Purchasing Groups Are a Vital Tool for All Independent Business Owners
By Steve Husome
If you are a small-business owner you need to consider joining a purchasing/ buying group to grow your business and stay competitive in your marketplace. Wikipedia defines a group purchasing organization (GPO) as an entity that is created to leverage the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members. In its simplest form, a buying group is the joining together of similar independent businesses to leverage their combined purchasing power to receive better pricing and terms on the products they buy. Successful buying groups bring efficiencies to the supply chain rather than simply flexing their ‘market power’ to extract a better deal. Efficiencies are created when suppliers can rely on the buying group to perform functions more cost effectively for its members as a group, than the current model of each supplier dealing with each independent separately.
GPOs exist in just about every industry imaginable. Do you belong to Costco or Sam’s Club? These retail giants are examples of buying clubs and not necessarily GPOs; however, the premise is very similar. They compete for consumers with lower prices by leveraging their buying power and reducing expenses for their suppliers by optimizing the economies of scale of all their retail outlets. Many buying groups are funded by administrative fees that are paid by the vendors with whom the group contracts. Some are funded by fees paid by the buying members, while others are 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. Members participate based on their purchasing needs and their level of confidence in what should be competitive pricing negotiated by their buying group.
The challenge of the independent business owner
Independent operators may have a great advantage over their corporate competitors. They possess an entrepreneurial spirit that is difficult to match and they have the ability to react to local market conditions very quickly. The nature of the supply chain within which independents exist, however, can often lead to a competitive disadvantage versus their much larger corporate rivals. National competitors can offer some of the same products that independents sell and oftentimes can offer these products direct to the consumer for prices below the independents’ cost. New products or services are often available to these national competitors months before suppliers contact the independent. When a product is in short supply, often it is the corporate competitor that has stock, not the independent business. The result is lower margins at best and at worst, the closure of the independent business. To top it off, many independents are unable to find buyers for their businesses after a lifetime of work.
The reason for this seemingly unfair situation can be traced to the fact that national corporations have a much more efficient supply chain. The extra margins gained through this supply chain has fueled their rapid growth and enabled them to amass huge market-share power. In the past two decades, there has been a rapid expansion of both the corporate chain store and the franchise model, where a successful format is replicated time and time again. This competitive onslaught from these business models has forced independently owned businesses to accept lower margins, operate in smaller communities, focus on more narrow market niches or simply go out of business. The independent has responded to this increased competition through innovation, finding market niches in which they can compete by providing superior customer service and immediate market responsiveness that can only come from an owner-operator.
This is not enough, however, since it does not address the supply-chain inequalities. The only way to address them and yet remain independent is to join a buying group. An effective, well-managed group is the most effective tool the independent can use to increase margins, grow market share and compete effectively without having to give up independence.
Benefits of joining a buying group include:
- Savings on operating supplies. Combining your volume with the volume of other members in the same industry results in lower overall costs for all.
- Time savings. The buying group utilizes industry experts to negotiate the best prices for the group, allowing the independent owner time to concentrate on core business.
- One-stop shopping. Members can save time by making multiple calls to multiple suppliers for business needs.
- Easy invoice pay. In some circumstances, members can order and pay for supplies through one simple source: their buying group.
- Current market updates. Buying groups often learn of industry trends and changes before independent business owners. Buying groups can be a valuable resource for market intelligence.
- Industry involvement. Buying groups often support the industries they serve through membership in trade organizations, to recruit and retain members and advocate on the behalf of their membership.
For independent business owners, getting the maximum return on investments requires a careful and precise use of all the tools at their disposal. Capitalizing on the strengths of a buying group can do more to ensure success than just about any other asset the business owner could acquire.
About the author
Steve Husome, Executive Vice President of Allied Purchasing, joined the company in 2010 with a successful resume within the beverage industry. Starting as a route salesman with Pepsi-Cola General Bottlers in the 80s, he worked his way through the organization with several purchasing, sales and management responsibilities. Husome has over 30 years of experience in the beverage business, including soft drink and brewery sales, distribution and procurement. He holds a Bachelor of Science Degree in marketing from Upper Iowa University.