Purchasing Strategy: Direct or Through a GPO?
By Mackenzie Oakley | March 23, 2020
Is negotiating directly with the supplier always the best procurement strategy? When you’re considering how to best manage your contracts, you have two goals: work with the best vendors and get the deepest discount possible.
The million dollar question is, do you want to negotiate with the provider, or partner with someone who has already done the hard work?
While many believe going direct is the only way to get the lowest price, it’s not always the case. This article will explain how to decide which is right for you so you can make sure you’re never spending more than necessary.
The most "bang for your buck"
Everyone wants to know what the best supplier relationship approach is or how to get the most “bang for the buck” so to speak. The truth is that it depends on several factors.
Is your organization set on using a particular supplier?
First, if your organization has their heart set on using a certain vendor you may not be able to leverage the contracts of a third party like a group purchasing organization (GPO).
Because each GPO is different and has a unique portfolio of pre-negotiated contracts, they may not offer an agreement from your favorite vendor. However, the best GPOs will have partnerships with the industry’s top suppliers which means that’s an excellent initial qualifier.
If you’re looking for the best overall savings in a certain category, not necessarily from a specific supplier, harnessing the power of group purchasing could be the perfect solution.
How much leverage does your organization have?
If you don’t have enough buying power – category volume or spend – many top suppliers won’t consider negotiating with you, especially if there’s not an existing relationship already in place.
Luckily, when you join a GPO, you join a group of buyers, so your buying power increases regardless of your category spend. As a result, this means you don’t have to buy in higher volume to get the best discounts.
How much time do you want to put in to developing a purchasing strategy?
If you’re planning on purchasing directly, you need to think about the time and effort required. Does your procurement team have the bandwidth to do another evaluation, for instance? Can they negotiate yet another contract, and manage one more vendor?
The great convenience of adding a group purchasing organization to your purchasing strategy is that it’s highly efficient. You won’t waste time negotiating only to get a subpar discount, and you won’t need to issue an RFP since the agreements are pre-negotiated. Best of all, you can get connected to your new suppliers quickly. As an added bonus, you’ll get extra monitoring through the GPO, ensuring your new vendor keeps up their end of the bargain.
Remember, leveraging group purchasing doesn’t mean you can’t negotiate the agreement yourself, it simply means you will have more time to focus on other important tasks.
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Are you getting the best price?
Bottom line, it’s all about how much your organization spends. If you’re a Fortune 500 company that has massive volume and a robust procurement team, for example, going direct will likely get you a better price, especially if you have several category experts on staff.
But for the majority of businesses, partnering with a GPO is a great way to increase your buying power. Not to mention, get deeper discounts, and improve your supplier accountability.
Pro of a direct purchasing strategy: Total control, no middle man. Possibly more agreement customization and flexibility.
Con of a direct purchasing strategy: It’s not always an option, and when it is, it requires a whole lot more time and effort. The beauty of working with a contract provider like a GPO is you’ll save time, get better overall discounts, and gain an added layer of vendor transparency.
The good news is, it doesn’t have to be either/or. A good GPO is never exclusive which means you can negotiate key contracts directly and get pre-negotiated agreements for lower volume, or lower priority categories.
When in doubt, let the savings do the talking. You may think you’re getting the best category discount possible, but you never know until you ask. (Request a free cost reduction consultation here.)
When considering your supplier relationship management, think about your vendor criteria. Are you set on a specific provider? Does overall category savings matter more? How high is your volume? How much capacity does your team have? The answers to these critical questions should dictate your overall purchasing strategy.