The Pros and Cons of Group Purchasing Organizations
By Janine Roberts Director of Sales and Marketing, Tradavo | October 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.