Daily Archives: March 13, 2008

GPOs and the Health Care Industry of Tomorrow

Join me in welcoming another guest author to Sourcing Innovation with his post questioning where GPOs will fit in the Health Care industry of tomorrow!

Where will GPOs fit as the Health Care industry starts leveraginge-procurement and the Internet to the level other industries have? Beforeanswering this, let’s start by quickly summarize the value proposition GPOs offer Health Care entities today, and then look at potential flaws in that value proposition and why these flaws exist … or more appropriately, what has changed.

Because most Health Care entities are small regional businesses, they don’thave the purchasing power of Global 2000 companies. One value that Health Care GPOs bring is their ability to leverage the purchasing requirements of multiple Health Care entities (based on the premise that greater volume will bring better prices). Also, many GPOs offer an additional service by processing the POs and invoices. So, by having the GPOs take over the strategic sourcing function as well as the transactional purchasing function, Health Care entities can focus their resources on what’s most important … patient care. Also, GPO services are usually free to Health Care entities.

For suppliers, they can reach hundreds of customers through a single organization, the GPO … and they pay the GPO a commission … which is how the GPOs make money.

Value Proposition Flaw #1: How do Health Care entities know whether they areactually getting the best possible price from the GPO? They don’t,especially if they have outsourced both strategic sourcing and transactional purchasing to the GPO. Today, the Internet has created price transparency in many markets (IT, office supplies, MRO … and some health care categories as well). Purchasing folks at Health Care entities go on the Internet and see lower prices than they are paying from their GPO right on a supplier’s website! Simply put, this price transparency created by the Internet has madeit hard for GPOs, especially with the supplier markup included, to ensure they are offering the best price to Health Care entities, especially when large, multi-national suppliers / distributors are involved (Sigma-Aldrich,Fisher-Scientific, VWR, Staples, Grainger, etc.). The result? Higher prices paid on both direct and indirect materials by the Health Care entity.

Value Proposition Flaw #2: The way GPOs manage transactional purchasing is still a manual process. There is still a large redundancy of resources betweenthe GPO and the Health Care entity, long lead times (which creates the well known and costly industry phenomenon of stockpiling inventory), and issues with compliance. Compare that to how leading Fortune 500 companies purchase using systems like Oracle iProcurement, Ariba Buyer, or SAP EBP, where the purchasing department is basically taken out of the process, which is automated, in most cases, from “requisition to check”, and totally compliant! The result? The cost of redundant resources, too much inventory and inefficient processes increase the operational costs at Health Care entities

So what needs to happen? It’s simple – the same thing that has already happened in other industries … the Health Care entities need to adopt e-procurement! It will not only lower their operational costs, but will let them take advantage of the aforementioned price transparency, which will result in lower prices. Also, the use of e-procurement doesn’t preclude the use of GPOs, but it gives the Health Care entity the option of dealing with certain categories directly, if that’s where the better prices lie!

And where can GPOs add value? One obvious place is with small suppliers. Although many large suppliers will be able to now “go direct” to clients, not every supplier has a web site, a punchout site, or the ability to support a client using an e-procurement system, so small suppliers still need an “on ramp” to their clients … and the GPOs can provide that.

A not so obvious opportunity is for the GPOs to get with the e-procurement program and provide the capability for the Health Care entities to buy from them in a self-service manner. After an initial technology investment, a GPO would also have lower operating costs, which could potentially make it more price competitive.

In closing, please be aware that there are Health Care entities that have already adopted the e-procurement best practices of other industries, and they are already reaping the rewards. One common thread I see across these market leaders is that they have successfully recruited both purchasing and IT professionals from other industry sectors that have been successful with e-procurement.