There are a lot of situations where being smaller is an advantage, but negotiating with suppliers isn’t one of them. While giant corporations can negotiate on the strength of their purchasing power, smaller companies must find strength in numbers.
A group purchasing organization leverages the collective buying power of its members to secure deep discounts with vendors and distributors. Just as it’s cheaper to buy in bulk at Costco, a GPO can slash costs for your business and streamline procurement.
There are several factors to consider before joining a group purchasing organization. Here are seven questions you should ask when deciding whether to partner with one:
1. How big is your company?
In general, small- and medium-sized businesses benefit the most from joining a group purchasing organization. Large corporations typically have their own dedicated purchasing arms and massive buying power that allows them to negotiate the best prices.
McDonald’s, for instance, is the single largest purchaser of beef, which gives it enormous influence over suppliers. Unless your company has McDonald’s-level sway, a GPO can likely negotiate deeper discounts than your business ever could.
2. What are your company’s biggest expenses?
For most businesses, employee wages, benefits, and payroll tax are far and away the biggest expenses. If you’re looking for ways to cut costs without cutting jobs, you have to go farther down your P&L statement.
One sneaky expense that can really cut into the bottom line is the cost of shipping and fulfillment. These costs can make up 15 to 20 percent of net sales, and many companies don’t realize that they’re overpaying for shipping. Joining a group purchasing organization could lower your shipping costs dramatically — even as much as 20 percent.
3. Do your employees travel frequently or use ride-share services?
The pandemic might have put widespread business travel on pause, but experts predict that those trips will ramp up again this fall. One study found that the average business trip costs companies $1,425 per traveler. (The largest expense was the employee’s hotel stay.)
If your team travels frequently for business, you can save a lot of money by joining a GPO. Many group purchasing organizations have relationships with hotels, airlines, car-rental companies, and ride-share services. They’ve pre-negotiated the best rates for their members, which can save your business big.
Another advantage to booking through your GPO is that it saves your team members time combing through hotel reviews. Finally, most GPOs take care of the billing or allow companies to prepay, which saves your team the hassle of submitting expense reports.
4. Does your company have a problem with maverick spending?
Just because your organization already has a procurement process in place doesn’t mean your team follows it consistently. Oftentimes, employees will book hotel rooms through popular discount sites or make small purchases without going through the correct process.
Research shows that maverick spending can increase purchasing costs by up to 40 percent. Going through an unapproved vendor may also be a breach of contract under an existing company agreement.
Even the most rule-conscious employees can become maverick spenders if your current procurement process is too time-consuming. Working with a GPO can help discourage maverick spending by simplifying procurement for your team.
5. Has your business ever struggled with quality control due to a bad supplier?
Our world is more connected than ever before. Increased global competition drives down prices, but it also means that there are more low-quality products on the market.
Just recently, Peru purchased a large amount of cheap antibody testing kits from China to diagnose cases of COVID-19. Many of these kits were rejected by the United States because they didn’t meet standards for accurately detecting the virus.
For most businesses, quality control isn’t life or death, but poor-quality components can erode brand trust. If your company has experienced quality-control issues with suppliers, a GPO can help by providing a list of trusted vendors.
6. Is your business concerned about possible supply-chain disruptions?
If the past year has taught us anything, it’s how fragile our supply chains really are. Global pandemics, natural disasters, and trade wars all pose a potential risk to supply chains. Since 2018, the US has been locked in a trade war with China. Talks for a post-Brexit trade deal between the UK and the EU are still ongoing.
While no one can predict the future, there’s safety in numbers. Joining a GPO gives your business more buying power whenever supplies are limited. If a particular vendor can’t get what you need, a GPO can work on your behalf to find a new supplier.
7. Could streamlining procurement free up crucial bandwidth for your team?
There’s a reason group purchasing organizations are great for the little guys. In smaller companies, the responsibility of procurement generally falls on one person’s shoulders.
Vetting suppliers and developing those relationships takes time. So does drafting RFPs, reviewing supplier contracts, and renegotiating the terms of agreements. This is one reason why so many companies have informal supplier agreements rather than written contracts.
One benefit of a group purchasing organization is that it does the legwork for you. A GPO will comparison-shop and negotiate on your behalf. Many provide reporting and analytics, as well, which makes it easier to track company spending.
It’s difficult leading an organization in these uncertain times — particularly when you’re looking to reduce company spending. Small- to medium-sized businesses just don’t have the leverage of their giant corporate counterparts — at least not on their own. But by joining forces with a GPO, you can save money on the things your company already buys.
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