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How small companies can benefit from group purchasing organizations

Oct. 19, 2018
One way for small companies to increase their profitability is to join with others to leverage their buying power in similar products and services to achieve discounts they would not qualify for on their own.

How would you like the opportunity to leverage your purchasing power and spend like the large conglomerates? Well, you can through a GPO. A group purchasing organization (GPO) allows a group of businesses to realize savings and efficiencies by aggregating purchasing volume. This gives you the advantage to obtain bigger discounts with manufacturers, distributors and other suppliers.

According to William Lipovsky, owner of First Quarter Finance, keeping a business solvent over time is even harder than most people realize.

According to research, nearly 96% of all small businesses fail within 10 years. While there are numerous reasons for this alarming statistic, one of the most clear-cut ones is that many businesses fail to become profitable. 

One way for small companies to increase their profitability is to join with others to leverage their buying power in similar products and services to achieve discounts they would not qualify for on their own. This is the most popular reason companies give when deciding whether to use a GPO. 

The challenge with small company purchasing is that it is exactly that — purchasing. Smaller companies typically do not devote resources focusing on procurement and most managers would say that they save enough and have the best pricing by having someone “shop” for essential material to run their business. 

With that said, there is a significant difference between purchasing and procurement. There are several problems with that purchasing approach, but the most important are that pricing is dynamic and may fluctuate over time and that shopping may take that person away from what he or she was hired to do. 

The function of procurement involves the process of selecting vendors, establishing payment terms, strategic vetting and selection, the negotiation of contracts and actual purchasing of goods. 

Purchasing is a function of procurement, which generally refers simply to buying goods or services. 

However, there are other benefits, specifically for a small company joining a GPO.

  • Reduction of transaction costs: Other than cost savings through pooling initiatives, small companies can see a reduction in transaction costs by reducing the average time spent on a transaction and reducing clerical errors. GPOs can help small companies by solidifying and simplifying the ordering process, establishing reduced fixed pricing thereby reducing the amount of time sourcing.
  • Improved purchasing processes: When different companies work together they can share information about their experiences with the same suppliers, share technologies and market knowledge, as well as past purchasing experiences. This type of collaboration can eliminate redundancy in the supply chain and reduce transaction costs through improved processes.
  • Improved resource utilization: In small business, it is not uncommon that your human resources may be fulfilling several job functions, but that is not ideal. In order for your company to achieve or maintain a competitive advantage, your employees are the key to success. However, they must be allowed to do what they are hired to do, and not spend time running to the store for paper, pens, tools, and the like. GPOs establish long-term pricing arrangements and purchasing processes so your employees can focus on their core competencies to ensure your company remains competitive.
  • Improved supplier management: This is a major benefit. Your small company is now working with the suppliers like a big company. Supplier management is a process by which an organization is strategically managing all interactions with the supplier in order to ensure that value is received for the dollars your organization spends with those suppliers. It includes establishing policies, negotiating, delivering goods and services to your organization’s agreed expectations, and contract management. This process ensures your suppliers are bringing long-term value at a consistent level.
  • Greater profits: Taking advantage of pricing discounts can have an immediate impact to profits. Smaller companies need every trick in the book to increase profits and cash flow. Therefore, utilizing a GPO can have an immediate impact. A reduction in purchasing costs produces an increase in profits without having to increase sales.

 GPOs can put your small business on the same plane as your bigger competitors and eliminate some of the advantages their size gives them.

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