E- Business And The Supply Chain

Edition: September 1999 - Vol 7 Number 09
Article#: 471
Author: Patrick Plummer

Are you at risk of being ‘Amazoned?’ Depending on who you talk to, it's more a probability than a possibility...and it will occur sooner rather than later. But is this hype or is it reality? Or is it somewhere in between? Can a fledgling dot-com company really swoop into health care and ‘re-intermediate,’ as Amazon.com has done in the publishing industry? After all, most other industries where this has occurred have had highly fragmented supply chains, whereas health care clearly does not. However, with predictions of business-to-business web transactions exceeding $1.3 trillion by 2003 (health care would experience about $300 billion of that), there's a real expectation that the Internet will play an extraordinary role in shaping the supply chain over the next four years. But while the masses scramble to create transaction-enabled websites to conduct ‘business’ over the web to reap their share of that $300 billion, we need to realize that the Internet will be much more than an electronic storefront--it will destabilize the economic foundation of the entire health care supply chain. The business world is poised to make quantum leaps in sophistication as we enter a networked world where the promise of the information age can be realized.

‘Every day it becomes more clear that the 'Net' is taking its place alongside the other great transformational technologies that first challenged, and then fundamentally changed, the way things are done in the world,’ says Louis V. Gerstner, Jr, Chairman and CEO of IBM and a board member of Bristol-Myers Squibb. Health care is in that ‘challenged’ stage today, poised to enter its ‘fundamental change’ period. Jack Welch, CEO of General Electric, calls the Internet the biggest force he has ever seen. And senior management of Philips is focused on turning itself into an ‘eBusiness.’ Indeed, the potential is enormous and key industry players are making bold moves to lead that reformation.

Knowledge is Power

‘The web's biggest impact is in four areas,’ says Bob Zollars, Chairman, CEO and President of Neoforma.com. ‘First, instant global access knocks down geographic and time barriers; second, it's very inexpensive so it can take costs out of the supply chain; third, it's very easy to use, and; fourth, it can provide excellent information to all members of the supply chain.’

The Health Strategist's latest ‘Voice Your Opinion!’ poll (‘VYO!’) on today's Internet impact was submitted in July 1999 to 2,000 senior supply chain executives, receiving a 25% response rate; about evenly split between suppliers and providers. eMail, by most standards a business necessity, appears to have the greatest impact today. Respondents rated it as a 4.4 on a scale of 1-to-5, with 5 being highest. Its value rating is expected to increase to 4.8 within 12-18 months.

Access to vital competitor, vendor, and customer intelligence is the web's top benefit for ‘VYO!’ respondents, with a value rating of 3.3. Expectations are that it will soar to 4.4 by the end of 2000, with good reason. The number one complaint of purchasing executives is that suppliers waste valuable time when they don't do sufficient homework and preparation before coming in for a meeting. There's simply no excuse for it according to one ‘VYO!’ respondent, the corporate account manager for an equipment manufacturer: ‘I can complete all of my research [via the web] on practically any customer in five minutes,’ he says. Customers that are increasingly comfortable with productivity gains realized through knowledgeable and sophisticated suppliers are increasingly impatient with blatant lack of preparation. ‘The immediate, real opportunity [with the web] is to introduce specific applications that bring immediate value to the existing supply chain,’ says Dennis Murphy, CEO of medibuy.com. Examples include RFP templates/automation and used equipment auctions.

Competitive Inflections 101

But the impact of eBusiness is much more profound than accessing customer information or applications, or in simply buying and selling products over the web. The ease of creating a transaction-capable site using relatively simple and inexpensive technologies (by today's standards) has significant market ramifications, including dramatic reductions in the barriers to entry for a known (or unfamiliar) competitor. More competition means more sources for your customer to buy comparable products, meaning that the cost of switching suppliers plummets to the click of a mouse...pretty cheap!

And with the speed, range, and accessibility of information on the Internet, customers have access to perfect market information on competitive products, market opinions, and current pricing. As such, Web-delivered information is influencing decision-makers before a supplier is even contacted. This is especially true for med/surg and equipment vendors. More knowledgeable and demanding customers will force widespread product commoditization as real-time capitalistic forces go into play. Indeed, customer service levels become almost more important than the product itself. ‘I don't think the Internet will replace a sales force at all,’ Zollars says. ‘But the sales force will evolve from order takers to clinical information resources.’

The Silver Lining

Lower barriers also allow for easier entry into new markets by lowering costs across both supply and demand chains. Perhaps most important, securing or intensifying relationships via a direct customer connection yields numerous competitive advantages, including providing better customer service to both decision-makers and end-users (improving chances that they'll remain as customers), helping determine production demand, and allowing for real-time collaboration/input into product development. It's a snowball effect that yields scale economies from both the supply- and demand-side of the equation, with the marketplace being the beneficiary.

This is the scenario that emerging dot-com companies (including U.S. LifeLine, publisher of The Health Strategist) predict will be the industry's future. And it may very well play out that way, as solid economic principles underlie much of the hype. But health care has unique characteristics that will preclude its Internet embrace--that is, the application beyond the hype -- from conforming to any Amazon.com, eBay, or business-to-business model that works elsewhere.

The Next eStep

Today's debate on health care eCommerce is ‘the difference between 'how-to-buy' and 'what-to-buy',’ says Morris Smetana, VP of Alliance and Supplier Administration for Catholic Health East. The ‘how-to-buy’ aspect allows you to buy a specific book at any number of websites with little thought beyond price, terms, and delivery. No matter where you buy, you will still get the same book by the same publisher. In other words, the book manufacturer still gets the sale, but the sales/distribution mechanism faces ‘how-to-buy’ competition. The reason for this is that each book is distinctly unique...it is not a commodity, for which a ‘like’ item can be substituted. Medical products and devices, at least those that are not patent-protected, are a different story altogether.

The ‘what-to-buy’ aspect positions the competition at the manufacturer level. And because the decision to buy a specific medical product has potentially life-or-death implications, it requires deeper consideration than a book purchase. Price, terms and delivery concerns (delivery is obviously more critical in health care) generally are secondary to the ‘what-to-buy’ decision. In either the real or virtual world, manufacturer issues of product quality, patient efficacy, safety, and company stability take priority. Buying an unknown book from an unknown source places the buyer at risk only for the purchase price. Buying a medical product from an unknown source (is the manufacturer reputable or working from a garage?) places the buyer at risk for lives and for multi-million dollar malpractice lawsuits if something should go wrong.

The Web Ahead

Massive market share shifts driven by web purchasing will not happen overnight because of the ‘incidental’ lawsuit issue mentioned above, because many purchasers are not yet ready for it, and because the current web process isn't sophisticated enough for those purchasers who are prepared. ‘The problem [with buying over the web] is that you've gone back to electronic order entry, where you figured out what you had to buy, and then had to manually order it,’ says Frank Fernandez, Assistant VP, Baptist Health Systems of South Florida. ‘You'll start seeing an explosion of web-based systems that allow for integration into our existing materials management information systems, that can send the PO via the web for automated ordering. This would give suppliers who haven't implemented EDI immediate benefit.’

EDI--that lengthy, expensive, inflexible and proprietary process for transferring basic information--may very well be short lived in a web world. ‘Traditional EDI will migrate very quickly to a web-based process because of its ease of use and the low cost of technology,’ says Zollars. Lowering costs via connectivity will further intensify deflationary pricing pressures, as suppliers look to gain competitive advantage by reducing the customers' prices even further. However, medical product purchasing is unique in that reducing transaction costs will only minimally stimulate economic activity, because a provider will only buy the products it needs to serve its patient population. This is different than buying a Dell computer online, where lower transactional costs could stimulate further capital investments. And it's different also from book buying, where lower costs would mean greater disposable income to spend on more books, etc.

(Re-) Intermediation

‘Customers are looking to deal with high quality niche players who can add up to a total solution for a specific clinical process--and have it in a one-stop-shop package,’ says Stan Gloss, Service Marketing Manager for Datex-Ohmeda. ‘That's what eCommerce can deliver.’ This potential is not achieved by having a customer go directly to the manufacturers' website...it's still necessary to have effective intermediation by a middleman to make it convenient for the customer. Today, GPOs and distributors generally fill that role, but tomorrow it could be one of the emerging ‘vortals’ (i.e., a vertical market portals) that are popping up right and left. Their quest? To become first to market with a supercharged ‘virtual GPO.’ And this is where the first major Internet battles will begin--with enormous ripple effects for every supply chain member.

‘Any GPO or distributor that signs a contract with an eCommerce company will have just signed its own death warrant,’ says one GPO executive. ‘Right now, [the eCommerce companies] are taking a GPO- and distributor-friendly position because they need us. They need our members. And they need information to build their internal databases. But the end-game finds the 'virtual GPO' the winner, with today's GPOs and distributors on the losing side.’ That's because eCommerce are poised to dominate in both the ‘what-to-buy’ and the ‘how-to-buy’ scenarios.

Business Model Demise

Responding to the possibility of an eCommerce company actually being GPO- and/or distributor-friendly, one ‘VYO!’ respondent likened them to a ‘wolf in sheep's clothing.’ The rationale? GPOs have two core assets: 1) membership, i.e., critical mass, and 2) information aggregation about pricing (contract portfolios), suppliers, products, etc. The former (membership) maintains its loyalty to the group in large part because of the latter (information). Stated another way, customers are not loyal just for loyalty's sake. Rather, they highly value the convenience that the GPO delivers.

‘What happens to our GPO when a more efficient information aggregator like [an eCommerce company] has more data, that it can deliver more efficiently--and allows us to buy direct?’ asked one IDN executive. Simple. Membership (asset #1) will rely less and less on its GPO for information (asset #2) and more on the eCommerce company. ‘Even a 20-year deal between a GPO and [an eCommerce firm] doesn't mean anything if the group's members defect.’

‘Once they have enough eyeballs (i.e., critical mass) and sufficient market information, they'll cut the GPO/distributor out, replacing a 2-3% 'admin fee' with a 5-10% 'transaction fee,' because that's how they'll maximize revenues,’ said one respondent, the SVP of a med/surg firm. ‘It'll end up costing the GPO/distributor a key market role, and increase our admin fee expense.’ However, many feel the market needs revitalization. ‘There's a lot of room out there to provide value for everyone,’ says Jim Hersma, SVP of medibuy.com. ‘But that's not to say that business models will remain stagnant...the market is demanding its re-evaluation.’

But since GPOs don't have ‘brick and mortar’ assets on which to rely, they are essentially ‘hard-copy infomediaries’ that are directly threatened by competing eCommerce firms. Alliances that offer its membership expanded services is often able to do so from the revenue generated by its profitable group-purchasing arm. Distributors, which do have distribution centers and corresponding tangible assets, are equally at risk because their future growth also lies in information brokerage, not in yesterday's role of pick, pack, and ship.

As a result, GPOs and distributors will probably figure that it's easy to stop a revolution, but impossible to stop evolution. As a result, expect GPOs and distributors to build their own eCommerce solutions, on their own or in partnership with each other, or to align them-selves with other non-competitive firms. They will attempt to lead the electronic re-intermediation, as it is their current business models (not the businesses themselves, because the Internet boosts the need for aggregation services) that are most immediately threatened.

Beyond Hype

IBM's Gertsner likens new dot-com companies to ‘fireflies before the storm’ all stirred up, throwing off sparks. The storm that is arriving--the real disturbance in the force--is when the thousands and thousands of institution that exist today seize the power of this global computing and communications infrastructure and use it to transform themselves. Common sense says he's right: Consider that the top 25 dot-com companies, e.g., eBay, Amazon.com, Yahoo, etc., lost about $1 billion last year on total revenues of about $5 billion. In comparison McKesson/HBOC and Columbia/HCA--only two of the industry's major players--combined for over $50 billion in total revenues. So, how much impact will be felt when other major players en masse embrace the web?

No one can even imagine the implications of being fully networked with everyone and everything. But strategically-oriented firms will adapt and thrive, making constant business plan adjustments along the way. Others will have difficulty making the transition. Strategy must come first and foremost. And while things may not evolve as quickly as many IT folks would like industry to believe over the next 12 months, it assuredly will progress differently and more dramatically over the next five years than anyone--techies included--can predict today. Hype aside, the impact of eCommerce may be the most profound evolution in our business lives.

Editor's Note: Uslifeline.com (publisher of The MAX, The Health Strategist and Major Account News) and Medical Distribution Solutions, Inc. (publisher of Repertoire and FirstMoves.com) have formed an information alliance to better serve the healthcare supply industry. Stay tuned for further developments.

About the Author: Patrick Plummer is the founder and CEO of U.S. LifeLine, Inc. He is also publisher and editor of industry newsletters ‘Major Account News’ and ‘The Health Strategist,’ and of The MAX online supply chain community www.uslifeline.com that focuses exclusively on the business of health care. Plummer holds an MBA in management, and a BS in BioMedical Engineering, and is a frequent guest speaker at national and regional meetings. He has been quoted and/or referenced by dozens of publications as a health care expert.