The Pros and Cons of Group Purchasing Organizations

By Janine Roberts Director of Sales and Marketing, Tradavo | October 09, 2011

Buying Groups, also known as Group Purchasing Organizations (GPOs) have been around for almost a century, and provide value to a number of industries, including Hospitality. The concept behind Buying Groups is laudable – small, independently run businesses can combine their purchasing power to negotiate better discounts traditionally only available to major enterprises. By participating in a Buying Group, businesses can theoretically save on purchasing costs by ‘outsourcing’ their purchasing capabilities to a Buying Group. It seems like a no brainer, but research indicates there are a few key pitfalls to this business model when it comes to supplying a hotel retail effort including free market independence, basic accounting and P&L tracking, and numerous restrictions that create barriers to obtaining the best pricing, technology and services once a vendor is selected by the GPO.

Group Purchasing Organizations bring advantages to buyers and vendors alike. Vendors generally prefer to secure business with large customers but recognize the value of reaching a large number of small customers through one cohesive network. Vendors are willing to extend discounts and additional service levels to the Buying Group to gain access to their large networks of buyers. This allows vendors to reduce their sales cycle and have a good forward view into demand - greatly impacting successful production and supply chain management.

While some Buying Groups are co-operatives and run as a non-profit, others are very much FOR profit corporations – so that the allowance offered by vendors is critical to the profitability of the Buying Group. But vendors have a limited budget for discounts and promotions, so anything that goes into allowances to earn business through the Buying Group is no longer available to be used for product discounts and other promotions that would directly benefit the members being served.

As a whole, Buying Groups benefit the smaller owner/operators more than the larger firms. Larger firms traditionally have sophisticated purchasing organizations and greater buying power – and, therefore, have the ability to negotiate very good arrangements on their own with the vendors of their choice. In this scenario, they are not locked into a single source supplier – one chosen by the Buying Group – but are free to negotiate with whoever best fits their purchasing needs on whatever terms make the most sense for their portfolio.

Additionally, since Buying Groups are structured to give all members a common price, larger owner/operators are offered the same pricing as smaller owner/operators, negating the normal competitive advantages that larger entities have in a free market.

All operators, large and small, forfeit many of the advantages of the free market when it comes to purchasing through the traditional Buying Group model. While a Buying Group may be able to offer good ‘every day’ prices, most vendors do not have static pricing. Just as hotels have sophisticated yield management programs for selling out inventory which results in price breaks and hot deals for their guests, the same is true for most vendors. Given the opportunity, vendors will offer promotions, discounts and closeouts to their customers as well as specially negotiated pricing in order to drive sales.

Coming up in January 2018...

Mobile Technology: Relentless Innovation

Technology has become a crucial component in attracting and retaining hotel guests, and the need to enhance a guest’s technology experience is driving a relentless pace of innovation. To meet and exceed guest expectations, 54% of hotels will spend more on technology in 2018, and mobile solutions in particular will top the list of capital investments. Many hotels are integrating mobile booking, mobile keys, mobile payments and mobile check-in into their operations. Other hotels are emphasizing the in-room experience, boosting bandwidth and upgrading flat screen TVs to more easily interface with guest mobile devices. And though not yet mainstream, there are many exciting technology developments on the near horizon. The Internet of Things (loT) is taking form in some places, and can be found in guest room control systems, voice activation systems, and in wearable sensors that can be used for access and payment options. Virtual reality headsets are available at some hotels so guests can enjoy virtual trips to exotic locations or if off-property, preview conference facilities and guest rooms. How long will it be before a hotel employs a fleet of robots for room service, or utilizes a hologram as a concierge, or installs gesture-controlled walls that feature interactive digital displays? Some hotels are already using augmented reality for translation services, or interactive wall maps, or even virtual décor. This pace of innovation is challenging property owners and brands to stay on top of the latest technology trends while still addressing current projects. The January Hotel Business Review will explore what some hotels are doing to maximize their opportunities in the mobile technology space.