23-03-2012, 01:37 PM
E-PROCUREMENT IN THE HOSPITAL INDUSTRY
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INTRODUCTION
The estimated value of the medical supply market in 1999 is $180 billion
lThe .
average amount a typical hospital spends on supplies in a year has been estimated at $50
million
2• While the hospital management is interested in improving quality, it looks to
cut costs wherever possible. Doctors, nurses, and other end users of the supplies look to
use the best product as soon as possible. The materials management staffs of hospitals
must delicately balance the wishes of both the hospital management and end users. This
thesis investigates how materials management departments at various hospitals in Oregon
are using a new purchasing tool (e-procurement) to continue satisfying the interests of
both management and the providers.
In the case studies that follow, I report the results of interviews conducted with
materials management departments at four hospitals. As I will discuss later, these
hospitals, although confined to Oregon, are representative of most types of hospitals
throughout the industry. This thesis is designed to explore the views of a representative,
although not scientific sample of individuals working on a day-to-day basis to make
purchases. The literature I have reviewed generally recommends the use of eprocurement. However, the move to e-procurement is not progressing as fast as the
literature suggests. I felt that the views of those actually involved in the procurement
process would provide valuable insight into why this powerful tool was not being
implemented at a fast pace rate as suggested by the literature.
1 Keiser, Barrie. 'The Higher Order ofE-procurement.'~ Health Management Technology 21.10 (2000):
80-81
2 Haugh, Richard. "Revenge of the GPO's." Hospitals and Health Networks 75.4 (2001): 60-64.2
Therefore this research was restricted to the following areas of interest. First,
what methods do hospitals currently employ to purchase supplies? Second, how
extensively has e-procurement been implemented in hospitals? Third, in the eyes of
materials management personnel, is e-procurement beneficial to them, and i f so, what do
these professionals see as impediments to a successful implementation?
Background Information
The process of purchasing supplies, arranging their transportation, receiving the
goods, and then warehousing the supplies, is known as procurement
3Companies .
constantly look at this entire process to lower costs, and ultimately increase profit
margins. By finding ways to lower the costs associated with each part of the procurement
process, managers can generate better margins. Corporations and healthcare facilities
have begun looking at the Internet to find ways to improve supply chain management.
E-procurement has been defined as, "The Internet-enabled purchasing of goods or
services by one buyer from many suppliers.,,4 I t allows businesses to implement supply
chain management techniques through the use of Int e rne t services. Companies use eprocurement for everything from the purchase of simple everyday supplies, as i f they
were using a paper catalog, to implementing reverse auctions whereby suppliers can bid
on company orders.
One reason companies implement e-procurement models is because they have
been presented with benefits that in many cases outweigh the potential costs. This does
3 Pittman, Nanette. When is E-Procurement Successful? Diss. Boise State D, 2001. 2.
4 E-Business Strategies in the Global Marketplace: E-Procurement and Other Challenges. New York: The
Conference Board, Inc., 2001. 1.3
not mean that the costs are inconsequential. In fact, the downsides to e-procurement can
be substantial. Downsides can include:
• High monetary costs associated with the implementation and
maintenance of e-catalogues
• Lack of uniformity among a multitude of disparate information
systems
• Non-cooperation by suppliers
5These costs can be large, and therefore, some organizations have decided either to enter
into e-procurement cautiously or not at all. However, many organizations view the
potential benefits of e-procurement as to significant to pass up and have proceeded with
the implementation of e-procurement models. The potential benefits these companies
foresee include:
• Reduced costs in supplies
• Reductions in cycle time (i.e. the time it takes for an order to be
completed)
• More organized information
• Tighter control of the supply chain
6Companies constantly weigh the costs and benefits associated with e-procurement in their
effort to determine the best solution for their organization.
Eli Lilly and Dell Computers are two examples of companies that have
implemented e-procurement. While the two organizations have both begun the movement
5 E-Business Strategies in the Global Marketplace: E-Procurement and Other Challenges. New York: The
Conference Board, Inc., 2001. 16-18.
6 Pittman, Nanette. When is E-Procurement Successful? Diss. Boise State U, 2001. 22.- - - - - - - - - - - - - - - - - - - - - - - - - - - - -
4
towards e-procurement, they used in different implementation methods. Eli Lilly has
adopted a cautious and selective approach to implementation, while Dell has taken an
aggressive attitude towards the adoption of e-procurement. Like Dell, Eli Lilly believes
the future lies in e-procurement, however, the Eli Lilly theory on implementation is to
begin by laying out a solid foundation. This way, when the company is ready to proceed,
the system will be well structured, tested, and not fail. This is exemplified by the
following quote:
The company is laying the foundations for e-procurement. One of its most
important tasks in Europe is to implement a global ERP system with
common business processes and data structures, and to identify more
regional suppliers that can meet the company's needs for goods and
services at the right price, quality, and service levels.
7Eli Lilly has currently invested $150,000 and plans on spending another $1,000,000 over
the next three years in order to get prepared for e-procurement
8• In contrast, Dell
installed an e-procurement plan in one year, that enables the company to purchase $15
billion worth of production materials over the Intemet
9The differences in .
implementation styles are symbolic of the rest of the major companies in the world.
While some are skeptical and cautious, others are enthusiastic about the potential of eprocurement.
Research on e-procurement is quite extensive because many major companies
around the world have gone through the decision making process and decided how they
plan to proceed. However, the concept of e-procurement in hospitals is much more
7 E-Business Strategies in the Global Marketplace: E-Procurement and Other Challenges. New York: The
Conference Board, Inc., 2001. 23.
8 E-Business Strategies in the Global Marketplace: E-Procurement and Other Challenges. New York: The
Conference Board, Inc., 2001. 24.
9 E-Business Strategies in the Global Marketplace: E-Procurement and Other Challenges. New York: The
Conference Board, Inc., 2001. 29.-
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rudimentary. A recent study found "U.S. hospitals currently make less than 3% of their
purchases online.,,10 Few hospitals are utilizing e-procurement for two reasons: first,
some people fail to see the value in e-procurement; second, some hospitals have longterm purchasing contracts making it difficult to change ordering procedures quickly. I I
Whi l e many hospitals currently do not participate in e-procurement, the future
could see a change. As purchasing contracts expire, and new Internet ba s ed companies,
like Everything4MDs and Global Healthcare Exchange, be come mor e established,
hospitals might re-evaluate the use of e-procurement. Large hospitals, in particular, can
be expected to use e-procurement mor e because in these organizations 50% of orders
currently contain errors, and the use of e-procurement would substantially reduce
transaction costs. For example, the following quote from a recent study is illustrative:
The average administrative cost pe r purchase order runs be twe en $75 and
$150. E-procurement c an reduce administrative costs significantly, by 60
percent to as much as 95 percent. I t can cut costs down to $30, and
sometimes as low as $6 pe r order. 12