What is a Group Purchasing Organization?

A group purchasing organization, or GPO, is a coalition of individuals or businesses that combine resources in order to negotiate discounts from suppliers of goods and services. Although common mostly in the health care industry, group purchasing organizations run the gamut of goods and services. From food to electronics, people find lower costs when purchasing power is increased.

The simplest form of a group purchasing organization is known as a co-op. The term is short for co-operative, and it applies to individuals who have banded together to purchase a specific item or group of items. An example could be a group of farmers who get together to negotiate better prices for seed or farm equipment. This concept is known as collective buying power.

On a large scale, businesses can unite to purchase goods or services at a significantly lower cost than they could on their own. For example, a small business might join a health care group purchasing organization and thus be able to get better rates on health insurance. This larger, united group of members can approach health care providers to negotiate better prices on health care packages. The cost of membership pays for itself in the savings available to the small business. A business should analyze the cost versus benefits before joining a group purchasing organization.

A group purchasing organization can be horizontal or vertical, referring to the market segment of goods and services available for purchase. A vertical group purchasing organization focuses solely on one industry, whereas a horizontal group purchasing organization attempts to get the most discounts from the most goods and services across a broad market.

The cost of administering a group purchasing organization is either collected in the form of commissions or rebates, or can be passed along to the consumer in the form of membership fees. In that way, no one individual or business bears the burden of administration. In the case of non-profit group purchasing organizations, most or all of the discounts are passed on to the end user.

Although the popularity of membership in a group purchasing organization is relatively new, the concept itself has been around for centuries. Throughout the 1900s, the idea of volume buying in order to save money has grown immeasurably, with large warehouse stores making volume purchasing a common experience. When applied to billion-dollar markets and million-dollar clients, the savings can add up fast.