How group purchasing organizations (GPOs) work

If you're struggling to secure better pricing from suppliers, a group purchasing organization (GPO) can be the key to simplifying your procurement processes and securing the discounts you're looking for.

A GPO is a cooperative entity that combines the purchasing power of multiple organizations to negotiate better prices and terms with suppliers. By consolidating their purchasing volume, member organizations can access cost savings and improved contract terms that would be difficult to get individually.

In this guide, we’ll explore what a GPO is, the different types of GPOs, and the key factors to consider when evaluating one for your procurement strategy.

What is a group purchasing organization (GPO)?

A group purchasing organization is a cooperative entity that helps businesses save money by pooling their purchasing power to negotiate better deals from vendors and suppliers. Instead of negotiating with suppliers individually, businesses join a GPO to access pre-negotiated contracts with better pricing, terms, and conditions.

GPOs are most common in the healthcare, manufacturing, and retail industries, helping companies reduce costs, simplify procurement, and gain access to suppliers they might not have been able to negotiate with on their own. Whether you're sourcing office supplies, raw materials, or specialized equipment, GPO procurement can be more efficient and cost-effective.

Why join a GPO?

Group purchasing organizations offer compelling benefits that make procurement easier and more affordable for businesses across industries. Here are the main reasons companies choose to join GPOs:

• Better pricing: Volume discounts save companies money on essential goods, often delivering substantial savings compared to going it alone
• Fast negotiations: GPOs handle supplier discussions, freeing up your team to focus on what they do best instead of haggling over contracts
• Industry expertise: Vertical GPOs bring specialized knowledge to your procurement process, understanding the unique needs and challenges of your specific sector
• Fewer approval hurdles: Pre-negotiated contracts cut complexity, so you can get what you need without lengthy internal reviews and legal back-and-forth

Beyond cost savings and efficiency gains, many GPOs also provide support with compliance requirements and risk management. Their established vendor relationships and contract expertise help GPO members navigate regulatory challenges while maintaining quality standards across their supply chains.

How do group purchasing organizations work?

Group purchasing organizations act as intermediaries that pool buying power from multiple businesses, allowing smaller companies to access the same favorable pricing typically reserved for large corporations. Here's how they work:

• Demand aggregation: GPOs collect purchasing needs from dozens or hundreds of member companies, combining their individual orders into massive bulk purchases that suppliers find attractive
• Contract negotiation: Armed with significant volume commitments, GPOs negotiate directly with manufacturers and distributors to secure discounted rates, extended payment terms, and exclusive deals
• Member access: Once contracts are established, members can browse available products through online portals, place orders at pre-negotiated prices, and often receive direct shipments from suppliers

This collaborative approach helps smaller businesses compete more effectively by accessing enterprise-level pricing and terms they couldn't negotiate independently, making GPO procurement more efficient and cost-effective for everyone involved.

How GPOs make money

Revenue streams for GPOs vary considerably. Some charge annual membership fees ranging from hundreds to thousands of dollars, while others collect administrative fees from suppliers for each transaction processed. Many GPOs use hybrid models, combining modest membership dues with supplier-paid fees to keep costs manageable for members.

Types of group purchasing organizations

Group purchasing organizations 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, also known as closed or industry-specific 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.

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

Horizontal GPOs

Horizontal GPOs, also called open or cross-industry 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.

These group purchasing organizations appeal to businesses looking for cost savings across general operational expenses rather than industry-specific needs. They're much more flexible and usually enjoy a broader supplier network.

Both types of GPOs have advantages: Vertical GPOs provide industry-specific expertise, while horizontal GPOs offer broader cost-saving opportunities. You'll choose based on whether you need specialized savings or general operational efficiency.

Healthcare GPOs

Healthcare represents the largest and most established GPO sector, with these organizations handling billions in purchasing volume annually. Major players such as Premier, Vizient, and HealthTrust Purchasing Group serve thousands of hospitals, clinics, and healthcare systems across the country.

These GPOs negotiate contracts for everything from medical devices and pharmaceuticals to food services and office supplies, helping healthcare facilities manage their procurement costs while maintaining quality standards. The scale of healthcare group purchasing organizations is impressive, making them powerful negotiators with suppliers and manufacturers.

For instance, consider a small clinic that joins a healthcare GPO. Instead of paying retail prices for surgical supplies, medical equipment, and pharmaceuticals, the clinic gains access to hospital-grade products at rates previously available only to large medical centers.

Retail GPOs

Retail businesses leverage GPOs to coordinate purchasing across multiple locations and product categories. Independent grocery stores, restaurants, and specialty retailers commonly join forces through organizations such as Associated Wholesale Grocers or National Co+op Grocers to secure better pricing on inventory, cleaning supplies, packaging materials, and equipment.

For example, a regional chain of hardware stores might participate in a group purchasing organization to negotiate volume discounts on tools, seasonal merchandise, and store fixtures that would be impossible to achieve individually. This approach allows smaller retailers to compete more effectively with larger chains that have built-in purchasing power.

Cross-industry GPOs

Cross-industry GPOs serve businesses across multiple sectors, offering flexibility for companies with diverse purchasing needs. Organizations such as GHX and Premier extend beyond their healthcare roots to serve government agencies, educational institutions, and commercial businesses.

These GPOs maintain extensive supplier networks, covering categories from office supplies and technology to maintenance services and consulting. The versatility of cross-industry GPOs appeals to businesses that need access to various product categories or operate in multiple market segments. They provide one-stop GPO procurement solutions with consistent terms and pricing across different spending categories.

Common GPO concerns

While GPOs offer compelling benefits, many businesses hesitate before joining due to legitimate concerns about costs, flexibility, and operational impact. Understanding these common concerns and how reputable GPOs address them can help you make an informed decision about whether to join one.

Membership fees

GPO fee structures vary widely depending on the organization and industry focus. Some charge flat annual membership fees ranging from a few hundred to several thousand dollars, while others use tiered pricing based on company size or purchasing volume. Many GPOs, particularly in healthcare, operate on supplier-funded models where manufacturers pay administrative fees, making membership free for buyers.

To evaluate whether the fees justify the savings, calculate your potential annual procurement spend through the group purchasing organization and compare the negotiated pricing against your current costs. Most businesses find that even modest volume purchases quickly offset membership fees, especially when factoring in reduced procurement staff time and administrative overhead.

Supplier limitations

Businesses often worry about losing flexibility in supplier selection or being locked into exclusive arrangements with preferred vendors. While group purchasing organizations do establish contracts with specific suppliers, most maintain diverse networks, offering multiple options within each product category.

The key is evaluating whether the GPO's supplier base aligns with your quality standards and operational needs. Review the organization's vendors, ask about their supplier onboarding process, and inquire about policies for requesting new suppliers. Many GPOs actively seek member input on vendor performance and regularly update their supplier networks based on feedback and market changes.

Compliance and transparency

Regulatory compliance varies significantly by industry. Reputable GPOs maintain detailed compliance programs, conduct regular audits, and provide transparent reporting on their supplier relationships and fee structures. They typically offer compliance training for members and maintain clear policies regarding conflicts of interest and vendor relationships.

When evaluating GPOs, request information about their compliance framework, audit procedures, and member protections. Look for organizations that provide detailed contract terms, pricing transparency, and clear documentation of their supplier selection criteria to mitigate regulatory and operational risks.

Advantages and disadvantages of GPOs

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 GPO procurement 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.

While GPOs provide significant cost and efficiency benefits, you need to weigh these advantages against the potential constraints to determine whether a group purchasing organization aligns with your procurement needs.

How to choose the right GPO for your business

Choosing the right group purchasing organization requires careful evaluation to make sure 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. Make sure 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.

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.

The evolution of GPOs

The first recorded healthcare group purchasing organization in the U.S. was established in 1910, bringing together hospitals to collectively negotiate lower prices on essential products. By 1962, 10 GPOs existed. Thanks to Medicare and Medicaid, by the mid-1970s, the number of GPOs had grown to roughly 120.

A major shift occurred in the early 2000s, when GPOs began moving beyond traditional procurement and started offering value-added services such as data analytics, supply chain consulting, and vendor management. This evolution reflected a broader recognition that purchasing power alone wasn't enough; companies needed comprehensive support to optimize their supply chains.

Industries outside healthcare started to take notice. Government agencies began to adopt the GPO model, recognizing its potential for public sector procurement. Educational institutions followed, then corporations across various sectors, including technology, manufacturing, hospitality, construction, and retail. As of 2024, the global GPO service market was valued at approximately $8.26 billion.

The sophistication of GPO operations has grown alongside this industry expansion. Many organizations now use advanced analytics and AI to identify savings opportunities and manage complex supplier relationships. They've evolved from simple buying cooperatives into true procurement partners that offer everything from contract negotiation to risk management services.

How Ramp can optimize your procurement process

Group purchasing organizations provide a strategic way for you to cut costs, streamline procurement, and access pre-negotiated supplier contracts depending on business needs. Whether it’s industry-specific vertical GPOs or broad horizontal GPOs, you can find a procurement model that fits your needs.

However, while GPOs help optimize purchasing power, they don’t address every challenge in procurement management. You still need visibility into spending, real-time tracking, and seamless vendor payments, all of which require more than just better pricing.

Ramp's procurement automation bridges this gap, eliminating manual workflows and providing complete control over purchasing decisions. Combining procurement automation with GPO participation can further optimize cost savings and operational efficiency.

Try an interactive demo to see Ramp Procurement in action.