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The benefits of group purchase.

The Benefits of Group Purchasing

Over the past few years, group purchasing organizations (GPOs) have emerged as an effective means of holding down operating costs in the multifamily industry. By banding companies together and pooling purchasing volume, these groups have produced significant savings for properties, thus increasing net operating profits.

The GPO system - how it works

Group purchasing organizations pool purchasing volume to negotiate the best possible prices and terms from qualified suppliers in key product categories. Because of their size, GPOs usually command better customer service for all members or subscribers. The obvious benefit to the supplier is the ability to expand market share or protect present market share with minimum marketing expense.

Although the health care industry has been the leader in capitalizing on the benefits offered through the GPO vehicle, the multifamily industry is quickly following suit. Today's competitive market makes reducing the costs of supplies an attractive option. Reducing the amounts paid for goods, maintenance supplies, and service is a partial means of achieving this goal.

The larger management companies may have the volume to negotiate discounts on some items, but companies with less than 15,000 units do not have buying power to warrant meaningful discounts. Group purchasing organizations may offer substantial savings for this group.

Groups of properties or management firms might also consider forming their own GPO organizations. However, the volumes of properties would have to be large enough to obtain sufficient discount leverage with suppliers. In addition, this cooperative venture would also incur some administrative and warehousing costs.

Property management firms managing between 1,000 and 20,000 units, or larger companies with properties spread throughout several states, derive the greatest rewards from the GPO. Companies with over 30,000 units typically are large enough to negotiate discounts and afford the overhead required for an effective internal national accounts program.

In addition to producing bottom line results for properties, GPOs offer management companies a technically competent professional purchasing staff that they might otherwise not be able to afford. Moreover, a company is assured that consistency of supplier and product quality is maintained from property to property and that minimum levels of insurance coverage are required from all suppliers, thus reducing risks for property owners and managers.

Savings from GPO purchasing depend on quantities purchased, but one GPO's experience may demonstrate savings potential. This GPO reported that program members spend an average of $235 per unit per year on the products available through the GPO. At an average savings rate of 25 percent, properties realize a gross savings of nearly $60 per unit per year by participating. For a typical 200-unit property, this represents a gross savings of $12,000 a year. After paying membership fees, the average net savings equalled almost $10,000.

Membership in GPOs is usually acquired for properties, not management companies. Fees are based on the total number of apartment units enrolled by the company and are charged to the properties. Membership fees per unit will vary per GPO; in some cases, fees are tiered - the greater the total number of units enrolled, the lower the fee per unit. In some cases, members are required to buy case quantities to qualify for discounts.

Alternatively, some GPOs collect fees by charging participating suppliers a percentage (ranging from 10 to 30 percent) of their gross sales to GPO members. To accommodate this type of rebate structure, the GPO fees typically are built into the suppliers' prices. This results in properties paying comparatively more for products purchased through these GPOs, but often eliminates or reduces the membership fee. Analyzing the impact on the bottom line of these two approaches is important before selecting a GPO.

The ordering process with a GPO does not change much from procedures a property might currently follow. Member properties continue to order directly from the suppliers, and they typically are invoiced directly by the supplier.

Key benefits

* Savings. Certainly the most compelling reason to join a GPO is for the savings. Large and small companies alike can benefit from the collective strength and negotiating leverage afforded through GPOs. Many GPOs will conduct a professional cost-comparison analysis based on your properties' pre-GPO invoices to demonstrate savings.

* Customer service. The degree of success experienced through a GPO may often rest with customer service. Although upper management will make the decision to join a GPO, the support of the day-to-day users, the site and maintenance staff, often determines the degree of success. A strong customer service staff that can provide immediate resolution of practical problems - such as shipping delays, back orders, and damaged merchandise - is an important factor.

* No overhead. GPOs offer the benefits of an effective national accounts program without the overhead. As most large companies have discovered, organizing, administering, and maintaining an effective national accounts program requires substantial staff time and support. The GPO provides technical competence, purchasing systems, controls, and support staff, so management companies need not incur additional overhead.

* Orientation and training. Orientation of management employees is another aspect of customer service which can prove invaluable in assuring the success of GPO participation.

Most GPOs will provide representatives to walk managers and maintenance personnel through the various operational aspects of the program, how to use it, and where to find the products and vendors that will supply their needs.

* One-step shopping. The GPO provides members with a wide variety of products. In the multifamily industry, these may range from computer software and office supplies for management offices to appliances, carpeting, or maintenance supplies for apartment units. Labor intensive services, such as the contracting trades, are not typically included in GPOs because labor rates cannot be secured on a national basis.

* Quality control. The reputation of a GPO is often reflected in the caliber of the suppliers selected for inclusion in the program. Consequently, suppliers tend to be well-known names that GPO members feel they can trust.

* Reduced liability. With new federal regulations regarding labeling and liability, property owners cannot afford to deal with suppliers without adequate insurance coverage and appropriate documentation for all chemicals sold. The better GPOs minimize their members' exposure to liability by requiring proof of adequate insurance coverage from all participating suppliers.

Drawbacks of group purchasing

While GPOs offer many advantages, there are some drawbacks. By its very nature, group purchasing imposes a specific set of purchasing procedures on the management organization. If these procedures do not coincide with established practices, difficulties may arise.

Likewise, the limits placed in vendor selection by GPOs may reduce the involvement of site and maintenance personnel in selecting suppliers. Thus, these employees may react negatively to what they consider a diminishing of their authority.

To some extent, buying through GPOs also limits the free selection of products for each property. While most organizations offer an array of products, every brand may not be represented.

Finally, like any other new system, integrating a GPO arrangement into existing management practices will require a period of adjustment for employees.

Shopping for a GPO

Perhaps the best way to locate a GPO in your area is to check business listings and query other managers. No national list of GPO organizations is currently available.

When shopping for a GPO, ask yourself first: What level of savings are available? Are the savings demonstrated through a professional cost-comparison analysis based on my properties' invoices? What are the gross savings per unit per year, and how will that affect the NOI?

If the answers to these questions are satisfactory, then ask yourself about the organization and support. For instance, is the GPO willing to provide comprehensive customer service to ensure prompt responses to problems or questions? Does the GPO take the responsibility for orienting and training site and maintenance personnel? Is ongoing practical information provided to members through a newsletter or some other direct communications vehicle? Does the GPO represent well-known, quality suppliers to ensure product integrity as well as to minimize risk?

If the answer to these questions is "yes," chances are the GPO is one that is dedicated to providing a dependable, valuable service.

The organization of the GPO also plays an integral role in its ability to service its accounts. GPOs should provide clear, concise guidelines to property managers on how the systems work and easy-to-use directories and catalogs listing product/vendor information, pricing, ordering procedures, and terms.

Confirm that any GPO under consideration meets these qualifications by investigating its track record. This final step should include one or more checks with current members of the GPO. Referrals such as these may point out problem areas and questions that should be asked, or can provide peace of mind.

Conclusion

Group purchasing organizations are not just a fad - they have been proven successful in a number of industries. For companies searching for ways to control operating expenses, GPOs may offer a valuable management tool.

Joseph P. Stefan is president of Property Service Group, Inc., a subsidiary of the National Corporation for Housing Partnerships in Washington, D.C. Among other responsibilities, he was the principal architect of Buyers Access. Prior to joining NCHP, Mr. Stefan was vice president of finance and marketing for ADEC, Inc., a Maryland-based energy management firm.

Ramona E. Santiago, vice president of Property Service Group, Inc., is director of the Buyers Access program. As one of the original architects of Buyers Access, she played a major role in the research, design, and development of this GPO. Prior to joining Buyers Access, Ms. Santiago was director of marketing for NCHP Property Management, Inc.

PHOTO : Customer service provided by GPOs assists managers in purchasing decisions ans cost monitoring.

PHOTO : GPO-sponsored training programs often assist managers in improving their purchasing and cost accounting skills as well as instruct them in the group buying procedures of the organization.
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Title Annotation:group purchasing plans
Author:Stefan, Joseph P.; Santiago, Ramona E.
Publication:Journal of Property Management
Date:Sep 1, 1989
Words:1624
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