negotiate-1

The purchasing power of a buying group

Posted by Elizabeth Allcock on June 11, 2020 09:55:59

When you become an independent business owner, you’re always thinking of ways to reduce your expenses, manage your finances better and stay ahead of the competition. One of the best ways to solve all three is to join a buying group also known as a group purchasing organization (GPO).

A buying group handles the payments, sourcing, contract and supplier management for you, while leveraging the purchasing power of the group to get better pricing than you could negotiate if you were independent. Buying groups give independent businesses a chance to compete with their larger competitors who have a much more efficient supply chain. Large corporations often offer similar products to the ones that independent businesses sell and can sometimes offer these products direct to the consumer for lower prices than the independent business.

These larger competitors often have access to new products months before suppliers contact the independent. When a product is in short supply, often it is the larger competitor that has stock, not the smaller independent business. This results in lower margins at best and at worst, could mean closure for the independent business. The only way to compete with these larger corporations whilst retaining independence is to join a buying group.

What is a buying group? And how do they operate?

Buying groups are made up of businesses seeking a better relationship with their suppliers and trying to leverage group purchasing power. We have seen that suppliers tend to give preferential pricing and better services to businesses who place a high number or value of orders with them annually. By being a member of a buying group, the purchasing power of several businesses can be consolidated to be comparable to a large multinational. The buying group can negotiate the best pricing discounts and form relationships on your behalf. In addition to better pricing, buying groups may seek to secure a range of other benefits for members, including special promotions and rebate deals.

Many buying groups help businesses source their stock and supplies, meaning a lower cost per item (and higher profits). Some buying groups provide services for all small businesses, while others specialize in specific niches. It’s worth researching whether there is a dedicated buying group for your industry.

What businesses use buying groups?

According to IBIS World there are 728 buying groups in the USA which make up a market size of 5 billion. So, there are many industries where smaller businesses leverage their combined purchasing power to obtain goods and services, including:

  • Healthcare providers
  • Industrial manufacturers
  • Agricultural interests
  • Grocery and retail enterprises
  • Non-profits

How much does it cost to be a member of a buying group?

There are national level buying groups with hundreds of members, as well as smaller buying groups that operate on a local level. Different sized buying groups will have varying price points and features. Some buying groups are funded by administrative fees that are paid by the suppliers and others by the buying members themselves, or they could even be funded by a combination of both of these methods. These fees can be set as a percentage of the purchase or as an annual fat rate. Some buying groups set mandatory participation levels for their members, while others are completely voluntary. 

Benefits of being a member of a buying group

There are many benefits to joining a buying group, such as lower cost of goods purchased from vendors, lower shipping costs, centralized ordering, and support from the organization itself. We discuss all the benefits in more detail.

  • Increased “purchasing power” 

Buying groups combine the purchasing power of different businesses to negotiate better discounts that result in an item level price not attainable by most single companies. The simple fact is that the more you buy, the bigger the discount you can negotiate for. Being that there are about 30.2 million small businesses in the US. Imagine what kind of purchasing power you can have when you join up with even a handful of them. 

  • Reduced costs for purchasing goods and services

One of the main functions of a buying group is to bring together small businesses in a particular sector or industry. They will then consolidate orders from these businesses to place a single large order with suppliers. This is known as “group purchasing.”

Due to the economy of scale, manufacturers and suppliers will often give preferential rates and discounts for buying in bulk. The purchasing group then passes these savings back to its members, meaning reduced costs for you. Many vendors have large purchasing order minimums before they provide discounts — buying groups will help you meet those. Small businesses can enjoy the discounts normally reserved for larger businesses simply by collaborating.

  • Further cost savings on freight and delivery

Many suppliers will waive freight and shipping fees for larger orders. Your buying group may be able to negotiate discounted rates or free shipping on group orders over a certain size. Keep in mind that in most cases, that means your group’s order will go to one location, so your buying group may be responsible for then ensuring you get your portion of the order.

  • Saving time by centralizing your purchasing

As a small business owner, time is another one of your most valuable assets. A buying group can make it easier to get everything you need from one place. Whether you’re setting up a new office or you just want to order stationery supplies once a quarter, being able to buy everything through one group is simply more efficient.

  • Reduction of transaction costs

By joining a buying groups, independent businesses can effectively simplify their procurement processes. This reduces both the per unit cost on their goods and also the per transaction costs, due to the reduced number of contracts to be negotiated, prepared and managed.

  • Excellent support and advice

Some buyers’ groups play an active role in supporting and furthering the interests of their members. These groups are often formed from industry bodies, lobbying organizations, and trade associations. They will provide services in addition to purchasing power, such as legal advice, business help, industry news, seminars, and support forums.

  • Networking with the members

Businesses that will benefit the most from a buying group are those that understand and welcome greater collaboration. When bringing together many different professionals, businesses are able to share best practices and exchange information. Bringing together different professionals in multiple industries with similar challenges and spends, allows members the opportunity to exchange tips and recent experiences whether good or bad.

  • Reduced workload

Since the buying group manages all stages in the lifecycle of contracts on behalf of their network, you as an independent business will benefit from a significant reduction in your workload and are free to focus on the strategic side of your business.

  • Lower purchasing risk and high-quality service

Buying groups strive for longevity when it comes to keeping their members; because of this, the pressure to support the member is immense. In order to give members, the best quality in suppliers, buying groups should subject potential suppliers to a full vetting process which ensures the credibility and value of the supplier, in return the members have a lower purchasing risk. Working with suppliers that are simply the “cheapest” option and provide little overall value may harm a buying groups reputation.

  • Navigating international suppliers

Many businesses want to source their goods from abroad because of lower labour and materials costs which translates into lower costs per item, meaning more profit. Unfortunately, navigating international suppliers can be tricky, especially with language barriers, cultural differences, and product requirements. Specialized buying groups can support you with this.

Rebate management software specifically designed for buying groups

Having lots of members, buying groups have to deal with many complex deals which can be difficult to process manually, that’s why for those who are involved in the supply chain to get the maximum return on their investments, the buying group needs to have a rebate management system at their disposal. This will make all their trading agreements between all parties easier to understand and calculate plus fewer claims should be challenged. At Enable we have seen the proof of this having worked with buying groups since 2002, including Unitas Wholesale.

Our rebate management system helps buying groups with the following features:

  • Supplier portal – this allows suppliers to upload details of promotions and input their sales figures for each member at the appropriate level of detail (i.e. by category, by product, by month).
  • Member rebate payments - Enable calculates the rebate payable to each member and provides an audit trail.
  • Promotions catalog - publish centrally negotiated promotions to members with full product details.
  • What-if scenario planning – allows members of the buying group to see how their purchasing decisions will impact the rebate that they will earn.

unitas

Topics: Rebate Management, Industry Sector: Buying Groups