Beyond Healthcare — Do GPOs Have a Place in Your Sourcing Portfolio? (Part 2)

It's rare that a single reference call captures or validates your initial hypothesis about a provider or supports everything you've heard through the grapevine in a matter of 15 or 20 minutes. But this was exactly what happened on a call with a Prime Advantage reference earlier this summer. During the call, I spoke to a decent-sized, though middle-market, specialty industrial manufacturer and distributor. This company was originally introduced to the GPO buying model as a supplier to another industry-based co-op. When it liked what it saw, it decided to investigate buying group options for itself. And what it found is very telling not only of why GPOs should absolutely be an agenda item for all but the largest companies, but how companies should think about GPOs in a targeted context rather than as a broad cost reduction panacea.

The gentleman I spoke with supported my premise that companies that join buying groups are most certainly mid-size players (at least it's this size organization which often stands to get the most out of them). For a company such as the one I spoke with, the savings in specific categories can be significant. For example, this organization realized savings in the 15-20% range in the fasteners categories (including nuts, bolts, etc.) However, it's worth pointing out, as someone who's been involved in sourcing this category in the past, if you have any reasonable amount of spend and you apply the right supply market and negotiation format, savings of 40-50% are not unreasonable. Yet running a complicated auction for fasteners is much more involved than simply leveraging a supply relationship through a GPO.

One of the situations this company found itself in with Prime Advantage speaks to how fascinating the sourcing world is (and why it's held my interest despite my short attention span for all of these years). And that's when it came time to benchmark pricing in certain categories, they often found Prime Advantage suppliers were lower across a market basket, but not often for the biggest volume items. Still, overall, the GPO provided some cost savings in certain areas. When this company switched suppliers to one within the GPO, however, their incumbent could not believe they would change to another provider given how low they were on the high volume items. Yet, the procurement director got it: "we give up a small bit on one item but make it up on the whole package [going through the GPO]."

However, Prime Advantage does not always deliver in certain categories. Where this company had bigger spends in certain metals categories, the GPO could not match the pricing that they were already receiving (nor were their incumbent suppliers interested in participating in the GPO model and paying a rebate check). In addition, one of the suppliers they started working with ultimately opted out of the GPO for various reasons, preferring to do business directly with customers. This person summed up the situation best when he noted that GPOs like Prime Advantage "are great for areas like MRO and bringing new ideas to the table (e.g., material/design substitutes)" but for "larger volume spend areas, they might not be the place to be".

In other words, "companies should evaluate GPO contracts on a category by category basis". And they should join them "with more in mind than just piggybacking on a contract". What's my advice? It's clear that GPOs like Prime Advantage and Corporate United can provide tremendous benefit for little up-front cost. But you've got to invest the time with GPOs to get the most out of them. While membership clearly has its privileges, simply joining is not enough to realize their potential value. Still, even for mid-market companies where most procurement leaders are in a constant state of fire-fighting and sourcing triage, I believe GPOs represent a worthwhile investment of time given the potential returns. Just don't treat them as a cure-all. And don't expect them to necessarily provide savings across all of your spend areas given your own sourcing capabilities, volumes and specification profiles.

Jason Busch

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