Group purchasing organization: What it is and how it works

Managing procurement costs while maintaining strong supplier relationships is a challenge for many businesses. Group Purchasing Organizations (GPOs) offer a solution by leveraging collective buying power to secure better pricing and terms from suppliers.

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Whether you're looking to reduce costs, simplify vendor negotiations, or improve procurement efficiency, understanding how GPOs work can help you determine if they’re the right fit for your business.

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In this guide, we’ll explore what a GPO is, how it operates, and the key factors to consider when evaluating one for your procurement strategy.

What is a Group Purchasing Organization (GPO)?

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Instead of negotiating with suppliers individually, businesses join a GPO to access pre-negotiated contracts with better pricing, terms, and conditions.

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GPOs operate across various industries—healthcare, manufacturing, retail, hospitality, and beyond—helping companies reduce costs, streamline procurement, and gain access to suppliers they might not have been able to negotiate with on their own. However, businesses with highly specialized procurement needs may require additional supplier agreements outside of GPO contracts.

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Whether a business is sourcing office supplies, raw materials, or specialized equipment, GPOs make procurement more efficient and cost-effective.

How do Group Purchasing Organizations work?

GPOs act as intermediaries between businesses and suppliers, negotiating contracts that benefit all members. Here’s how the process works:

1. Businesses join a GPO: Organizations become members of a GPO, sometimes at no cost, and gain access to the GPO’s supplier network.
2. The GPO negotiates contracts: Leveraging the collective purchasing volume of all members, the GPO secures discounted pricing, favorable terms, and bulk purchasing advantages from suppliers.
3. Members purchase through GPO agreements: Instead of negotiating their own deals, businesses buy directly from GPO-contracted suppliers, benefiting from pre-arranged discounts.
4. GPOs may receive a fee from suppliers: Many GPOs operate at no direct cost to members, and instead earn revenue through administrative fees paid by suppliers. But some GPOs may charge transaction fees, volume-based rebates, or tiered membership pricing for additional services.

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GPOs provide cost savings and efficiency, reducing the time businesses spend on vendor negotiations and securing competitive pricing. However, the extent of savings depends on industry, purchasing volume, and contract terms.

Historical context and evolution of GPOs

The first recorded healthcare GPO in the U.S. was established in 1910, bringing together hospitals to collectively negotiate lower prices on essential products. While formalized GPO structures emerged in the 20th century, early forms of cooperative purchasing existed in various industries before this period.

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Over time, the success of GPOs in healthcare led to their expansion into other industries. Manufacturing, retail, hospitality, and even corporate procurement teams saw the value of collective purchasing, leading to the rise of industry-specific and multi-industry GPOs. Today, businesses of all sizes—whether small startups or Fortune 500 companies—use GPOs to reduce procurement costs and improve operational efficiency.

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As supply chains become more complex, GPOs continue to evolve, with many incorporating technology, automation, and data-driven purchasing strategies to enhance procurement efficiency.

Types of Group Purchasing Organizations

Group Purchasing Organizations (GPOs) fall into two primary categories: vertical GPOs and horizontal GPOs. The key distinction lies in how they structure their supplier agreements and the industries they serve.

Vertical GPOs

Vertical GPOs focus on a single industry, offering specialized contracts and supplier relationships tailored to that sector. For example, a healthcare GPO negotiates bulk discounts on medical supplies, pharmaceuticals, and equipment specifically for hospitals and clinics. 

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These GPOs provide deep industry expertise, regulatory compliance support, and vendor specialization, making them highly effective for niche markets.

Horizontal GPOs

Horizontal GPOs serve multiple industries, offering broad procurement solutions that cater to diverse businesses. For instance, a horizontal GPO might provide discounts on office supplies, IT services, and fleet management to companies in retail, finance, and manufacturing.

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These GPOs appeal to businesses looking for cost savings across general operational expenses rather than industry-specific needs.

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Both types of GPOs have advantages: vertical GPOs provide industry-specific expertise, while horizontal GPOs offer broader cost-saving opportunities. Businesses choose based on their procurement priorities—specialized savings or general operational efficiency.

Advantages and disadvantages of GPOs

GPOs offer businesses a way to leverage collective buying power to reduce costs and streamline procurement. However, like any business strategy, joining a GPO comes with both advantages and potential drawbacks.

Advantages of GPOs

• Cost savings: By aggregating purchasing power across multiple businesses, GPOs negotiate bulk pricing and exclusive supplier contracts that individual companies wouldn’t be able to secure alone. These discounts reduce procurement costs and improve overall financial efficiency.
• Reduced procurement workload: GPOs handle supplier negotiations, contract management, and compliance checks, allowing procurement teams to focus on strategic initiatives rather than price comparisons and vendor negotiations.
• Access to pre-negotiated contracts: Businesses benefit from supplier agreements that already meet industry standards, saving time on vetting vendors, ensuring regulatory compliance, and reducing the risk of entering into unfavorable contracts.
• Improved supplier relationships: GPOs establish long-term agreements with vetted suppliers, enhancing procurement reliability. However, businesses may have less direct influence over supplier relationships compared to direct procurement agreements.
• Increased operational efficiency: Centralized procurement through a GPO simplifies purchasing, standardizes processes, and streamlines procurement workflows, making it easier to track expenses and maintain budget control.

Disadvantages of GPOs

• Limited supplier flexibility: Some GPOs restrict purchasing to select vendors under exclusive agreements, limiting supplier choices. This can be restrictive if a company prefers local vendors, niche suppliers, or more customizable service agreements.
• Membership fees and contractual commitments: Some GPOs charge membership fees or require long-term contracts, which may limit flexibility for businesses that only need occasional bulk discounts rather than ongoing procurement partnerships.
• Potential for supplier dependency: Overreliance on a GPO’s supplier network can reduce negotiation leverage for businesses looking to diversify sourcing strategies or pivot quickly in response to market changes.
• Transparency concerns: Not all GPOs clearly disclose rebate structures, administrative fees, or supplier agreements. Some industries, such as healthcare, have stricter regulations requiring transparency in GPO contracts.

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While GPOs provide significant cost and efficiency benefits, businesses must weigh these advantages against the potential constraints to determine if a GPO aligns with their procurement needs.

How to choose the right GPO for your business

Choosing the right GPO requires careful evaluation to ensure it aligns with your business objectives. Here are key factors to consider:

• Industry alignment: Look for a GPO that serves businesses in your industry and provides access to suppliers that meet your operational needs. A healthcare provider, for instance, will need vastly different supplier contracts than a manufacturing firm.
• Cost transparency: Review membership fees, administrative costs, and any hidden charges. Some GPOs take a percentage of supplier rebates, while others charge flat fees. Clear financial terms are essential for avoiding unexpected costs.
• Contract flexibility: Assess contract terms carefully—are you locked into long-term agreements, or can you opt out easily? If your business requires supplier flexibility, look for a GPO that allows for individualized purchasing outside its network when needed.
• Technology and integration: The best GPOs provide digital procurement tools, automated reporting, and spend analytics to streamline procurement processes. Ensure the GPO’s platform integrates with your ERP or procurement software for seamless workflow management.
• Support and compliance management: A strong GPO partner should assist with regulatory compliance, vendor risk management, and contract negotiations. Look for organizations that offer dedicated support teams and robust compliance tracking to mitigate risks.

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When selecting a GPO, focus on choosing a procurement partner that enhances efficiency, strengthens supplier relationships, and aligns with long-term business goals, not just cost savings.

How to optimize your procurement process beyond GPOs

Group Purchasing Organizations provide a strategic way for companies to cut costs, streamline procurement, and access pre-negotiated supplier contracts depending on business needs. Whether through industry-specific vertical GPOs or broad horizontal GPOs, businesses can find a procurement model that fits their needs.

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However, while GPOs help optimize purchasing power, they don’t address every challenge in procurement management. Businesses still need visibility into spending, real-time tracking, and seamless vendor payments—all of which require more than just better pricing. Procurement automation bridges this gap, eliminating manual workflows and ensuring complete control over purchasing decisions.

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With Ramp Procurement, businesses can centralize procurement, enforce policy controls, and streamline approvals. Combining procurement automation with GPO participation can further optimize cost savings and operational efficiency

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Interested? Get started with Ramp Procurement starting at $15 per user per month.