Chain Reactions

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The Great Recession didn’t just adversely affect financially troubled companies. After all, every time a bankruptcy is filed, shock waves travel along supply chains and often take healthy companies by surprise. In other words, when companies share suppliers, especially with major global corporations like General Motors, they share operational risks.

Now, businesses can simply accept this risk. But with the global economy still on life support, it really makes more sense for managers to at least think about using a group purchasing organization, or GPO, to insulate their operations from the ongoing business failures that are a natural result of any financial crisis or economic downturn.

And let’s not forget the risk posed by black swan events like Japan’s earthquake/tsunami disaster in 2011 — when, as a Forbes article noted, a significant portion of the Japanese disaster’s impact on global supply chains was not even caused by physical damage at the epicentre of the catastrophe. “Instead, rolling brownouts in southern Japan delayed production at many firms, costing even more in business interruption and recovery expenses. This surprising cause and effect taught multinational organizations some hard lessons about supply chain sensitivity, and caused some to rethink their procurement interdependencies from [a] risk perspective as well as a cost calculation.”

Partnering with a GPO isn’t for everyone. In fact, managing your own supply chain seems to be in line with the entrepreneurial spirit. It certainly allows for quick adjustments when market conditions or business needs change. And it enables one-on-one relationships with supplier partners. But GPOs insulate companies against downturns and disasters and mitigate the risks associated with independent supply chain management as a result. And there are other advantages.

Better pricing: GPOs use the collective buying power of their members to negotiate for better prices. Independent businesses often have less purchasing power and, therefore, have to settle for less favourable prices. This means they are at a competitive disadvantage when pitted against bigger corporations or GPOs. Partnering with a GPO saves money and allows companies to pass savings on to consumers, improving both their value proposition and their bank balance.

More advantageous payment terms: GPOs can negotiate better payment terms with sellers so members can save money to use for other parts of their business. Unfavourable payment terms — sometimes up to Net 60 or Net 90 — can amount to your business providing short-term loans to supplier companies. Businesses that partner with GPOs can get products quickly and without the hassle of poor payment terms.

Greater reliability: When a supplier goes bankrupt, it can devastate a supply chain if there are no backup suppliers available. While an independently managed supply chain might include one or two suppliers for a given product, many GPOs have dozens of redundant suppliers to guard against supply chain disruptions. In the midst of an economic downturn, GPOs help smaller suppliers obtain products that often wouldn’t be available otherwise.

Improved selection: Product development must continue even in the midst of a recession, so it’s essential that businesses can obtain the resources needed for new products and services. The wide range of similar products available through GPOs allows your company to experiment with, build, and test new products without worrying about limited selection.

Group purchasing organizations are nothing new. The first vertical market GPO in North America was established in the United States in 1910 to assist healthcare providers. Today, businesses across numerous sectors take advantage of the strength in numbers provided by vertical market GPOs. Meanwhile, horizontal market GPOs provide more purchasing leverage across a spectrum of industries.

But while GPOs have been around for a long time, the fact remains that they are growing in number in the post-Great Recession world because supply chain management is now more about guarding against market uncertainties than ever before.

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