Procurement Transformation Blog

Procurement Transformation Blog

Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

Teaching an Old Dog New Tricks: A Fresh Look at Group Purchasing Organizations

The article below is written by Ann Kildahl on April 13, 2012

Group purchasing organizations (GPO) are not a new concept and their popularity has risen and fallen with the performance of the economy.  However, there are limits to the success of group buying:

  1. The price received is only as good as the spend amounts of the participating members.
  2. GPOs remove the function of strategic sourcing in certain areas of Procurement, in turn losing internal expertise.

The democratization of the Internet and information with the advent of Web 2.0 has provided every individual a voice, no matter his or her status, location, or beliefs.  It has provided every individual no matter what their status, location, beliefs a voice.  News is broken on blogs before traditional news organizations even have a chance.  Even in a 24-hour news cycle, blog- and micro-blogs break news before traditional media outlets.  For good or bad, media such as Twitter and Facebook have become a front line for breaking news and news organizations work to leverage their content and user base.

Discount online coupon companies such as Groupon, Scoutmob, and Living Social have capitalized on the downturn in the economy by acting as a group buyer for the consumer.  Instead of the traditional B2B model, they are able to use their vast distribution lists to negotiate with the vendor, thus obtaining the best deal for the consumer.  Vendors are not promised volume and spend thresholds, but pay for the marketing and distribution of the deal.  This leaves the opt-in/opt-out decision of the deal up to the consumer, with certain limitations, usually an expiration date.

The future of Group Purchasing Organizations will parallel the Web2.0 revolution.  Group purchasing organizations are not receiving the best price for their clients due to the limitations of participation in the group.  Companies are paying a large amount of money to contribute their spend ability, but in theory, still not receiving the best price possible. It is very probable that there still exists a “Winner’s Curse” in the traditional GPO model.

There is a need for a democratization of GPOs, a GPO2.0.  By aggregating the purchasing power of not only a few organizations but allowing open participation by individuals and companies of all sizes through a series of e-auctions, the price can be driven down to its true cost without the need for traditional negotiation.   Participation is not limited to the consuming companies; an aggregation of suppliers is also needed to be able to provide adequate supply.

From a direct procurement perspective, it is believed that this GPO2.0 model needs to be undertaken first by industry groups to be successful.  These companies all have similar needs and purchasing habits.  All retail manufacturers need to purchase cotton, ink, tags.  Many garments for competing brands are already made in the same factories for different costs.  Food Manufacturers need similar basic goods.  Collaboration, shared spend and visibility creates an even playing field for everyone on the buy side of the organization.  This frees up resources and most importantly efforts to allow product differentiation from competition on the innovation and sell side of the organization.

Indirect procurement can be treated in a different manner.  Most companies and corporations need fleet management, office supplies, janitorial supplies, MRO, janitorial services, wireless phone contracts, etc.  Therefore, aggregating spend amounts of all companies and corporations to perform negotiations allows small companies to participate in a space that is much larger than their size and purchasing power would allow.

In conclusion, within direct and indirect procurement, a hybrid business model incorporating both B2B/B2C models is the future for Group Purchasing and will allow more resource availability for concentrated innovation and product differentiation.

About the author

Adrian Penka
Adrian Penka
Mr. Penka is a Vice President in the Supply Chain Practice of Capgemini, specializing in procurement strategy and transformation with a strong background in process design and SRM and ERP implementations. Adrian also leads Capgemini’s Global Procurement Transformation Center of Excellence. Adrian has held a diverse set of roles during his 16 year tenure with Ernst & Young and Capgemini such as Mergers and Acquisitions Synergy Savings Strategy Advisor, Process Design, Sourcing, Contract Analysis and Management, Source to Pay Transformations, Technical Report Development, and Project Manager for full life cycle implementations of SRM and ERP systems such as Commerce One, Ariba, SAP SRM, and PeopleSoft.
2 Comments Leave a comment
Buying Groups may contract a particular distributor which does carry a long line of products from a variety of vendors, but each of those vendors will be required to contract with and pay the allowance to the Buying Group - resulting in higher prices
Further reducing the power of the masses...

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