According to a Technomic study, about 17% of mostly non-commercial operations purchase through a group purchasing organization. While there is value to be found in participating with a GPO giant, some operations have opted for "alternative" GPOs, be it focused on a specific product or just keeping it between neighbors. FSD talked to three operators to learn how these small GPOs can still provide value.
Large group purchasing organizations have had fans in healthcare for many years. As the economy has forced operators to make every dollar count, other foodservice segments have looked into different types of group purchasing organizations. According to a recent Technomic study, about 17% of foodservice operators (mostly in non-commercial segments) purchase through a GPO. David Henkes, vice president for Technomic, noted that the penetration levels vary widely by market segment. For example, healthcare has 97% participation with GPOs, whereas schools have only 39%. The study reported that on specific product categories, the cost savings of participating in a GPO could be 10% or 15%, but overall the amount of savings depends greatly on how much the operations purchase. Henkes gave an average overall savings of about 5% to 7% but admits the number varies widely.
While Henkes says that the large GPOs (Premier, Amerinet, Novation, HPSI) are growing rapidly, smaller, self-made GPOs are also a hotbed of activity. These “alternative” GPOs are popping up all around the country, whether they focus on small school districts or neighboring colleges or are dedicated to a certain type of product. FSD spoke to three operators to find out how these smaller GPOs still make a large impact.
K-12 SCHOOLS
GPO: Massachusetts Buying Group
Established: 2007
Members: Reading Public Schools, Reading, Mass.; Andover Public Schools, Andover, Mass.; Arlington Public Schools, Arlington, Mass.; Billerica Public Schools, Billerica, Mass.; Shawsheen Valley Regional Technical School, Billerica, Mass.; Greater Lawrence Regional Technical School, Andover, Mass.; Northeast Metropolitan Regional Technical School, Wakefield, Mass.
At 4,200-student Reading Public Schools in Reading, Mass., Kristin Morello, director of food services, didn’t share the same purchasing philosophy as her original GPO, so she decided to create her own.
“I was purchasing with a different collaborative in the area,” Morello says. “Given the history of the collaborative, I didn’t feel it was what would work best for this town. For instance, we have a driver, so I can get larger shipments at the high school, have someone break them up and bring out only what each school needs. I decided to go out on my own, and a couple of other districts agreed with me. When we started I said, ‘I’m not going to work with anyone who doesn’t share my purchasing philosophy. If people can’t commit to the philosophy that we agreed on, then they can’t buy in the group. That’s the bottom line.’”
How it works: That philosophy was simple. When the buying group bid on something, it was going to bid honestly and ethically and follow through and buy the product. Morello says another important thing she did when getting the group started was create a distributor survey.
“Because there are so many small towns in New England, the way it works is that the distributors pull the manufacturer pricing for the bid, then the distributor does its markup on it and then we bid through the distributor,” Morello says. “I sent out a survey of 12 questions asking about volume size, delivery stops, geography, minimum drop size, etc. I also surveyed all the different collaboratives in Massachusetts to find out how they did things. After I got all the answers to my questions we sat down and established some minimum criteria for the bid.”
Morello says her department purchases between 86% to 90% of all purchases from the collaborative. The bids include groceries, bread, ice cream, milk and paper. Morello says one of the major steps was to sample products with students.
“We spent the entire year sampling food with the kids and coming up with as many options as possible to go out to bid,” Morello says. “We were really hoping that the pricing structure from the distributor would come back in such a way that the prices were extremely competitive. It was grueling and it took forever, but we are trying to do things in a way that attracts the most bidders.”
Challenges: Morello believes that besides labor, buying collectively has the most impact on an operations’ bottom line, so it’s something everyone should be doing.
“A big challenge is the fact that this is not the only thing we do,” Morello says. “Another part of the challenge is maintaining that balance between what we need to do and what we can afford. We are also impacted by the USDA and what foods they do and don’t send us. We want to be truthful to the distributors, but we don’t have a crystal ball. It’s really a challenge to find distributors that can work with us because we don’t control the commodity program, but we must use it to survive.”
Advice: One of the things Morello thinks the group did well was figuring out who gets say over what product.
“We talked about something like potatoes,” Morello says. “When you look at a school lunch program, kids love potatoes. What we decided was the person who buys the most of something gets to yell the loudest. So if I sell the most potato puffs and I think your brand is inferior, I’m going to make sure the ones I like are on the bid and it’s my job to deal with it. If you need a certain hot dog because it doesn’t have milk in it and you have a lot of milk allergies, we will concede. We understand that by working together and sacrificing for each other, it will ultimately give us an end result that is win-win for all of us.”
Morello also stressed the importance of learning the laws concerning group purchasing.
“Many people have no idea what the laws are concerning how to bid, etc,” Morello says. “Ignorance is not an excuse. One of the things we did that was helpful was get my boss, who is a Massachusetts Certified Public Purchasing Official (MCPPO), involved. She reviews everything we do. I also think if you start small and work with people who have a similar philosophy and geography it is much easier. Also, have people who know how to use Excel.”
COLLEGE & UNIVERSITY
GPO: Group Purchasing Partnership (no formal name)
Established: 2008
Members: University of Akron, Akron, Ohio; Miami University, Oxford, Ohio; Ohio University, Athens, Ohio
Colleges and universities have been jumping on the GPO bandwagon for several years, but sometimes a larger GPO isn’t the answer for certain product categories. During his more than 15 years at the University of Akron, Zia Ahmed, who became senior director of dining services at The Ohio State University in Columbus in September, had always been willing to share resources with other Ohio schools. When he heard that area universities were having trouble with convenience-store vendors, he saw an opportunity to help.
“I was in touch with Ohio University and Miami University, and we had a discussion about ways we could share our resources,” Ahmed says. “In the meantime, Miami University was looking for a convenience-store vendor because its current vendor was going out of business. Ohio University was having a hard time finding a vendor that would deliver to them five days a week. We were happy with our vendor, but since we found that there was some type of synergy to be had with the other two schools, we decided that we’d go out for a convenience-item RFP together.”
How it works: Ahmed says an initial conference call where the three schools discussed each other’s needs was a very helpful first step.
“Whenever you create a partnership like this it’s important to create trust,” Ahmed says.“You want to make sure that one college is not controlling the business over another in any way, shape or form. We each have our own unique needs, and our goal was that all of us would get those needs satisfied. If for some reason that didn’t happen then that college could back out.”
Ahmed says after establishing each college’s needs, Ohio University’s purchasing department took the lead in organizing, formatting and creating the actual RFP. Once complete, the three directors reviewed it and had a pre-bid meeting to meet with all the vendors.
“I think we had six or seven vendors at first,” Ahmed says. “We wanted to narrow it down to three. The unique thing was that each college actually evaluated the vendors independently, then we came together and talked about it and we had all come up with the same top three vendors. With the top three we all went back and again individually used our own criteria to evaluate those vendors. We happened to all have the same vendor that we wanted to go with. Once we looked at the new proposal, the pricing, the service and everything else, the new proposal made it very easy to change the vendors.”
The bid is for convenience-store items such as prepackaged baked goods, candy bars and granola bars, etc. Ahmed says buying through the GPP saves the colleges about 5% on their costs. Since moving to Ohio State University, Ahmed says his new department is considering joining the group as well.
“We not only looked at the savings itself but also some of the other opportunities that came with forming a group,” Ahmed says. “The new vendor had greater variety in its product line than the other vendors. Also, Ohio University got their five-day-a-week delivery, which, without this, would have been very difficult for them.”
Challenges: Ahmed says that the group ran into relatively few challenges when setting up their GPP.
“The biggest challenge was really the distance between us, getting the group together and coordinating our time to meet and discuss,” Ahmed says. “Although it was somewhat challenging it was nowhere near as bad as I thought it would be.”
Advice: “Set intentions and be very candid in what each other’s goals are,” Ahmed says. “Make it very clear from the get-go that we are looking for a win-win situation. Offer an out if one of the group doesn’t feel its needs are being met. Also important is to make sure you address everybody’s need in a very specific way. That way our unified approach will find the vendor that is going to fill everybody’s need.
“We work with a larger GPO for other purchases. The advantage for doing convenience items in a smaller group is that usually a lot of those GPOs come with a specific requirement, such as a certain percentage of purchases. They also sometimes come with a membership fee. In this case you are not committed to any of that. This is your own GPO, so there are no guidelines you have to follow.”
HEALTHCARE
GPO: Producers and Buyers Co-op
Established: 2008
Members: Sacred Heart Hospital, Eau Claire, Wis.; St. Joseph’s Hospital, Chippewa Falls, Wis.; Luther Midelfort Hospital, Eau Claire, Wis.; Chippewa Valley Technical College, Eau Claire, Wis.
Two years ago when Rick Beckler, director of hospitality at Sacred Heart, met with his CEO to discuss how they could provide the hospital the most nutritious foods possible—from both a wellness and recovery standpoint—Beckler knew he’d have to make a stand.
“We’re up here in the Great White North, so we don’t have local produce being grown year-round,” Beckler says. “So we started looking at buying local goods and it was very difficult because of our volume and because there was no model we could learn from. It became very frustrating. I attended this statewide sustainability conference that was being held for small producers and farmers. During that conference I stood up and said, ‘I’m trying to buy local food for my hospital and I can’t get any of you to work with me. But I’m going to spend a quarter of a million dollars in the next year buying local with or without you. If anyone wants a piece of this, come find me.’ Two things happened: The local producers and farmers were shocked that a hospital had stood up and said we want this. Secondly, a group called River Country Resource and Development Conversation, which is funded by the USDA in the state to work with local growers to grow and sell product, came running.”
The River Country group had the relationship with the local producers that Beckler says he needed. Beckler says it became very apparent up front that his program needed somebody in the middle to coordinate the product and to set maintain standards. The co-op was created to facilitate ordering, transportation, processing/scheduling, membership, safety standards, etc. The co-op set the standards off the USDA and state standards for beef, chicken and pork, and Beckler says the members of the co-op conduct farm visits to make sure standards are being followed.
How it works: “On our co-op bill we order beef, chicken, pork, fish, cheeses and produce,” Beckler says. “The co-op goes out to the local producers, who are all meeting the standards, and they find the product for us. Then the co-op sells it back to us. Everything still goes through state and USDA plants and processes, just like all GPOs. We originally committed to purchasing 10% of our food budget, which was the quarter of a million dollars I spoke of at the conference. Now St. Joseph’s Hospital has joined Sacred Heart to commit to purchasing 15% of its food budget from the co-op. That is $345,000. The financial experts have told us that for every dollar we spend locally it goes around seven times before it’s deflated. So you start taking $345,000 by seven times to deflate and we are talking about $2.5 million spent in western Wisconsin. That’s significant dollars.”
Beckler says he has been amazed with the response he’s received from the state and community.
“The state of Wisconsin has jumped all over this thing,” Beckler says. “The state was saying, ‘you don’t realize what you’ve done.’ They said the co-op is helping create an infrastructure where certain communities can take care of themselves. For example, if there were an emergency situation and we couldn’t get product in from elsewhere. Plus, we are having a major impact on the carbon footprint.”
Although the co-op wasn’t formed to save money—it actually costs 10% to 20% more, depending on product—Beckler says it is worth the extra money.
“We didn’t do it to save money,” Beckley says. “The way we look at it is if I’m going to spend $345,000 a year buying local items, I’m going to spend $345,000 buying food whether it’s through my local GPO or not. So when I take that $345,000 and I’m paying, let’s say, 20% more for that food product, that’s an extra $68,000 I’m going to spend in food. To offset that we raised prices in the café, and the customers were very willing to do that. We were able to offset that $68,000 by about half. So what we did was we looked at our budget and saw it was going to cost us another $35,000 for food in our hospital, so buying local this way is actually costing us just 10% more in food. We knew it was going to cost more, but we felt it was worth it.”
Challenges: Beckler says his department is receiving about 70% of its beef, 60% of its pork, 70% of its chicken, 30% of its cheese and 20% of its produce from the co-op. The biggest challenge in creating the co-op has been the availability of product, Beckler says.
“When we started I remember I sat down with local chicken producers and they asked how much chicken our department needed per year,” Beckler says. “I said I need 45,000 chicken quarters a year. One of them started to cry. One stood up to walk out the door and the other just stared blankly. They said they couldn’t do that. I said that’s not the issue, I still have my larger GPO in place that I can backfill with until we can build the infrastructure to make this thing work.”
Produce has also been a big challenge considering Wisconsin’s climate.
“These small producers didn’t trust us because we are so big,” Beckler says. “If I grow the product are you really going to buy it? That’s where we came out with our commitment of 10% and now 15%. Since I committed to buying, people are finding ways to keep it going because it’s revenue for them. Instead of that greenhouse sitting empty and making no money for six months, now all of a sudden they can generate money 12 months a year. Usually by September everything up here is gone. Now we have greenhouses staying open and growing all our tomatoes, peppers, onions, carrots, lettuces and spinaches year-round.”
Beckler says he believes as the co-op expands its buying power, prices are going to be very competitive with the larger GPO contracts. There also are efforts being made to increase the co-op’s membership, but it has to be done carefully, Beckler says.
“Two weeks ago the college signed on, and what’s neat about that is they are planning a new cafeteria that is going to be all local,” Beckler says. “The important thing is we have to make sure the co-op has the infrastructure to support the growth before we turn it loose. We’re growing a step at a time so producers and buyers don’t get in a bind.”
Advice: “Get started right now,” Beckler says. “Make sure you talk with people about who you are, what you do and why you are doing it. You’ve got to look at hooking up with those who have the relationships with the local producers. You’ve got to be very careful in your standards and who is part of it.
“It’s something that you take in baby steps. If you are really committed to it then you have stay that way. I think the other thing is to communicate what you are doing to your staff. We were shocked with the support. What we’ve really learned in the past few years is why weren’t we doing it sooner?”