Finding the Right Match: Group Purchasing Organizations

Good business people have long understood the value of buying in larger quantities to reduce the unit costs of products they sell. Volume purchases can make a business more competitive and profitable, helping it to grow and strengthening its position in the marketplace. And that is why people are in business, right?

Storage problems and financial considerations, however, play important roles when negotiating and executing volume purchase agreements and sometimes, smaller businesses cannot take advantage of these agreements. This makes it difficult to compete with larger, regional and national businesses that have more flexibility when pricing their products for the end user. The smaller, independent business has to charge more for its product and risk losing business to the competition or charge less to keep the business and operate at a lower margin - which is unhealthy for the welfare of the business. This problem for the smaller player raises several questions: How can an independent HME dealer become more competitive without risking profit or business? What volume purchasing opportunities could be used to eliminate over-stocking the warehouse and also not cause cash flow problems?

Enter the concept of group purchasing. By creating volume through a membership of dealers, group purchasing organizations (GPOs) offer potential volume to manufacturers who in turn provide discounted pricing to participating dealers. The manufacturers have an instant customer base with which to work, and the dealer has instant access to lower pricing and lower quantity purchases. It is a win-win for everyone especially when contracts go beyond discounted pricing and include benefits such as extended terms of payment, no minimum order requirements, reduced shipping charges and co-op advertising opportunities. Contracts often are structured differently, but the bottom line remains the same -- everyone is saving time and money in one form or another. The focus of the traditional GPO has evolved and in recent years many GPOs have developed their total program offering to include all aspects of operating a successful business from administrative services to operations, acquisitions and education. The right GPO used in the right way can help a business operate more efficiently, resulting in faster growth and economic stability. But what is the right GPO for you?

GPOs come in all shapes and sizes, some specializing in particular areas of the DME industry such as mobility, respiratory, rehabilitation, managed care contracting, orthotics and prosthetics, while others are fairly well-balanced for those dealers who have a broad-based patient and customer population. If your company's focus is in a particular area, you will want to consider a buying group that has a compatible vendor base. Likewise, if your patient base and services require access to a variety of products, then the well-rounded and broad-based group purchasing organization is best suited to your needs. Effectively, the time you would normally require to research the best products, manufacturers and prices for your referrals and patients has been spent by the GPO, and you have an instant resource at your fingertips.

The focus of the traditional GPO has evolved and in recent years many GPOs have developed their total program offering to include all aspects of operating a successful business from administrative services to operations, acquisitions and education.
Frequently, time saved is equally as valuable and important to your return on investment, and a good GPO should be designed to help you preserve and improve both.

Choosing the right GPO is no easy task since there are as many nuances to each GPO as there are manufacturers who participate within them. We can simplify the task by first getting down to basics. The most obvious place to start is to examine their vendor line-up. Who are their participating manufacturers? Are they leaders in the industry? How does the GPO vendor list, contract pricing, and added benefits compare to the manufacturers you currently use? It may appear to be overwhelming at first, but let the GPO representative earn your business. If they want it, they will assist you in the process of comparison.

After you have reviewed the vendors, create a list of commonly ordered products from a handful of manufacturers and compare the pricing. Include large ticket items as well as moderately priced items and those that have high and low profit margins. Keep it simple, but comprehensive so that it remains a fair estimate of your pricing structure and product base. Use this same list with each GPO to keep the process fair and easy for a side-by-side comparison. Know your annual volumes so you will be prepared to compute the annual savings. This information will be necessary when considering the cost of the membership versus the value it offers to you. What is the annual fee to become a member in the GPO? Is it cost justified based upon the money you will save? If it is a break-even proposition, are there other features or benefits of this particular GPO you still need to consider giving it intrinsic value to your organization?

Other features or benefits might include areas of administrative support such as educational opportunities, insurance programs, marketing, financial and communication services along with legislative advocacy, referral sources and managed care network participation. Some GPOs send cash rebates to their members based upon their purchases. Depending upon the level of participation, this feature of a GPO could offset the cost of the membership while the member continues to save money on equipment purchases. Perhaps the GPO has an affiliation with groups or trade commissions with whom you would like easy access or association. Some or all of these added values may appeal to your particular business and customer base and should be examined closely to determine if you would be able to take advantage of them and use them effectively.

Next, consider the support you will receive once you have become a member. Will your representative be available to help you set up your accounts, notify the vendors, and assist your purchasing department in the use of the program manual? While seemingly small aspects in the overall scheme of things, this support will be essential in order to use the GPO to its fullest potential and your overall benefit. Ask for references. Talk to other dealers who have first hand experience and take their comments to heart. If all of the promises made to you were kept, you have a winner on your hands, and ultimately, you will reap the rewards.

View the selected GPO as a business partner. Like any good partner, they are motivated and have a reason to want you to succeed -- they are in business to make money too. How does that happen? It starts with the membership fee that dealers pay to access the manufacturer contracts and programs. But that is only a portion of what is required to administer the programs within a GPO. The manufacturers that participate with the GPO not only offer discounts to members, but remit an administrative or marketing fee to the GPO. This fee is often linked to the volume purchased or growth achieved through member purchases over the course of the year. Depending upon the negotiation, a small percentage is remitted to the GPO to offset the expenses involved in operating it. It follows then, that the more a dealer purchases and uses the contracts and programs within a GPO, the more administrative/marketing fee is provided to the GPO. This should result in ongoing development of the GPO, better contracts and added programs as each of the partners continue to grow and strengthen.

Finally, read the GPO's mission statement and determine whether or not their ideals and vision for the future are in line with your own. A true partnership should share a similar vision and work together toward a common goal. Teaming with a partner whose fundamental beliefs and approach to business are similar to your own will lead to an alliance that will produce positive results. At the end of the day, it's still your business but the support of an innovative and targeted GPO will make achieving your goals easier and faster.

This article originally appeared in the April 2003 issue of HME Business.

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