06/12/2017
WHAT IS A GROUP PURCHASING ORGANIZATION?
In the United States, a group purchasing organization (GPO) is an entity that is created to leverage the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members.
Many GPOs are funded by administrative fees that are paid by the vendors that GPOs oversee. Some GPOs are funded by fees paid by the buying members. Some GPOs are funded by a combination of both. These fees can be set as a percentage of the purchase or set as an annual flat rate. Some GPOs set mandatory participation levels for their members, while others are completely voluntary. Members participate based on their purchasing needs and their level of confidence in what should be competitive pricing negotiated by their GPOs.
Group purchasing is used in many industries to purchase raw materials and supplies, but it is common practice in the grocery industry, electronics, health care, and industrial manufacturing and agricultural industries.
A foodservice or grocery GPO focuses exclusively on the $600 billion foodservice marketplace, including food and food-related purchasing for multi-unit foodservice operators, contract negotiation and supply chain services. These negotiations are made with supplier/manufacturing agreements and purchasing contracts. Categories for grocer purchases include: poultry, fresh produce, frozen food products, fresh and frozen meats, candy and snacks, dairy and bakery, dry goods, disposables and beverages, etc.
Questions and Answers:
What is a GPO?
A GPO is an entity that helps Independent Restaurateurs (i.e. restaurants, bars, clubs, hotels, hospitals, schools) realize savings and efficiencies by aggregating purchasing volume and using that leverage to negotiate discounts with manufacturers, distributors and other vendors.
How does a GPO “work”?
GPOs do not purchase or buy any products. They negotiate contracts that IR’s can use when making their own purchases. With input from members and clients, GPOs work to negotiate contracts with food manufacturers, distributors and other suppliers. After a group purchasing contract is created, it is still up to the operator to decide which product is most appropriate in each circumstance and make the most appropriate purchase. Most IR’s make purchasing selections on their own which is time consuming and often does not provide the best overall savings. IR’s remain free to make non-GPO contracted purchases and often do.
What type of services do GPOs provide?
IR’s are increasingly relying on GPOs to help manage the complex system of purchasing. Many GPOs offer solutions to help manage their purchasing. GPOs provide a unique mechanism for a group of restaurants to coordinate not only purchasing power, but also brain power. By drawing upon their broad-based memberships or client base, GPOs give operators a pathway to evaluate new products and assess their impact on the quality of care. GPOs take the adage that many minds are better than one, and apply it to decision-making.
What is the history of GPOs?
Group Purchasing was started in the healthcare field. The first healthcare GPO was established in 1910 by the Hospital Bureau of New York. For many decades, healthcare GPOs grew slowly in number, to only 10 in 1962. Medicaid & Medicare stimulated growth in the number of GPOs to 40 in 1974. That number tripled between 1974 and 1977. The institution of the Medicare Prospective Payment System (PPS) in 1983 focused greater scrutiny on costs and fostered further rapid GPO expansion. In 1986, Congress granted GPOs in healthcare "Safe Harbor" from federal anti-kickback statutes after successful lobbying efforts. By 2007, there were hundreds of healthcare GPOs, "affiliates" and cooperatives in the United States that were availing themselves of substantial revenues obtained from vendors in the form of administrative fees, or "remuneration." 96 percent of all acute-care hospitals and 98 percent of all community hospitals held at least one GPO membership. Importantly, 97 percent of all not-for-profit, non-governmental hospitals participated in some form of group purchasing. That has since spread into other industries, specifically foodservice.
Are there different types of GPOs?
If you've seen one GPO, you've really only seen one GPO, as they vary greatly in size, type of ownership and the services they offer their members and clients. Some GPOs are member owned, while others do not have a link to the facilities they serve. Some GPOs offer operators the ability to purchase nearly every conceivable type of product, while others focus on specific product categories. In addition, some GPOs specialize in certain types of restaurant & group sizes or segments.
Who uses GPO’s?
The concept of group purchasing is seen throughout the economy. Indeed, GPOs provide hospitals and other health care providers the ability to use fundamental economic principles to reduce the cost of purchasing products and improve the quality of care. In addition to healthcare & foodservice, the federal government, namely the General Services Administration, Department of Defense, and Department of Veterans Affairs, use many of the same techniques for purchasing products as GPOs.
How many GPOs are there in the United States?
There are more than 600 organizations in the United States that participate in some form of group purchasing. About 30 of the 600 are very large health care GPOs that negotiate sizeable contracts for their members. The remaining organizations may offer their members access to larger groups' contracts and negotiate agreements with regional vendors for some services.
How do GPOs finance their operations?
GPOs rely, in part, on administrative fees paid by vendors to finance the services the GPOs to their members. These administrative fees are generally based upon the purchase price that the member pays for a product purchased through a GPO contract. The administrative fee is paid when a GPO's member or client utilizes a GPO contract. MVP reports all administrative fees to its members.
