Why Study the Supply Chain?

Edition: June 2002 - Vol 10 Number 06
Article#: 1263
Author: Repertoire

What would prompt a professor in the Wharton School of the University of Pennsylvania to study things like tracing fees, Universal Product Numbers and – egads! – GPO administrative fees? Is Lawton Burns a glutton for punishment, or does he know something that the rest of the industry doesn't? Repertoire recently put that question to him.

Repertoire: Why did you write this book?
I'm a professor of management and healthcare systems. Historically, academics like me have focused either on the providers (hospitals, physicians, IDNs) or the payers (HMOs, federal government Medicare program). But that's just one part of the healthcare system. We've ignored all the “upstream” players, such as manufacturers, distributors, and group purchasing organizations.

I knew virtually nothing about the healthcare supply chain as late as 1997. I knew a bit about industry supply chains because I'd studied Chrysler and Toyota, and I knew a bit about GPOs. But the upstream supply chain in healthcare was an exploratory investigation for myself and my colleagues.

The book is the culmination of a three-year research initiative underwritten by an industry/university consortium – the Center for Health Management Research – funded by the National Science Foundation. What is this?
During the early 1990s, the National Science Foundation set up 55 collaborative industry/university consortia to study a variety of things. One consortium focuses on healthcare management. The healthcare consortium has 15 academic members (universities) and 15 large IDNs. Each of the IDNs puts up a fixed amount of money per year for research, and together, they propose research projects in which they're interested. Then the 15 universities respond to the RFP and put together research teams to bid on the research projects.

In 1997, the CHMR was interested in studying vertical integration. We submitted a proposal to study integration between payers and providers. They responded, “That's nice, but have you thought about studying vertical integration between providers and product manufacturers?” I didn't know anything about it. But they said, “Educate us about it.” So, the book is an effort to educate IDNs about the upstream supply chain, and the prospects of developing collaborative relationships with upstream players.

Why do you think the healthcare supply chain lags behind those in other industries in terms of efficiency?
We're not just dealing with commodities. We're dealing with physicians and pharmacists and patients, and sometimes life-threatening episodes in a hospital – very hairy issues. Plus, healthcare is resistant to change, for a lot of reasons. There are institutional barriers, and lots of different professions, each of which protects its own prerogatives. Also, this is a very regulated industry. In fact, providers have fallen into almost a passive role. Oftentimes, major change takes place only because of new government regulations.

You've pointed to the many conflicts that exist within the supply chain today. Is it unusual to find so many conflicts?
The thing that surprised me as I did my research was how many different players there are, and how they all play at cross-purposes to each other. It's hard to find win/win situations across the whole chain.

And unlike some other industries, healthcare lacks a dominant party who can impose standards on everyone – except perhaps the federal government. The physician is the driving factor for clinical preference items. This is where I think the real savings will come from. This is where local, tailored solutions can come into play.

But if we're going to do something about product ordering, utilization, data monitoring and outcomes monitoring, then the materials manager and physicians will have to engage one another. Who else is going to do it?

Can you find anything healthy in all the conflicts within the supply chain, or are they pretty much all destructive?
Conflict is healthy. But you have to be able to discuss it, get it out in the open and deal with it. Then you have to be able to come to a consensus and have the authority to carry out a decision. But in healthcare, there are too many conflicts, too many parties involved, and no adequate structures to deal with them.

You spend a lot of time on e-commerce in the book. How come?
In the middle of the project, e-commerce took off. I might not spend as much time on it now. But at the end of the day, e-commerce is about connectivity and linkages between the players in the chain. Then it's a question of getting hospitals to use it. Then we need to decide what we can do with the data.

One big issue for distributors is this: The e-commerce companies will be able to capture all the purchasing data that distributors used to. They could become the repositories of data, and then sell the data back to the manufacturers. This is the single biggest threat to distributors; they'll lose their tracing fees.

What's the bottom-line value of e-commerce?
Today, the real value is in reducing the number of errors, the inaccurate item numbers, pricing numbers and product numbers. Long term, it's the availability of real-time usage data.

Distributors come off pretty well in your book. Can you explain that?
One of the real values that distributors bring is educating providers about supply chain efficiencies. They help them on their systems, they make them more efficient. They seem to have more of the providers' interest at heart. They ought to continue to do that.

You talk about “extended enterprises” in other industries. How do they work?
In the extended enterprise, you find virtual integration based on tight alliances rather than ownership. You have deeply penetrating partnerships, so the players are interdependent with one another. Eventually they form a large trading block, and as a virtually integrated entity, they try to out-compete everyone else as a team. It has worked in other industries. Toyota in Japan and Chrysler in the U.S. are two examples of firms that worked closely with the suppliers of auto parts and out-competed other automakers.

Chrysler applied this concept to develop a healthcare team. They dealt with their healthcare “input suppliers,” that is, the HMOs, hospitals, physicians. Chrysler tried to teach them TQM so they come become more efficient suppliers of healthcare. Why was Chrysler so interested? Because 7 percent of the cost of a Chrysler car is consumed by healthcare benefits for its workers.

Can this happen in the healthcare supply chain?
It's easier for Chrysler to work with doctors than for an IDN to work with distributors. When a Fortune 100 corporation speaks, it gets everyone's respect, because it's such a huge

business partner.

But within the healthcare supply chain, I don't see a lot of this happening. There's the trust factor. When someone loses, another benefits, and vice versa. It's hard to fight all that. You need a major, dominant firm to set a standard. If that doesn't happen, it will have to occur from the bottom up.

Do you think that the larger healthcare industry will pick up the banner of supply chain management?
The supply chain may get picked up by the industry as a fad, the flavor of the month. But if people read my book, they'll realize they have a lot of hard, dirty work ahead of them.