Group Purchasing Organization (GPO) is the Organization which is formed by a group of persons, companies or institutions of similar interests to purchase a good or number of goods in bulk to reduce the purchase cost and total investment. GPO may be formed at nonprofit basis or commission basis or profit basis.
In American Healthcare system, 90% of purchase is done through group purchasing. Group Purchasing can be beneficial in all sectors. In Indian healthcare system it may also be very beneficial e.g. one of the important benefits of group purchasing is that it increases bargaining power whether it is Hospitals, Pharmaceutical companies, distributors, retailers etc. In today’s competition time purchase cost can make the difference. Group purchasing makes it easy for small enterprises to compete with big enterprises.
First discuss about pharmaceutical companies. Both manufacturing companies and marketing companies can get profit from group purchasing. Raw material cost matter when it comes to manufacturing cost. A small Pharma company purchase raw material in Kilograms where Big Pharma companies purchase raw material in quintals and tans. Purchase cost difference in that cost may vary from few hundreds to few thousands rupees per kilogram depend at molecule cost.
Suppose a molecule actual manufacturing cost is 2000/- per kg. Raw material manufacturer/importer doesn’t sell material in loose and minimum quantity should be 500 kilograms. Big Pharma Company will have power to purchase in bulk and can get it supposed at rate of 2400/-. Small manufacturers have less demand and need only 50 kg of raw material. In that case he will go to the dealer and stockiest of raw materials and will purchase it supposed at rate of minimum of 3200/- per kg.
If small manufacturer create a group of other small manufacturers who need similar raw material and purchase 500 kg of raw material directly from manufacturer or importer. Every manufacturer will be benefited with 800/- per kg of raw material purchase. In case manufacturer feels he don’t have time to manage group purchasing, they can appoint any third party to make group purchasing after discussion with all group member and get his commission or profit at each purchase done.
Small marketing companies can also beat competition of big companies by purchasing at group. Suppose a marketing company need 30000 tablets of Aceclofenac with Paracetamol. Manufacturer quotes 45/- per 100 tab for 30000 batch size, 43/- per 100 tab for 50000 batch size, 40/- per 100 tab for one lakh batch size and 38/- per 100 tab for two lakh batch size. Small marketing company purchase cost will be 45/- per 100 tablets where big companies suppose to sell it at 46/- per 100 tab while getting 20 percent profit. Small company can sell it at 54/- while getting 20% margins. If small marketing companies make a group and quote for 2 lakh tablets. Batch will be taken of 2 lakh. Only difference in packaging of different brands has to done. That doesn’t cost much. Only 1 or two rupees difference will occur.
Major problem that is faced by small hospitals is purchasing of it equipment, devices and other substances. Big hospitals make tie-ups directly with companies to purchase anything while small hospitals have to rely at dealers or distributors. It increases the making and maintenance cost of small hospitals. Suppose a single in-door patient bed cost is 4500/- per piece quoted by distributor. Hospital can’t purchase it from manufacturer because of transportation cost and number of beds. Hospital needs only 5 beds. Purchase cost will be 22500/-. Manufacturer’s rate is 4000/- per piece for five beds with 600/- per piece transportation. If other small hospital also requires beds, then group purchasing can reduce the purchase cost at large extent. 40 or 50 bed definitely will cost less and transportation cost will also be reduced to major extent.
Distributors and retailers can also follow the above methods to reduce their purchasing cost and decline the competitions. No matter how big is seller, quantity always bargains it to minimum level. Not just in Pharma, every sector can get benefits from group purchasing.
Hope above information is useful to you…
For any query and suggestion, mail us at pharmafranchiseehelp@gmail.com
Query Related:
We are pleased to introduce our group Kansons Overseas Ltd., to your office. We are five decades old family run business house established in North India. We have business interest spanning from manufacturing, exports, distribution, to warehousing and others.
I am a follower of your blogs and let me acknowledge that they have been of great help to people who want to get into healthcare business.
Our group is planning to start a GPO (group purchase organization) for hospitals in tier 2/tier 3 towns in North India and believe that we would benefit from some guidance from you.
Please let us know if you can provide business consultancy services for the same?
Response:
As you mentioned you want to start GPO ( Group Purchasing Organisation) for hospitals in North India in small towns. Group purchasing is well known in American/European countries & Metro cities in India but in case of small towns, it is not so much popular. You could be benefited with it. There may be two types of group purchasing, you can involve.
- Medicines and Drug Group Purchasing
- Hospital Devices, Equipment and related Products Group Purchasing
In case of Medicines and Drugs, there is minimum possibility of Group purchasing because market in India is so open and there is large number of manufacturers available that everyone can purchase medicines from manufacturers directly at minimum cost. This concept is very popular in USA but it is very difficult in Indian Market.
In case of Hospital Devices, Equipment and related products, you can get strong presence if you plan it successfully. Small towns have small hospitals and clinics only. Very rarely we find any corporate hospital in these towns. There is much chances of success in medical device and equipment sector.
Hope this information will be helpful to you…
