The Health Care Supply Chain -- Just How Safe Is the Herd?

There is no doubt that supply chain management has been one of the single most significant drivers of strategic competitive advantage across many industries in the past twenty years. The stellar results have elevated Supply Chain to a C Level function at many companies. But that rise to greatness would have likely never happened if there was no compelling case for strategic competitive advantage in your company or in your industry. What if, in your industry, doing no worse than the competition was the standard of excellence by which your efforts were judged?

If you can even envision such a scenario you have begun to understand the typical hospital's role in its own supply chain. Strategic competitive advantage in the supply chain does not appear to be something hospitals seek. Instead they appear to be focused on being at or becoming the center of the bell curve with all of the other hospitals. Like many companies, they purchase through consortiums -- a well accepted practice. But hospitals don't just purchase their indirect materials this way, they purchase their direct materials that way too -- seemingly content to have the same costs as hundreds or thousands of other hospitals (competitors). A friend of mine once said that hospitals willingly trade the chance to do better for the security of being no worse than everyone else. Sadly, hospitals seem to trust their futures to lobbyists and legislators, rather than to strategic competitive advantage -- such as could be found in the unique and untapped power in their own supply chains.

At this point it might be easy to blame hospitals for this situation. However, doing so would be incorrect. At the root of the situation is an old outmoded system of how government pays hospitals for the care they provide. A system in which reimbursement rates are based largely on hospital created cost reports and other assorted data including trending of supply costs. In spite of the lobbyists influence in Washington, they have not figured out how to change the laws of mathematics. All Americans are right to be concerned about the future of health care. The Medicare program is already going broke and more than a few hospitals are struggling finanially. Yet some in Washington believe we can add in tens of millions more users and somehow reduce the cost to levels below where we are today without placing limits on how much and what kind of care a person can receive. If there was ever any doubt, it should now be clear that they don't teach mathematics in law school.

For the vast majority of hospitals, purchased goods and services combined represent their second highest expense after labor. If health care reform is to succeed on any level, the government will need to provide hospitals with real incentives to manage their supply chains with the goal of achieving strategic competitive advantage.

So now it's your turn. How much strategic competitive advantage could you have created in your supply chain if you had to buy your direct materials from the same sources and at the same prices as your largest competitors? Do you think that companies should buy their direct materials through consortiums with competitors?

Is your organization or someone you know looking for a procurement leader or consultant with a deep understanding of the health care industry? If so, please send an email to: leverard@bellsouth. Net.

- Lynn James Everard