One Vote in Favor of Group Purchasing Organizations for Simple Categories

In the debate over group purchasing organizations (GPOs), I'm still not entirely convinced that they represent a good investment outside of a handful of select spend areas -- at least for most companies. After all, the payoff for doing sourcing right versus wrong is so much larger for companies who invest in the right teams and processes (not to mention technologies). Moreover, the incremental benefit from a non-leveraged category environment versus one where a party (e.g., a GPO) skims off the top can still be large. This is because in most cases GPOs are nearly always compensated based on a portion of the transaction, so it makes no sense for them to get a price that is any lower than "good enough" from suppliers, since they'll make less as the offer becomes more competitive. But perhaps I’m in the minority in this type of thinking, especially if you consider the arguments that Mark Usher makes in favor of leveraged buying approaches for non-strategic categories.

In a recent post, Mark retells the story of how, back in his days at GE, the division he worked for spent “about eight million dollars annually on various facilities maintenance services such as general R&M, cleaning, lawn & grounds and security.” But, “despite this level of spend number” GE “never ran an RFP for facilities maintenance services … and instead [opted to participate] in a regional purchasing cooperative that … secured us about 12% savings on our facilities spend, or $960K annually.” Mark agrees that if GE had gone through a sourcing effort on its own in these areas it might have saved another 5%. But his point is that such an effort is not worth it, considering that “for us the foregone savings on $8M of facilities spend by not going to RFP was far exceeded by the total cost savings on the direct materials spend category.”

Today, Mark is surprised that so many companies expend “time- consuming” effort on “RFPs for office supplies, MRO and other simple cross-industry indirect spend categories” when they could be pursuing alternative leveraged strategies. In fact, he suggests, “In an ideal sourcing world far far away, companies would never run RFPs or reverse auctions for simple indirects like office supplies and MRO.” Rather, “Sourcing events for these types of categories would only ever be conducted by Group Purchasing Organizations who would use them to drive down prices for all buyers,” leaving internal sourcing organizations to go after more complicated and rewarding spend areas.

Call Mark the pragmatist and call me a dreamer, but I still believe that many indirect and MRO categories are better suited to sourcing directly than punting halfway down the field. After all, once you source a category, running a repeat sourcing effort is relatively easy. Moreover, it’s often a combination of unit and non-unit cost savings (e.g., JIT, VMI, delayed-payment terms) that yields the best total cost result in these areas. And it’s highly unlikely that a GPO will support the type of sourcing, supply-chain, and working-capital flexibility required to get the best results. I could also go down the technology side of the indirect-argument equation, showing how sourcing and P2P efforts should tie together for the best results. But I’ll leave that to a more detailed examination of the subject some other time.

- Jason Busch