The profitability of a business strongly depends on the cost of the raw materials or the products it purchases for its inventory to sell to the customers. It is well-known that a product costs less if purchased in bulk. However, a bulk purchase might require more investment, which small businesses cannot do. In such a case, a small business might connect with a Group Purchase Organization or a GPO.
A GPO purchase a product in bulk on behalf of many small organization. Thus, the unit price of a product comes down drastically. GPOs help small businesses stay competitive by lowering their purchase cost.
There are many benefits of joining a GPO, and today, we will discuss them individually.
What Is A GPO Business Or Group Purchasing Organization?
An organization that buys one or multiple products in bulk is called a Group Purchasing Organization or a GPO. This type of purchasing is also called community buying, where multiple entities combine their orders to purchase a particular product in bulk.
Bulk purchasing aims to reduce the purchasing price and improve profits.
A GPO might deal with a specific niche. This niche includes grocery products, vehicles, electronic items, insurance policies, etc. Some GPOs deal in everything and anything based on the market demand. Some of them deal only in one product or a category of product.
A GPO can help any size of a business to start. Be it a small retail store or a big organization dealing with thousands of customers.
How Does a GPO Buying Group Earn?
Different GPOs have different strategies to earn. But the most common ways they earn are through joining charges and selling margins or supplier’s commission. Even though these margins are minute as they buy and sell in bulk, the total volume they earn is big.
Benefits Of Group Purchasing Organization
The most important benefit of working with a Group Purchasing Organization is saving money on every purchase. When the purchasing cost of the business drops drastically, the profit margins increase.
GPOs also do a hardcore negotiation to stay ahead in the competition. The more they negotiate, the more savings they pass on to the associated small businesses. The bulk price that is usually inaccessible to small vendors and businesses can easily be managed through Group Purchasing Organizations.
Most of the GPOs give the options to small businesses to buy only what they want and how much they want. In short, there is no minimum spending or a long-term commitment.
GPOs work with multiple vendors and businesses to purchase the items in demand. They do not compromise on the quality and negotiate strongly on different aspects. This includes shipping costs, packaging costs, and other overheads. GPOs have strong teams to analyze current market prices, price variations due to inflation, upcoming seasonal demands, and various other factors.
As a small or micro-business, these factors are important. But due to the lack of resources and time, small organizations cannot asses the risks in such depth. Therefore, associating with a Group Purchasing Organization mitigates risk and safeguards profitability.
Lower Or Zero Shipping Cost
Many GPOs offer free shipping for a certain minimum quantity. They also offer a discount on shipping costs if you do not want to buy the minimum order quantity (MOQ). They can do this because they buy and ship in bulk. Shipping companies like FedEx give a huge discount if the quantity is high.
The GPOs, most of the time, pass on this shipping cost saving to their customers.
Enhanced Purchasing Power
Two factors affect your purchasing power as a small business. The first is the money you invest to buy items; the other is the range of items. When you work with a GPO, you get bigger discounts, and thus, you save more. The more savings you make, the better the range of products you can purchase.
Furthermore, you can buy more quantities with the savings you make with the bulk discounts. In short, you gain more purchasing power by associating with bulk purchase companies or groups.
Better Focus on Revenue-Generating Activities
Small businesses do not have many resources to handle various non-productive things. For example, if you are a small business owner and want to buy certain products, you will first have to find different suppliers, negotiate with each separately, and still get a small discount. Your time and energy on these activities might help you improve your profit margins. But eventually, you will have less energy to spend on actual sales activities that generate revenues.
Then, there is another important part where you will have to spend money and negotiate: shipping the products to your business location.
By associating with a Group Purchasing Organization, you save yourself from all the time-consuming activities that do not generate revenues. By finding a one-point solution type of GPO, you can easily get your products at a much cheaper price, and that too quickly. Most of them give free shipping on MOQ and take care of the supply chain.
Streamlining Your Purchase Activities
After you associate with a GPO, they do most of the hard work. You only have to focus on your purchase based on your sales, which is easy now. You get an invoice and make payment to only one organization. The bookkeeping becomes easy, and your entire purchase chain is streamlined and simplified.
After globalization, the world has become one village. But as a small business owner, you cannot easily reach a supplier in a different country. It can be costly and carries many risks.
With GPO, this is made easy. They have the resources and capacity to reach manufacturers in other countries and negotiate a bulk deal. Then, they take care of the shipping to the local warehouse from where you purchase the product. They manage any risk in between. Thus, your reach will be global, even if you are a small retailer.
Support And Personalized Consultation
Most of the GPOs have a strong customer care division and a huge information base for products and other things that can benefit any small business. By associating with them, you get access to this information and support. This can add more value to your business when you deal with your customers.
Many GPOs give personalized consultations that can greatly help grow your business.
When you associate with a GPO, you get to know the other groups that are associated with the same GPO. These groups can be trade or industry organizations or other networking bodies. This exposure will keep you updated with the market trends. You also get more exposure to events, seminars and webinars, legal advice, new products in trend, various business support groups, etc.
Supply Chain Without Risk
Any business- small or large- spends substantial time and resources on managing the supply chain. With a GPO, most of the supply chain is managed without you getting involved. Thus, you save precious time on other important business-related activities.
Reduced Labor Cost
We have listed so many advantages above. The additional advantage of lower or reduced labor costs comes with all these advantages. Right from purchasing, shipping, and handling the supply chain, you save time. You will not require an additional hand in your organization to handle everything. Thus further adding more margins to your overall profits.
Disadvantages of Joining A Group Purchasing Organization
With such a big list of benefits, you might be wondering if there can be any disadvantages to associating with a GPO. The answer is yes. There are a few disadvantages that you should know to make a well-informed decision. Let us understand them, and then you can decide if any of these affect your business model.
Joining Fee And Commission
Every GPO charges a certain amount of fee. It can be a monthly fee or an annual fee. Many GPOs are free to join, but they demand your time and involvement in managing things.
Some GPOs charge a commission on every item they sell. This will certainly knock you out of the competition if you are competing with a big store or chains of stores that buy products themselves in bulk rates with high-profit margins.
Many GPOs will require you to buy a minimum order. This can be problematic if you have a wide range of products to purchase. The minimum order also means more storage at your end.
If you are a micro business with a small space to operate, the minimum order requirement can be problematic for you.
Product Of Choice Is Not Always Possible
A Group Purchasing Organization works based on one simple principle – It purchases on behalf of multiple small or micro businesses. In such a scenario, you might not have to compromise with the product of your own choice.
A huge number of items are imported from other countries. A GPO is highly capable of negotiating prices for such items. But, at the same time, due to a cumulative demand and the price factor, the GPO might insist on something other than the quality of the product. In such a scenario, the quality control is compromised.
As mentioned above, some GPOs require a minimum purchase order or a specific quantity to be purchased. For small organizations with less space, this can be a challenge if they are buying multiple products under the MPO. For example, your inventory’s monthly requirement for Item-A is 5. But under the GPO contract of a minimum purchase order, you might have to buy 100. When you scale it up to multiple items in your inventory, you will require additional space to store them.
GPOs deal with limited vendors where they can extract the best price. As a small business associated with these GPOs, you are also limited to this specific number of vendors. This can be a disadvantage in certain cases.
As a small or micro business, a GPO can greatly enhance your purchasing capacity and profits. It can substantially improve your networking with other businesses and give you access to the information hub that GPOs have. Some GPOs give personalized consultations that can boost your business further. It is important to choose the right GPO based on your type of business and requirements.
We have also listed the disadvantages of a Group Purchasing Organization that can help you make an informed decision.