GPOs Can Improve the Healthcare Value Chain

May 1, 2005

Group purchasing organizations bring efficiencies

 For healthcare organizations, the buying efficiencies of Group Purchasing Organizations (GPOs) are obvious. What’s not so obvious, however, is how GPOs will continue to invent new and superior models for delivering health services that will leverage their size, linkages, and resources to deliver those services to more people, at a lower cost and higher quality. About 25% of hospital costs are supply-related

Healthcare supply chains are very fragmented. Manufacturers, distributors, group purchasing organizations, and providers largely operate independently from one another. The channel is often characterized by forward buying in anticipation of price increases. There is little upstream demand signaling.

Healthcare supply chains need to move toward an integrated demand-driven model, so that manufacturers have much earlier visibility into actual consumption. In many other industries, this integrated supply chain system has enabled the participants to align production and distribution much more closely with actual demand.

One way that forward-thinking GPOs can help move toward an integrated demand-driven model is through Internet-enabled purchasing automation-also known as electronic sourcing or eSourcing. Driven by an accurate and complete online catalog of product information, eSourcing automates the business processes associated with activating and managing a contract, creating a user-friendly online environment in which GPO members, manufacturers, and distributors agree on the pricing tier and total cost for each item on the GPO’s contract.

Through comprehensive search and comparison of complete, accurate, standardized product information, eSourcing provides managers with an up-to-date total price view of contracted products and enables them to optimize purchasing for their increasingly complex provider networks and to determine and forecast purchasing patterns.

eSourcing requires the aggregation, rationalization and normalization of incompatible, inconsistent and error-prone product data. Managing product information has been a daunting task for the healthcare industry, given the lack of data standards required to identify millions of products as well as thousands of hospitals utilizing just as many different purchasing practices. GPOs are in a unique position to help drive the efficiencies of eSourcing in the healthcare value chain.

Until just a few years ago it was nearly impossible to achieve such an elusive goal. But the advent of powerful product information management (PIM) software has now made it possible to transform product data so that errors and inconsistencies are a thing of the past.

PIM applications accomplish a number of valuable tasks. They cleanse and standardize product information; integrate structured data (specifications, price, etc.) with unstructured (photos, sales sheets and the like); store the results in a central repository; send the improved data to Web sites, catalogs, data pools and procurement systems in whatever format needed; synchronize it with internal systems and external trading partners; and finally, fuel a wealth of analytical and reporting tools.

Other advantages also accrue throughout the healthcare value chain. Product information effectively managed through PIM fuels data synchronization through the evolving industry trading standards like EAN.UCC. Trading partners can also more easily participate in data pools (e.g., UCCnet) and exchanges (GHX), as well as leverage initiatives like RFID.

Product information management is a key enabler of product truth. When trading partners use PIM they’re transforming their product data into a strategic asset-perhaps the most strategic of all. As GPOs, suppliers and healthcare providers continue to eliminate waste from the supply chain, PIM will be a critical catalyst for trading more reliably, more efficiently and, ultimately, more profitably.

A GPO providing eSourcing capabilities to its members is an example of true value creation, which is the precondition for major improvements in supply chain efficiency. In well-functioning supply chains, each participant has an important role in creating unique, visible value as product flows from source to consumption.

There is enough potential improvement at stake in healthcare supply chains so that each major participant who steps up to the real, visible value creation that supply chain integration can bring, can change the industry and be rewarded with major gains for years to come. And effective product information management will fuel many of these initiatives.

Bob Moyer is president and director of FullTilt Solutions Inc., a leader in enterprise product information management software. He can be reached at bmoyer@fulltilt.com.