E-Commerce In Year 3:
How Far Have We Really Come?

Edition: September 2002 - Vol 10 Number 09
Article#: 1302
Author: Lynn James Everard, C.P.M., A.P.P.

When they first splashed onto the scene, e-commerce companies promised supply chain efficiencies to any hospital that would listen. Almost three years later it is time to ask whether, from the hospital’s point of view, e-commerce has delivered on its promises.

Before answering that question, it is important to understand what e-commerce can in fact do for a health system. In general, hospitals have two avenues for cost-savings, and e-commerce can play a role in both. They are product price reduction and process cost reduction.

Reducing Product Prices

In e-procurement’s early days, most success stories came from hospitals who had found cheaper products.

Although perhaps not surprised by this development, manufacturers and distributors were concerned enough that they felt compelled to enter the market with their own offering in hopes of slowing any downward spiral of margins. Perhaps pricing would have reached equilibrium, but there was no guarantee that it would happen. Unfortunately, their response may not only have bottled up efforts toward a market equalization of price, but it may also have limited progress in using the Internet to create supply chain efficiencies.

Meanwhile, GPOs asked themselves whether, if they did not enter the market early, they would risk losing access to the purchasing information that was so vital to their leveraging better pricing for their members.

Reducing Process Costs

Process cost reduction is a treasure trove of savings opportunities for the healthcare supply chain, but it requires serious effort to realize results. Two areas are relevant to this discussion – replenishment and sourcing.

Replenishment involves replacing or re-supplying items that are held in inventory and are used on a regular basis. Replenishment items are likely to be contracted commodities. (Of course, there are exceptions to every rule.)

EDI and most of the early efforts at e-commerce were focused largely on replenishment, although some narrow sourcing applications do exist. Although EDI and XML are different technologies, either one will work for simple replenishment. In fact, EDI has been used for simple replenishment for many years. Just how much process cost can be eliminated from replenishment is the subject of much speculation.

Sourcing is the process of locating specialized or low-volume products and obtaining pricing and availability information. It also is where e-commerce may have its largest potential for process cost-savings. Sourcing is one of the most costly of all supply management functions. Searching through books, CDs and individual websites (where they exist), and making countless phone calls in the pursuit of a single line item can consume a great deal of time. In fact, the Andersen study, “The Value of E-Commerce in the Health Care Supply Chain,” authored by Kevin J. Connor, M.B.A., et al., reported that 43 percent of buyer time was spent doing strategic buying (sourcing).

Unfortunately for hospitals, open sourcing has not been a focus of the players who dominate the e-commerce landscape. Efficient sourcing would require open marketplaces that permit side-by-side comparison of product specifications and prices. In the beginning, a number of companies went to market with an open marketplace approach, but as more powerful players began to dominate the landscape, the open marketplaces all but disappeared.

E-sourcing, whenever it comes into play, will become an essential component of procurement efficiency. In the meantime, we should not be surprised that the companies who control e-commerce have not offered the necessary open marketplaces.

Manufacturers, distributors, and group purchasing organizations all make money when hospitals buy products. That is their mission, the reason they exist, and the reason they have employees. And it would be safe to say that, for most of them, providing efficiency to customers is not high on the list of topics discussed at board meetings and shareholder meetings.

The reality is that hospitals will have to look beyond their suppliers for most of their supply chain efficiency gains. If they are not already doing so, directors of materials management must work as hard at identifying sources of efficiency gains as they do looking for the best price on products.

Statistics Needed

Up to this point, e-commerce in the healthcare supply chain has been little more than an alternative way to place product orders. The websites of the major e-commerce players still boldly promise supply chain efficiencies, yet far too few health systems have come forward to share their quantified efficiency savings with those who have yet to be convinced. We could easily end the first chapter of e-commerce and move to the second if we could just get a handle on the real benefits of e-commerce. Isn’t it time for us as an industry to demand that the purveyors of e-commerce efficiency document that efficiency? If they would do so, we could all move forward. If they don’t, there is plenty of other work to be done, and one less distraction wouldn’t be such a bad thing.

E-commerce is an important decision for any health system. If there is value for a provider to sign on, that value must be clearly defined. If there is no value, directors of materials management have plenty of other important responsibilities on which to spend their time and resources. The e-commerce decision is too important to be arrived at by default. Nor should hospitals be herded into e-commerce because of relationships of convenience.

Directors of materials management must take full control of their own supply chain destinies. The stakes are simply too high to be a passenger in someone else’s car.

This article is an edited version of a similar article published in Repertoire’s sister publication, FirstMoves, a bimonthly publication for healthcare buyers.

Lynn James Everard, C.P.M. is vice president of supply chain education and strategy for HealthCare Logistics Services, a supply chain consulting firm. Everard is a consultant, author, and speaker specializing in healthcare supply chain management, supply chain education, activity-based management, and business transformation services. Everard is a 20-year industry veteran who has occupied a number of local, regional, and national materials management positions for hospital, long-term care, home healthcare and medical supply distribution organizations. He can be reached via e-mail at econserve@mindspring.com.