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How small businesses can buffer inflation by joining a GPO

How small businesses can buffer inflation by joining a GPO

This column is a shout out to businesses worried about inflation, particularly small businesses. There is one action you can take right away to help ease inflationary pressure and your anxiety.

Typically, business news focuses on the ABCs — Amazon and Apple, Berkshire Hathaway, CVS — as well as the UVWs — UnitedHealth, Verizon and Visa, Walmart, etc. The titans of business rule the roost and hog the spotlight.

The reality is small business deserves a lot more attention and credit for being the key cog in the U.S. economic engine. According to the U.S. Small Business Administration, small businesses of 500 or fewer employees:

  • Make up 99.9% of all U.S. businesses and 99.7% of firms with paid employees,
  • Accounted for 62% of new jobs created between 1995 and 2020 – 12.7 million versus 7.9 million by large businesses, and
  • Account for 5% of U.S. gross domestic product.

Small businesses that have been around for more than two years also deserve a medal for surviving a once-in-a-century pandemic, its shutdowns and required adjustments, pressures brought by Russia’s war in Ukraine, unprecedented supply chain disruptions, and today’s finicky and fickle workforce. Many intrepid entrepreneurs even seized on opportunity wrought by the pandemic to open a small business.

Small business has been rewarded: According to American Express’ Kabbage, small business owners nearly doubled their revenues between July 2021 and July 2022. A cross-analysis of those survey results shows that small business revenues have increased on average by 87%.

Instead of being relieved, however, surveys show a remarkable level of pessimism in this sector.

In June, the National Federal of Independent Business (NFIB) recorded its lowest level ever for small business economic expectations, just one measurement in the Small Business Economic Trends data NFIB has been collecting since 1973. NFIB’s Small Business Optimism Index in September recorded its ninth consecutive month below the 48-year average of 98.31 points. At 92.10, September’ score was an improvement over June’s 89.50, which was the lowest since January 2013. (All-time low was 80.10 in April 1980, all-time high was 108.80 in August 2018.)

Also bleak was the third quarter score of another confidence gauge: The MetLife and U.S. Chamber of Commerce Small Business Index reflected the largest drop from the previous quarter since the start of the pandemic.

Why so glum?

Not surprisingly, inflation is driving small business angst. Those same surveys found that 50% of small businesses feel inflation is their top challenge, 91% report that rising prices are having either a “substantial” (56%) or “moderate” (35%) impact on their business, and 71% believe the worst of inflationary pressure is still to come.

Anxiety is understandable. While the Kabbage survey found that revenues increased by 87% since last summer, it also showed that small business profits dropped by 4% during the same period.

To manage the highest inflation rate in decades, small businesses must either absorb additional costs, pass them on to inflation-wary and -weary consumers, or take on debt, all while competing with larger companies for workers, supplies and customers. Another option is to reduce input and supply costs. But how does one swim against the inflation tsunami?

Some small and midsize businesses may not be aware that they can join group purchasing organizations (GPOs) just like large companies do, granting them entry into the club of market titans with loads of leverage to drive down procurement costs.

GPOs aggregate the collective buying power of many clients, large and small; combine it with the negotiating power that comes when contracting with many vendors; and leverage that purchasing power to generate savings for the smallest GPO member on the goods and services they purchase week in and week out. The best part is that the GPO member gets this service for free.

GPOs started in the hospital industry in 1910 with the formation of the Hospital Bureau of New York in New York City for laundry services. By 1962, there were only 10 GPOs, including Pandion Optimization Alliance. (Founded in 1947 as the Rochester Regional Hospital Association, we began group purchasing by the end of that decade.) The passage of Medicare, Medicaid and other federal laws led to rapid expansion in the number of GPOs through the end of the century. In recent years, the industry has consolidated into fewer, larger organizations. Pandion’s equity partner, Premier Inc., is the second largest healthcare GPO in the country.

GPOs have also diversified beyond hospitals and healthcare to other industries and beyond medical supplies to all goods and services used by all businesses. Food and food service, office supplies, technology, internet and cybersecurity, fuel and energy, accounting and debt collection services, and so forth.

Inflation Immunity

GPOs are never more important than when inflation is raging. To use Pandion as an example, despite the past year of soaring inflation, our member prices went up on average just 2% across the board. We have safeguards in place so vendors cannot just raise prices on a whim. They must alert us and verify that the requested price change is driven by legitimate cost increases, and we get to approve any change. This protects clients from what many in the market are doing these days – using inflation as an excuse to jack up prices beyond inflationary levels and pocket the profits.

Rampant inflation aside, small businesses should consider joining a GPO regardless. Again using Pandion as example, our contracts save members on average 10 to 30% on products and services they already buy and use. Many of our vendors are local, particularly with food products sourced from regional farms, so we boost the overall local economy and avoid global supply-chain glitches. GPOs are purchasing specialists that also alleviate the procurement administrative burden that has become increasingly onerous and vexing of late, especially for small companies.

I will mention one more benefit that is particularly attractive to small businesses. Their employees can take advantage of the same discounted pricing negotiated for their company on many of the same products and services. For example, wireless services and cell phones, office supplies, computers, parking, exercise equipment, home-improvement supplies, pest control, home inspection, travel and rental car discounts, etc. This is a nice bonus for small employers without the resources to provide amenities and perks like large companies do.

Giant companies may grab the headlines, but economists and financial experts keep a mighty sharp eye on U.S. small businesses and how they are doing. We know this just by the sheer number of surveys and studies tracking small business confidence, optimism, worries, expectations, apprehensions, anxiety levels, outlook, and so forth. GPOs enable small businesses to tap into some of the advantages that the giants enjoy. Given the current environment, small business could use that boost. The U.S. economy will be anxiously watching their progress.

Travis Heider is President and CEO, Pandion Optimization Alliance