Beyond Healthcare — Do GPOs Have a Place in Your Sourcing Portfolio? (Part 1)

Over the past few years, I've gotten to know the folks at Corporate United quite well including their customers and also some of their suppliers. And more recently I was introduced to Prime Advantage, a Chicago-based group purchasing organization (GPO). After doing research in both cases -- cursory in the case of Prime Advantage, in-depth in the case of Corporate United -- it's become pretty clear to me that companies of most sizes, except the Fortune 250 (perhaps with some exceptions), should investigate the GPO option to see how it might fit into their procurement arsenal, potentially as a side-arm, potentially as a machine gun, depending on the situation. But there's not just the one reason to look to GPOs that many people think.

I've come to believe after examining both Corporate United and Prime Advantage that there are two key benefits for companies to join. The first is benchmarking their own pricing in certain categories and taking advantage of select contracts that might deliver better pricing and/or higher service levels than what they're currently realizing. But the second benefit is often less clear to companies getting started down the GPO path. And that's the benefit of networking with peers and suppliers to get new ideas. Now I know this sounds squishy. But stay with me for a minute.

I spoke to one Prime Advantage member who was able to not only identify alternative sources of supply, but to introduce a possible design change into a large volume item (a gasket), potentially switching from one material to another after a thorough in-process engineering review. This new supply / design change would result, in their words, in "big savings to customers and manufacturers" and only came about as a result of the introduction from networking within the GPO with an innovative supplier.

When it comes to the primary benefit of joining GPOs -- taking advantage of category savings opportunities -- the benefits often vary extensively from category to category. In the case of Corporate United, some of the contracts that they're better known for (e.g., office supplies) can deliver significant savings even for companies that have sourced the category well in the past. And part of this reason is not only negotiated purchase cost. GPOs can also serve as a compliance partner sitting in the middle of the transaction to make sure that the contracted price and item is exactly what you get and pay for, respectively. This is a big deal in certain categories prone to over invoicing or related "errors".

While Corporate United is best known for indirect and services spend category coverage, Prime Advantage has taken a different course, choosing to focus primarily on direct materials and industrial MRO for small and mid-sized manufacturing companies. They initially focused quite extensively on the food services industry but have now branched out into other areas of industrial manufacturing (50% of their business is now outside of their initial area of focus). The business model is slightly different as well. With Corporate United, the entire model is predicated on a preferred supplier for each category paying a percentage of the transaction back to the GPO. But with Prime Advantage, members can either source from a preferred contract in this manner or they can opt to introduce their own suppliers into the GPO as well and have them participate in a discount/rebate program required of suppliers (which assumes that they will agree to join). In addition, Prime Advantage has 2-4 suppliers per category.

Today, Prime Advantage has more than 600 customers/sites using their service. They've also got over 100 endorsed suppliers as well. The initial engagement model is similar to Corporate United in that buyer members pay a small fee to join (this avoids the "free benchmarking" potential as potential members prospect around). Suppliers also pay a fee to join. Once they join, buying organizations work with a regional account manager to identify a handful of categories (usually 4 to 5) that warrant benchmarking and investigation to see if they are a good fit to put through the GPO. Stay tuned for Part 2 of this series to see how it works in practice.

Jason Busch

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