Procurement has long been a top-flight concern for businesses, but recent developments related to COVID-19 have made it more important than ever for businesses to have reliable and sustainable procurement strategies. For small businesses in particular, the right products have to be purchased at the right price in order for things to stay profitable.
Joining a group purchasing organization is a great way to solve many of these issues. GPOs are membership-based collectives that use the combined purchasing power of their numerous members in order to get the best deals. GPOs can use their leverage in order to lower prices, develop more efficient distribution routes, or help acquire more niche products for businesses.
Not all GPOs, however, are created equal. Most GPOs can be split into two major categories: horizontal and vertical. Horizontal GPOs contain large numbers of diverse companies that need a wide breadth of products. Vertical, industry-specific GPOs operate only in certain sectors, making them particularly adept at securing specific types of products.
If you’re thinking about bringing your business into a GPO, it can be difficult to know which one is best for your business. Before deciding between a horizontal or vertical GPO, make sure to ask yourself the following questions first:
How specific are the products I need?
The most famous vertical GPOs are those found in the healthcare industry — since being endorsed by Congress in the 1980s, medical GPOs have helped lower costs across the public and private sectors. It’s not hard to see why, either — hospitals are the largest and most common members of healthcare GPOs, and hospitals need specific products that the vast majority of other businesses have no use purchasing.
If your business is like a hospital insofar as most of the products you need are found in your industry alone, then a vertical GPO might be the best choice for you. For most businesses, the choice might not be all that clear. Try looking at your account sheets and calculating the costs of all the products you typically purchase. If the costs of your more niche products outweigh those of your more run-of-the-mill procurements, then you’ll probably want to look more at vertical GPOs. Otherwise, a more traditional horizontal GPO is likely the better option.
What kind of suppliers do I need to buy from?
Far too few businesses have an appropriate supplier management strategy. Companies that initiate an advanced strategy for dealing with their suppliers can save up to 12% of their annual expenses. One of the best ways to get your supply chain in order is by pairing up with a GPO that has experience dealing with the kinds of suppliers you regularly encounter.
If you regularly purchase your products from larger suppliers, a horizontal GPO will probably be best equipped to handle your supply strategies. Smaller suppliers, however, can often fly under the radar of traditional group purchasing organizations — making vertical GPOs the better option for businesses that deal with more independent distributors.
Are there other businesses that need the same things?
While the average-sized GPO member has around 5000 employees and 750 million dollars in revenue, businesses of every size increasingly stand to benefit from combining their buying power with other, similar companies. With that being said, every business is different and needs different things in order to operate. Some businesses might find that they need things few other businesses do.
If your business has a well-defined place in its sector, then look at what other businesses like yours are doing — the GPOs they join will likely work as well for you as it does for them. Otherwise, you might want to lean towards horizontal GPOs, as they allow for a greater degree of flexibility in your procurement strategy while you figure out exactly which products and services your business requires in the long run.
What might distribution look like?
Purchasing is just one part of procurement — you need to physically get your products for them to mean anything to you. Different GPOs have different strategies and capabilities when it comes to distribution, but there is one thing you need to look for in whatever GPO you use: command over the digital supply chain.
Whether your business is urban, rural, remote, or onsite, the digital supply chain allows suppliers to be sure that their distribution strategy works for every kind of business. Horizontal and vertical GPOs alike will likely have access to digital solutions, but vertical GPOs might be using tools more well-tuned to your needs — be sure to know what digital platforms the GPOs you’re interested in are using before you sign on.
There’s no definite answer the same for your business. As you sift through GPOs to join, remember to ask these questions in order to know which will do the most for your company.
Interesting related article: “What is the Supply Chain?“