How GPO's And Distributors Can Benefit Each Other

While not as prevalent today as in the past, there has been tension between group purchasing organizations (GPOs) and distributors over the years. A good deal of the tension was the result of a misunderstanding as to the roles each plays in the supply chain. For instance, many distributors believed — and may still believe — that they are in competition with GPOs.

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While its not true for all GPOs and all situations, in the health care industry and in scores of other industries, that is not the case. In fact, instead of competing, distributors often can benefit from their association with GPOs.

The Truth is it's almost impossible to exist in the health care supply chain without some GPO affiliations or membership.

But the fact remains that the distributor remains the key element in the supply chain: the manufactured products are distributed and sold by the distributor and the distributor receives their typical fees and rebates for providing these services.

What Is a GPO?

A group purchasing organization helps its members realize savings on scores of different products and supplies by aggregating member purchasing power. The GPO negotiates discounts from manufacturers and suppliers, which are then passed on to members.

The first GPOs date back to the early 1900s and served the healthcare industry. Today, healthcare still has more GPOs than any other industry sector. According to various studies, from 85 percent to more than 90 percent of all medical facilities in the United States are members of a GPO, and many are members of more than one GPO. These healthcare facilities are purchasing everything from toilet paper to medical supplies through GPO networks.*

The key reason these healthcare facilities have signed up with GPOs is the same reason most organizations join GPOs, and that is to save money. The savings can be significant and tend to be even more significant the larger — and the greater the purchasing needs — of the GPO members. For instance, according to a 2011 report from the Healthcare Supply Chain Association, “GPO enabled hospitals [have] saved up to $33 billion each year through lower priced products [purchased through GPOs].”**

While healthcare is still prominent, many other industry sectors have also embraced GPOs. Among them are foodservice and grocery; industrial manufacturing, especially manufacturers purchasing raw materials; farming; and now cleaning. The following identifies the essential components of a GPO:

• GPOs do not purchase products in large volumes in exchange for price reductions that are then marketed to GPO members (buyers). (That would be a more like a buying group, not a GPO.)
• GPOs do not market a manufacturer’s or organization’s products. They are not marketing organizations. Manufacturers decide to work with GPOs because they see it as another profit center that can benefit them and their distributors.
• Most B2B GPOs make money by receiving a percentage of the purchase price of each sale, along with membership and administrative fees charged to GPO members. These charges do not impact commissions paid to the distributor.
• GPOs do not distribute products to their members. Delivery of goods or services is between the GPO member and the distributor…and this is where the distributor comes in directly.

In fact, most GPOs know they cannot be successful without having a strong relationship with distributors. According to Steve Tackett, vice president of national accounts with Amerinet ( now IntALere), a GPO that works with the healthcare industry, “Our big allies in all this are the distributors, given the fact that they have more ‘feet on the street’ [calling on end-customers] than we do.” However, it’s a two-way street. One way distributors benefit from GPOs is that GPOs can bring in buyers for one product who then purchase other items from the distributor. And because most GPOs work with larger organizations — for instance, most members of GPO's are large health systems or chains with larger sales — very often these larger customers also become larger buyers of a distributor’s products when compared to a non-GPO member. Another benefit is that very often manufacturers essentially beta test new products with GPO members. This provides the distributor with firsthand knowledge of new technologies entering the industry that may benefit many of their other non-GPO customers.

GPO's also level the playing field to a large extent in that the Pricing you can now get access to from your manufacturers and suppliers is on par or in some cases better then your larger competitors. This is often because the healthcare systems directly negotiate with your suppliers and just as you to service the contracts they have put in place. 

But nothing in life is free....  

The price for this wonderful arrangement is typically in the form a processing fee and a rebate agreement between you and the manufacturer. Most GPO's will take a percentage on top of a rebate you would have to claim and in many cases require and have fairly stringent reporting requirements. 

The Net affect is that when you sell a product figuring out if you are really going to make a profit becomes that much harder. 

This is where the MDS-Nx System comes in, by allowing you to load both contract eligibility and contract pricing into your ERP / Supply chain management system. This allows you to see your true acquistion costs net of your potential future rebate and calculate if the item is really profitable. 

In turn it will also track the sales and create a sales tracing claim for the rebate amount you would normally have to calculate manually 

and creates a Debit claim in your General ledger to tie out your additonal rebates against. 

This allows you to pay vendors with your rebate claims and debit memo's increasing cash flow and available purchasing power. By doing so you can take advantage of positive terms like a 2% cash discount because you are effectively paying them with their own money. 

Rebates and GPO's can sound like a problem and something to avoid. 

But the business climate today doesn't allow you to ignore them any more. 

 Your competitors are doing it, you need to do it. So make sure you do it successfully. Partner with a proven solution for the NDC, NuEdge and IMCO direct vendor rebates. Team up with an industry solution that will ensure your company is taking advantage of the latest rebates and GPO management tools. 

Ready to level the playing field?

For more information on TSH or MDS call The Systems House, Inc. at 1-800- MDS-5556. Or send a message to sales@tshinc.com

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