Smoke Jumpers Magazine
FSIC Inc's Jerry Wilhite [FoodService Insider] guest authored an article about the Gregory Packaging vs FoodBuy decision, the GPO space, and what it means for the industry.
With GPOs, there’s no clarity around participation costs, and location-level integrity poses major problems.
GPOs’ message to manufacturers has always been, “Give us a program and we’ll both make a lot of money.” But manufacturers are the ones required to pay to participate. And, even with a partnership, there’s no clarity around the operation. There’s no way to know how the deals impact business. Did it gain new customers? Did the program have any impact on the operator?
Additionally, GPOs are infamous for double dipping and overbilling. Think of it like this: If a manufacturer gives a $10 rebate and only $2.50 flows through to the customer, it costs them $7.50 to be in that GPO program. Then, the manufacturer is tasked with validating the billback on every case, even though they don’t have sufficient data or the resources to manual complete the process.
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This historically lopsided arrangement now seems poised to shift. In November 2018, Gregory Packaging, a juice manufacturer, won a multi-million dollar judgment against Foodbuy, the largest foodservice GPO in the US. At the end of their agreement, Gregory Packaging refused to pay the final four months of invoices, alleging that Foodbuy had over-invoiced them for millions of dollars worth of volume allowances over their five-year contract, which was based on Foodbuy’s template supplier agreement. Foodbuy sued Gregory Packaging for the volume allowances. Gregory Packaging counterclaimed, alleging the over-invoicing was a breach of the Foodbuy Supplier Agreement.
The Court ruled in favor of Gregory Packaging, agreeing they had been over-invoiced and that Foodbuy had wrongfully collected rebates. The court awarded Gregory Packaging $9.265 million.
This is a huge deal for the industry and identifies several challenges we have long suspected... including Foodbuy billing for:
1. Volume where the operator had a direct deal (double-dip)
2. Products not on contract – products not on the approved product list as well as products that were not the manufacturer’s product
3. Operators not in the program
4. Unauthorized distributors and distributors to which the manufacturer did not sell any product
5. Incorrect volume allowance rates
Foodbuy invoices to Gregory did not normally include Customer information, only “sector” data making it extremely difficult for Gregory to audit submitted invoices. Special permission was required to supply Customer data. However, Foodbuy receives over 29 data elements from the distributor, including Customer Number, Customer Name, and address, City State, Zip Code, each line item sold, General Product Description, and Customer Price Paid.
This information is owned by the operators.
This data is readily available from the distributor.
This information is sent from the distributors to the GPOs every month and should be part of the process of getting any rebates paid from the manufacturer or distributor.
Without this data, manufacturers don’t have the data necessary to validate claims from the GPO including:
Unable to validate if operators in claim are members of the program
Unable to determine double-dip, when the operator has a direct deal with the manufacturer
As a result, Gregory Packaging was billed for:
Operators not in the program
Double-billed/paid for operators with direct deals, both from the GPO and for the direct deal
Incorrect volume allowance rates
This has created millions of dollars of over billings that are paid by manufacturers, driving up COGS for the industry. The time is now for the industry to push back and demand better data to process GPO invoices.