $4 million.

According to Mike Breslin, director of corporate accounts at Skytron: "The group buy program was a fantastic opportunity for us. It was a valuable tool for guaranteeing sales and helped us plan our production schedule. But beyond the benefits for us internally, we were able to foster strong relationships with Novation and the member hospitals of VHA, UHC and Provista by offering a discounted rate on our products."

More Than a One-time Success

While participating in a single group buy can be valuable for suppliers, group buys can be an integral part of a company's long-term strategy. Participating in group buys year after year allows suppliers to continually garner strong sales and develop long-term relationships with group purchasing organizations and their members.

In the case of Siemens Medical Solutions, participating in group buys has been a long-term revenue source. Siemens provides imaging equipment, information technology, management consulting and services intended to improve operational efficiencies and optimize workflow in hospitals, clinics, home health agencies and doctors' offices. One of their service lines, Siemens AX, offers a combination of clinical software, workflow and system features to provide a unique and complete solution for all aspects of interventional cardiology.

Siemens entered into a contract with Novation for Siemens AX cardiovascular equipment in 2005. Shortly after the contract launched, Novation extended an offer to Siemens to participate in a group buy. Siemens had significant success in this group buy, which provided tremendous exposure for the new agreement and raised awareness of Siemens among VHA and UHC alliance members. After the strong results of the 2005 group buy, Siemens has continued to participate during each subsequent year. Despite weak market conditions in 2007, Siemens was still able to increase its revenues from Novation purchases due to group buys. In fact, the cardiovascular equipment group buy for 2007 resulted in $34 million in sales.

In 2008, Siemens has continued to see success with its magnetic resonance (MR) and computed tomography (CT) equipment. MR group buys realized a 25 percent increase in volume over last year, while CT saw a 33 percent increase in volume over last year's group buy. In addition, 34 new customers purchased from Siemens that had never before purchased from the company.

According to Scott Polston, national accounts manager at Siemens: "Participating in group buys has been an asset to our business year after year. The consistent revenue from the program has helped us plan our production schedule and cut down on marketing costs."

Creating Value, from Production to Marketing

While it's clear that group buys can provide significant revenue, it's important to consider their other advantages. For one, group buys cut down on supplier marketing costs. Group purchasing organizations market directly to their member hospitals, eliminating or minimizing the need for marketing from the suppliers involved.

Additionally, participating in group buys helps suppliers manage manufacturing. Suppliers have a secure sell of a set amount of equipment, helping them understand their business flow. Instead of guessing their production needs and risking a large supply of product sitting in a warehouse, suppliers can be more confident about their product needs. With advantages ranging from improved production timing to reduced marketing costs to predetermined sales, group buys are a worthwhile solution for suppliers looking to increase revenue and manage the bottom line.

About the Author: Kelly Rodriguez is capital asset manager with Novation. More information at www.novationco.com.

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