{"id":22984,"date":"2017-11-14T22:43:02","date_gmt":"2017-11-15T03:43:02","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/amazons-digital-encroachment-of-hospital-network-supply-chains\/"},"modified":"2017-11-14T22:43:02","modified_gmt":"2017-11-15T03:43:02","slug":"amazon-business-meets-healthcare-digital-encroachment-of-hospital-network-supply-chains","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/amazon-business-meets-healthcare-digital-encroachment-of-hospital-network-supply-chains\/","title":{"rendered":"Amazon Business meets healthcare \u2013 digital encroachment of hospital network supply chains"},"content":{"rendered":"

Supply chain dynamics within healthcare delivery networks are complicated by the fact that demand forecasts are often more difficult to predict, given that demand is typically not driven by market dynamics determined by discretionary spending.\u00a0 Patients are considered a form of consumer, but their behavior is dissimilar from most material consumers in that their consumption of healthcare resources is most often not<\/em> by choice.\u00a0 Even when demand driven by patients\u2019 decision-making is predictable, the logistics of offering drugs, devices and services tends to require specialized means of delivery by suppliers like Owens & Minor.<\/p>\n

Digitization of supply chain management by delivery systems through Electronic Data Interchange (EDI) initially benefitted the bottom line of medical device suppliers like Owens & Minor, a firm that was featured in 2002 by a 性视界 Business School case study for its adoption of Activity-Based Costing (ABC).\u00a0 Hospital system mergers under the managed care momentum of the 1990s caused consolidation of demand that drove down the already-thin margins of Owens & Minor, while EDI improved demand forecasting. \u00a0Suppliers, seeing hospital systems work directly with manufacturers to order high-margin items and avoid paying a percentage to distributors, adopted EDI and offered just-in-time (JIT) delivery of goods (even intra-operatively) to avoid being cut out as middlemen.\u00a0 Of late, however, Owens & Minor has faced equal pressures from fully-digitized supply chain marketplaces, such as Amazon Business, which launched in 2015 to attract 45,000 sellers of 5 million differentiated products and offers benefits akin to Amazon\u2019s consumer-facing counterpart \u2013 same day shipping, free 2-day shipping for certain purchases, and possible sales tax exemptions (1).\u00a0 Rather than representing competitive pressures of consolidated hospital networks working directly with manufacturers to secure higher margin items at cost, Amazon Business represents a competitive pressure that willingly assumes supply responsibility for the high-volume, low margin sales with which Owens & Minor has been left.<\/p>\n

Owens & Minor has admitted to this \u201congoing margin pressure\u201d as recently as Q1 2017 when its revenue and gross margin both dropped 5.2%, prompting CEO P. Cody Phipps to outline a 4 part strategy that includes \u201cthe most intelligent route to market, expanding along the continuum of care, becoming the preferred outsourcer for leading manufacturers, and leveraging our data, analytics, and services\u201d (2). \u00a0O&M management\u2019s short-term response to Amazon\u2019s digital presence in the supply chain has been similar to that of many businesses in diverse industries as Amazon has encroached (the \u2018Amazon effect\u2019) \u2013 join rather than fight.\u00a0 O&M and other medical suppliers have started to sell such low-margin, high volume items as catheters, syringes, infusion pumps, forceps, scalpels, sutures and even hospital beds.\u00a0 Looking forward 10 years, O&M may choose to continue to outsource distribution of such product types to Amazon Business while focusing on higher margin items that require idiosyncratic means of storage and delivery due to their fragile or perishable nature.\u00a0 In other words, digitization via electronic data interchanges (EDIs) with hospitals in the late 1990s improved Owen & Minor\u2019s competitiveness in a consolidating industry by reducing their exposure to the \u2018bullwhip effect\u2019 of supply\/demand mismatches with provider groups (3).\u00a0 Now, hospital networks ordering high volume, low margin items from the best bidder on the digital marketplace of Amazon Business has left O&M vulnerable to competitive pressure on both ends of the pricing spectrum.<\/p>\n

Going forward, Owens & Minor\u2019s executive leadership will need to review their strategy of outsourcing low-margin, high volume delivery to Amazon Business, as a general movement toward value-based healthcare and continued consolidation of healthcare networks will reward those suppliers who are best able to offer insight to networks into reducing waste upstream of the point of care (4).\u00a0 Indeed, Owens & Minor\u2019s strategic move from cost-plus pricing to activity-based pricing has provided valuable information to partnerships with hospital networks on what items should and should not require JIT delivery, large-volume delivery, or specialized storage due to high-spoilage rates.\u00a0 First, O&M should focus on strengthening its existing contracts and pricing relationships with hospital networks by building its own EDIs to embolden provider groups\u2019 cost containment efforts. \u00a0Second, O&M should offer more appealing revenue-sharing agreements to manufacturers of low volume, high margin items in order to maintain supply through the supply chain and deter hospital networks from ostracizing distributors in the supply chain.\u00a0 Finally, O&M should direct its marketing efforts toward accountable care organizations (ACOs) that require greater value out of the supply chain and stand to benefit most from a vertically integrated, fully digitized supplier that focuses on cost efficiency.<\/p>\n

Still, O&M\u2019s efforts will not address the growing trend of consumerism by patients \u2013 has the \u2018Amazon effect\u2019 created such brand equity that patients will demand more medical delivery direct-to-consumer by their favorite digital marketplace, be it to their clinics, long-term care facilities, or their homes? (789 words)<\/p>\n

 <\/p>\n

(1) Kacik, Alex. \u201cAmazon poised to deliver disruption in medical supply industry.\u201d Modern Healthcare<\/em>, June 10, 2017. http:\/\/www.modernhealthcare.com\/article\/20170610\/MAGAZINE\/170609923<\/a><\/p>\n

(2) Investor press release by Owens & Minor.<\/em> \u201cOwens & Minor Outlined its New Strategic Plan and Reaffirmed its Financial Outlook for 2017 and 2018 at Annual Investor Meeting,\u201d March 16, 2017. http:\/\/investors.owens-minor.com\/releasedetail.cfm?releaseid=1017649<\/a><\/p>\n

(3) Narayanan, V.C. & Brem, L. \u201cOwens & Minor, Inc.\u201d HBS No. 9-100-055. Boston: 性视界 Business School Publishing,\u00a0 Feb, 14, 2002.<\/p>\n

(4) \u201cAmazon’s shaking up the medical supply business. Here’s how we’re thinking about it.\u201d Advisory Board Company<\/em>, July 15, 2017. https:\/\/www.advisory.com\/daily-briefing\/2017\/06\/15\/amazon-medical-supplies#ABCtake<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Supply chain offerings to hospital networks by medical distributors have been helped and hurt by digitization. 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