Magazine article Journal of Property Management

The Benefits of Group Purchase

Magazine article Journal of Property Management

The Benefits of Group Purchase

Article excerpt

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. …

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