Medical Device Link.

Originally Published MX July/August 2003

ADVERTISING, DISTRIBUTION, & SALES

Use of Internet-based trading exchanges provides insights into purchasing patterns as well as numerous efficiency advantages.

Karen Conway

Electronic commerce (e-commerce) and its potential to reduce supply-chain costs have been much talked about in recent years. The 1996 Efficient Healthcare Consumer Response study suggested that the healthcare industry could recoup $11 billion if the supply chain were optimized.¹ Hospitals and healthcare systems nationwide increasingly are reporting the improved efficiencies they realize by automating their purchasing processes.

But many in the medical device industry still wonder: Can e-commerce really make a difference in profitability, or is it just something that must be undertaken obligatorily to satisfy customers? The answer to that question lies in understanding better what e-commerce entails and how it fits a company's overall business strategy.

Some people think of e-commerce as buying and selling products over the Internet via a company Web site or Internet trading exchange. Others consider it the use of electronic data interchange (EDI) or some other electronic file format generated by a hospital's enterprise resource planning or materials management information system. Most would be happy to allow a combination of these. But for Tim Richards, worldwide e-business director for medtech supplier BD (Becton, Dickinson & Co.; Franklin Lakes, NJ), it has less to do with technology than it does with change management.

Richards says that claims regarding the value of e-commerce made by Internet-based companies during the 1990s dot-com boom are still valid, though they were premature. He cites the mistaken assumption that literally everything is faster in the Internet age. "Technology can make a process faster, but it still takes people—and, in particular, large organizations—time to change business practices to derive optimum benefit from that technology."

Take the automobile assembly line. "It took seven years for that innovation to dramatically reduce the time and expense associated with building a car," says Richards. "Not because the technology wasn't there, but because Ford needed to change its business practices in order to realize those savings."

Even in this faster-paced era, Richards believes that 5 to 10 years is a realistic time frame for the healthcare industry to see widespread benefits from business process improvements made possible by e-commerce technologies and especially the Internet.

Foundations of Healthcare E-Commerce

When five preeminent healthcare manufacturers in 2000 announced their joint entry into the already packed field of Internet-based healthcare companies as a revenue-neutral trading exchange, doubters noted that big suppliers have never successfully collaborated on anything. Those critics had forgotten how competing manufacturers came together in the late 1980s to create one system that hospitals could use to purchase products electronically from multiple vendors.

The healthcare industry's first foray into e-commerce in fact dates to the early 1960s, when American Hospital Supply Co. (AHSC) provided customers with IBM data phones and punch cards to transmit product orders over telephone lines to IBM card readers located at AHSC distribution centers. Customers found that the faster communications helped them reduce inventory. Over the next 20 years, AHSC eventually offered on-line customer access to data such as pending back orders, price, and delivery dates.

With the advent of the personal computer, the AHSC system, by then known as ASAP, claimed to automate everything but the approval process, with order confirmations sent directly to hospital computers. By automating customer service and increasing sales, ASAP not only gave AHSC, a distinct competitive advantage, it is also said to have saved the company millions of dollars.

But by 1986, after AHSC had been acquired by what is now Baxter Healthcare Corp., most of Baxter's competitors offered similar proprietary services, and customers were clamoring for a single system they could use with multiple vendors. The following year, Baxter and three Premier hospital alliance members began piloting ASAP Express, billed as the first all-vendor, all-transaction electronic ordering system for healthcare. For the first time, hospitals were able to order products using a standard electronic format. This laid the foundation for the widespread use of EDI in healthcare today.²

Other major manufacturers, including Abbott Laboratories Inc., C. R. Bard Inc., Johnson & Johnson Healthcare System Inc., and Kimberly-Clark Corp., got together to offer their own multivendor systems. As little as three years ago, Abbott's Quik Link program had nearly 100 participating vendors, with about 25 still actively receiving orders.

Then came the dot-com boom, when dozens of companies offered an Internet-based version of those early initiatives. These Internet trading exchanges provide hospitals with the same benefits the earlier systems did—one method to reach many vendors, faster processing times, fewer invoice exceptions, and consolidated data—but an advantage of the Internet is that suppliers can now reach multiple hospital customers using one pipeline.

Some of the Internet healthcare companies were created by technology entrepreneurs, while others were formed by organizations representing links of the industry supply chain—healthcare providers, group purchasing organizations (GPOs), distributors, and manufacturers. The dot-com bust spelled the demise of many, but others reinvented themselves or engaged in mergers or strategic alliances in order to strengthen their market value (see sidebar 1).

E-Commerce Options

Many manufacturers today offer a variety of e-commerce options. BD's Richards says, "It's not about choosing the Internet over EDI. It's about offering whatever methods best suit our customer base, within which there is a wide range of e-commerce readiness." In addition to using distributors, some large manufacturers such as Baxter Healthcare and Abbott Laboratories sell products via several e-commerce channels, including their own Web sites, direct seller-to-buyer EDI connections, and Internet-based trading exchanges.

Providing so many options might seem cost-prohibitive for all but large organizations, but Dan Pearson, vice president of sales and marketing for small specialty supplier Tri-anim (Sylmar, CA) begs to differ. "Our business has grown and our profit margins have increased by giving customers the opportunity to order products in the manner they prefer, whether that be by phone, fax, our Web site, EDI, or an Internet exchange," he says.

Like its larger competitors, Tri-anim aims to increase the number of orders received electronically. Pearson explains: "Our gross profits on electronic orders are higher than with other order methods, and 14% of the purchases through our Web site qualify as new business from existing customers."

The goal for Baxter (Deerfield, IL) is to receive 80–90% of its orders electronically. Its e-commerce director for the U.S. region, Todd Lesser, notes that, in particular, fax orders are most problematic and hinder the overall objective of streamlining the supply chain. For suppliers in general, fax orders usually contain more line items and more pages that can get lost in transmission.

Richards provides some analysis. He says that, at BD, faxed orders are the most expensive to process. Orders placed through Global Healthcare Exchange (GHX), on the other hand, are 91% less than the cost of a fax, 74% lower than a phone order, and 43% less than an EDI order, according to Richards.

BD conducted an activity-based cost study, looking primarily at the impacts on customer service and information technology, to determine that GHX—that is, trading exchange—orders provided the lowest-cost option, primarily due to the operational efficiencies they offer over EDI systems.

Efficiency Advantages of Trading Exchanges

EDI, still the predominant method of electronic ordering for most hospitals, requires that suppliers establish separate connections with each of their trading partners. On the other hand, with a trading exchange, suppliers can reach all of their customers also connected to the exchange through a single Internet connection. And connecting customers takes less time. To establish a new EDI connection can take a couple of weeks to a couple of months; with a trading exchange, the process may require only a few hours.

Use of an exchange benefits customers, too. Healthcare providers can avoid the costs of establishing and maintaining separate EDI interfaces at their end, which hospitals participating in GHX have said can range from $5000 to $30,000 per connection. Notes Lesser of Baxter Healthcare: "The real beauty of e-commerce is that it produces complementary cost savings and efficiencies for both buyers and sellers."

Largely proprietary return-on-investment studies conducted by GHX and others have shown that hospital purchasing departments can process more purchase orders in less time using e-commerce—an average increase of 25% in the number of transactions a staffer can handle—while supplier customer service departments are more productive as well.

Many suppliers, including Baxter, have been able to increase sales volume without a corresponding increase in customer service personnel. Tri-anim has been able to reduce the number of its employees who were essentially order takers by 12%, reassigning them to more-strategic positions where they can apply their product knowledge in performing true customer service.

Manufacturers participating in GHX report a 50–90% reduction in order-processing labor. Processing time is shorter, too. Orders arrive at the warehouse or assembly plant 80–90% faster, and, even better, payment is received 20–30% sooner on average with electronic invoicing.

Improved Data Accuracy

Better data accuracy also improves processing time, and reduces invoice exceptions that force buyer and seller to research the problem and that ultimately delay payments to suppliers. But e-commerce alone does not improve data accuracy. In fact, EDI transactions traditionally have a high error rate, as much as 25%, mostly owing to product data inaccuracies. Tri-anim reports that about 42% of its EDI transactions that are stopped involve errors based on customers having inaccurate item master records, which contain part numbers and pricing information.

Using e-commerce without addressing the issue of data accuracy can be a case of hurrying up and waiting. This bottleneck is a key driver behind the recent call for industry standards. (See this issue's Industry Associations column)

"We have the technology to tell you in a matter of moments about every part number sold and every customer we have done business with in the past 36 months," says Dan Pearson. "But because we have to rely on our business partners for some of that information, our data are only as good as theirs. That's why standards are important."

Data inaccuracies in purchasing generally originate with hospitals, where an average of 30% of the product information in their internal databases is incorrect.³ But strained resources make it difficult for these buyers to cleanse and properly maintain their files. Consequently, having bad data on the front end is causing inefficiencies for manufacturers and distributors as orders move through the process.

Ordering errors, wrong products being shipped, and invoice exceptions that delay payments are unnecessary supply-chain costs. More than 24% of supply-chain employees' time is spent correcting nonconformance errors.⁴ As for product suppliers, rather than focusing on growing business, they must waste time manually correcting orders and researching price discrepancies.

Johnson & Johnson Health Care Systems (New Brunswick, NJ) has to correct by hand anywhere from 10 to 90% of the purchase orders it receives, depending on the customer, because of inaccurate product data. Its e-business manager, Tuck Bigelow, says that the company decided to tackle the problem head-on by fostering through GHX the development of a smart technology that would automatically identify and correct inaccurate product data in purchase orders and then notify hospitals about changes needing to be made in their databases.

When one customer began using the resulting system, GHX Content Intelligence, Johnson & Johnson saw a 50% reduction in order errors within three weeks, and nearly another 50% improvement over the next six weeks. "Reducing the number of orders that must be handled manually due to inaccurate data is central to our ability to move to a fully automated, hands-free system," says Bigelow.

Purchasing Pattern Visibility

One reason BD is making e-commerce a key part of its business strategy is the opportunity to see better what customers are buying electronically. "Since we conduct a lot of our business through distributors," Richards says, "we don't see this information until later as part of the rebate process. With more real-time information about what our customers are buying over time—which e-commerce can provide—we can dramatically improve how we conduct demand planning and how we manage inventory and service levels."

Healthcare product purchasers also benefit from having a better understanding of what their facilities are purchasing over time. Dan McDow, chief operating officer for Iowa Health System Contracting Services LLC (Des Moines, IA), explains how: "By using a single Internet exchange, we have access not only to more-reliable product data but also to summarized purchasing history reports, which we can use to identify new contracting opportunities while improving compliance under existing contracts."

Skeptics have questioned whether manufacturers and distributors really want to promote the data visibility that an Internet exchange can offer. They contend that some suppliers want to keep the process complex, and purchasers in the dark, because obscurity maximizes buyer dependence on vendors for information and can be used to keep margins high. Perhaps some companies have benefited from the confusion, whether or not by design, but creating a more efficient healthcare supply chain will yield far greater value for everyone involved.

Conclusion

Given that the supply-related logistical cost that hospitals incur averages twice what these purchasers pay for the products themselves, many healthcare providers would agree that using sophisticated e-commerce technology to improve supply-chain efficiency is desirable generally. Concludes McDow: "This is not about the price we pay for products. It's about making the process more efficient for everyone involved. If we can help our vendors reduce their costs, healthcare purchasers will benefit as well."

Where should the healthcare product supply industry go from here? Now that the market has consolidated, it's time to get back to implementing practices that can really make a difference in the bottom line: expanding the percentage of business handled electronically, automating the purchasing process from purchase order to payment, and improving data accuracy.

Copyright ©2003 MX