Has there ever been an industry as addicted to price benchmarking as the healthcare supply chain? The argument goes that if the supply chain spend is in the top right quartile with reference to their peers then they are doing extremely well. This is usually supported by very large XL sheets, power point presentations, and dash boards provided by consulting partners, benchmark data providers, and GPOs. More than 85% of the providers claim that they are perfect and that everything is in order and hence no need to look at other ways of reducing the cost.
Understanding that supply chain spend is the second largest spend after labor, and 85% of the providers are in the top right quartile, then why do we find ourselves in such, for want of a better way of putting it, a mess?
We spend close to $4 trillion on healthcare, that is more than the combined GDP of many countries in Europe and roughly equal to the GDP of the world’s second fastest growing country, India.
For all the money we spend, we are ranked eleventh in the world in effectiveness of care delivered.
We spend close to $200 billion in medical, surgical, and supplies – and waste about 20% of it, i.e. $40 billion.
The result is those emerging economies that are looking to improve their healthcare look at us to decide how not to design healthcare systems.
In my experience price in most cases is always directly proportional to quantity and frequency of purchase, buyer’s financial health, payment terms and conditions, image and prestige of the provider, number of suppliers, etc. While there is universal agreement on the adage, “what cannot be measured, cannot be improved,” should we stop at benchmarking alone and use it to justify inaction? Or should we not use it as a starting point and evaluate bold and innovative opportunities the world has to offer?
Shouldn’t price benchmarking be similar to, say, losing weight? You put a plan in action to achieve a certain goal that is right for you. You don’t simply compare yourself to a more obese person and keep eating.
Let’s compare this to a manufacturer’s and CPG’s supply chain.
General Electric: GE arguably has one of the most sophisticated supply chains in the world for manufacturing aircraft engines. These engines are built with the highest quality standards leveraging hundreds of suppliers spread all over the globe. Assuming that GE leverages its size and clout to control the cost of each component that goes into its aircraft engines, it’s safe to assume they are getting the best prices in the world, if not THE best prices. By any price comparison, they are industry leaders and hence there is no reason for anyone to put any extra effort into reducing cost. For all practical purposes, these supply chain managers could be playing golf year around knowing that they already have the best price. But the exact opposite happens at GE every year. Each sourcing and commodity manager is challenged to reduce the cost by X% (assuming that commodity prices are not going up like crazy). Can you imagine a sourcing or a category manager showing price benchmarking to her boss? That individual would likely be shown the door very quickly.
Procter & Gamble - P&G tracks every single box of diapers that is sold at a point of purchase and feeds that data into their demand planning and manufacturing systems in real time. Going by industry statistics, P&G is already a leader of this category and there is no reason for them to spend an enormous number of dollars to continuously improve their cost base. But they continuously do – with impressive results.
Healthcare supply chain has a lot to gain by taking a few pages from other industries. Those include stopping using benchmarking and replace it with a continuous approach to cost savings, specialized category management, accurate demand planning, reduced waste, improved communication within and outside, being open to unusual partnerships, finding global suppliers, and last but not the least, evaluating supplier risk on an ongoing basis.
If you are one of those 15% who are bold enough to sincerely implement game changing ideas(benchmarking be damned), we would love to hear from you.
The author is founder and CEO of SupplyCopia(www.supplycopia.com), a marketplace for healthcare supply chain, he can be reached at firstname.lastname@example.org.