January 14, 2019

Disruptive innovation in supply chain: Impact of Amazon Business and technology, Part 1

By: Cynthia Saver, MS, RN
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Supply chain is the lifeblood of the OR, so any disruption in the flow of that lifeblood can lead to outcomes ranging from dissatisfaction with backorders to chaos if a new implant doesn’t arrive on time. But disruption also can be a positive force, especially if it supports flow.

When Amazon Business entered the medical supply chain market, Matthew Palcich, MBA, implemented the service at Summit Pacific Medical Center in Elma, Washington. The change reduced time spent on supply procurement by 80% in 1 year and saved money by reducing the operating budget by 15% (through not needing to backfill a position) and cutting annual shipping costs by $10,000.

With supply chain estimated to represent 30% of hospital costs (second only to labor), even small improvements can make big differences. And a 2018 Navigant report estimated that hospitals may be spending $25.4 billion more than necessary on supply chain (up by 10.2% from 2017).

Amazon Business offers a wide array of healthcare products, including IV fluids and administration kits, dressings, ostomy supplies, pulse oximeter monitors, and durable medical equipment. Many basic surgical instruments such as forceps, hemostats, needle holders, retractors, and scissors can be purchased online as well, along with suture, suction catheters and canisters, urinary catheters, and other medical items seen in the OR.

Summit orders mostly nonsurgical items from Amazon Business, although it purchases some surgical instruments, which are sterilized by the hospital before use.

“This [ordering through Amazon Business] is a no-brainer for smaller hospitals and systems with fewer than 10 procurement people,” says Palcich, manager of business analytics and logistics for a four-person supply chain department at Summit. “It allows people to focus more on patient care.” Summit is a critical-access hospital with three rural healthcare clinics and an urgent care clinic.

Amazon Business isn’t limiting itself to smaller hospitals, however. The company is also partnering with a hospital in the Midwest, which it declined to name, although market penetration isn’t widespread. (Amazon Business did not respond to a request for the number of hospitals using the service.)

“We need disruptors [like Amazon Business] in every type of business to keep us sharp and to provide us with ideas that we never thought of and we didn’t think were practical,” says Jamie Kowalski, MBA, FACHE, founder of Jamie C. Kowalski Consulting, LLC, a healthcare supply chain management company in Whitefish Bay, Wisconsin. “Sometimes we get stuck in what’s comfortable.”

Jamie Kowalski, MBA, FACHE

Will Amazon Business produce exciting new processes, or will its fate be like the UPS plan to revolutionize the healthcare supply chain, which hasn’t taken off as quickly as expected? What do OR, supply chain, and business leaders need to consider before ordering through Amazon Business? What other supply chain disruptions are occurring?

To answer those questions, OR Manager spoke with experts in a variety of settings. In Part 1, we’ll share what we learned about the current and possible future role of Amazon Business in the surgical supply chain. Part 2 will examine technology-related innovations and how they can improve the supply chain.

 

Ease of ordering

The advantages of Amazon Business can be illustrated by the Summit experience. Although Summit doesn’t have ORs, the hospital and clinics need some of the same supplies required in the OR, such as gloves, forceps, and biomedical filters. Summit only orders supplies that will not be used on or in a patient, unless they can prepare it properly. For instance, surgical scissors and other basic surgical instruments can be purchased and then sterilized before use, but dressings cannot, so dressings are not ordered through Amazon Business.

Examples of products Summit orders include office supplies, safety glasses, televisions for patient care areas, service carts, lab coats, computer equipment, pulse oximeters, and medicine cups.

Palcich was inspired to give Amazon Business a try based on his personal experience with using Amazon and the desire to reduce time spent on procurement. “Users were spending too much time searching for what they wanted in a ticket system,” he says.

Now clinical staff compare prices and place an order online by selecting a button next to the photo of what they want. The order is routed to the department manager for approval and then goes to supply chain staff for final approval, procurement, and creation of a purchase order. Dollar limits are set for request approvals.

Each employee has a secure login to promote cybersecurity. Once a facility has placed an order, the address and payment information are retained in the system for future purchases, and delivery can be tracked. When the package arrives, staff check the label to see where it needs to be delivered and use an app called Package Zen loaded onto an iPod touch to record the signature and tracking information.

Dash buttons make reordering more efficient. When a supply chain staff member sees that inventory is running low in a product bin, he or she pushes the Dash button in the bin, which triggers an email to the purchasing department. The email includes the item, where it needs to be delivered, and the quantity. The order is also sent to the appropriate manager for approval. Once approved, the order is placed.

Palcich finds the detailed reports from Amazon Business, which show him analytics such as who ordered, what was ordered, supplier name, and cost, to be helpful. “You can really drill down, see what you are buying, and see if you should go to contract on a product,” Palcich says.

He cites the example of paper: “We can say how many we want to buy, vendors then bid on the landed cost of a pallet of paper, and we can select the lowest bid, or not.” He notes that the process is used primarily for larger purchases when speed doesn’t matter.

Amazon Business charges an annual membership fee based on the number of users of the system, and shipping is free and efficient.

“People get what they order within 2 days,” Palcich says. Because staff are confident orders will arrive on time, they’re less likely to over-order. Another advantage is receiving 5% cash back when paying with a credit card.

“The process is easy because most people are already familiar with using Amazon,” Palcich notes. Amazon Business customers can sign up for an annual Business Prime membership based on the number of users on their business account: $179/year for up to 3 users, $499/year for up to 10 users, $1,299/year for up to 100 users, and $10,099/year for more than 100 users (rates current as of January 2019).

 

Will Amazon Business expand its reach?

Some healthcare professionals not currently using Amazon Business see its potential value to the supply chain. Mary Lou Jones, BSN, CSSM, business manager at Maricopa Integrated Health System in Phoenix, foresees a future role for Amazon Business for non-lifesaving products that are commonly used, such as 4X4 dressings, because it could deliver such products rapidly.

In a 2018 Reaction Data survey of 152 respondents that included chief executive officers, directors of materials management, directors of operations, and directors of finance, 62% said hospitals and clinics are supportive of the plan for Amazon Business to enter the healthcare supply chain market, with only 12% saying they were unsupportive, and 61% viewed the effect as positive. Most (75%) also believed Amazon Business would be successful.

“You can’t argue with [the company’s] success in what they have been doing, but whether they’ll be successful in healthcare is unknown,” says Kowalski, who sees hospital culture as a challenge in changing patterns. “Hospitals are risk averse because our ‘products’ are our patients, and no one wants to jeopardize the patient.” That makes hospitals reluctant to try new options. Although some hospitals (like Summit) are willing to be pioneers, most don’t want to be first.

Kowalski adds that even though processing healthcare supply orders is similar to what’s done in other businesses, hospital staff may resist changes in existing processes that have been in place for many years. “Amazon Business could end up not being able to overcome the risk-averse culture and the ingrained practices people already have,” he says. Hospitals also have to decide if the financial savings is worth making the change.

Most would agree that Amazon Business is an option for business supplies and smaller orders, but what about larger quantities—larger and/or heavier items, or more complex healthcare products? “I don’t see them delivering a pallet of materials,” Kowalski says. “They might have to reconfigure their distribution centers to do that.”

Jones worries that staff might become complacent about planning ahead because they can quickly order a product through Amazon Business. “They would still need to be proactive to be sure they have the supplies they need,” Jones says.

She also notes that temperature and humidity must be controlled for many medical items. “Can Amazon Business do that in its large distribution centers?” she asks. “Are people packing [medical] supplies trained in how they need to be handled?”

Stephen Downey

The ability to verify vendors and to track a product from manufacturer to patient use is important for patient safety. “Amazon Business doesn’t yet have a transparent vendor credentialing program,” Palcich says. “We want to know the supply has been in a temperature-controlled, pest-free, secure environment from the manufacturer all the way to our loading dock to make sure it’s safe to use in patient care.”

Without some kind of quality assurance of vendors, it will be difficult for Amazon Business to expand into medical supplies. Palcich says that Amazon Business could supply 80% of the items Summit’s clinics need to operate; however, the organization doesn’t order that percentage because it can’t verify the chain of custody, and its group purchasing organization (GPO) prices are better through its normal distribution channels.

It also may be necessary to limit the choices for hospital users, to avoid inefficiencies. “When we put out a bid for exam gloves, 100 companies responded,” says Stephen Downey, group SVP for supply chain operations at Vizient, Inc, Irving, Texas.

If all those companies are available on Amazon Business, clinicians would have to sort through them to determine what the best option is from a clinical and a price perspective.

Kowalski thinks that Amazon Business will want to analyze the cost/benefits of healthcare product categories and then decide which ones it could easily add, which ones would require modifications by the company, and which ones don’t offer financial benefits. “Amazon Business could take on very few categories and still be a player,” he says.

In the Reaction Data survey, nearly half (49%) thought Amazon Business should focus on commodities, as opposed to items such as surgical supplies and IV solutions.

In an interview with Healthcare Dive, Chris Holt, Amazon’s leader of global healthcare, said that Amazon Business is targeting the 20% tail spend. Those are items that aren’t high-volume purchases, which makes them vulnerable to poor management and waste. Holt added that these are suppliers who don’t have contracts with the customers.

 

Role of GPOs and distributors

The ability of Amazon Business to ship directly to customers may change not only how hospitals order supplies in the future, but also how they are delivered to end users. Already, an increasing number of large hospital systems are bypassing the distributor and creating their own warehouses, referred to as self-distribution, through consolidated service centers (CSCs).

A 2018 survey conducted by Kowalski’s company found more than 70 such centers. Suppliers ship directly to the CSC, which then fills orders and ships to individual locations, avoiding multiple storerooms. Another advantage is that inventory is “visible” because it’s located in one place—the CSC. That high consolidated volume provides an additional benefit—buying directly from manufacturers.

Beth Bozzelli, MBA, RN, CNOR, CSSM

HCA Healthcare has several regional distribution centers, according to Beth Bozzelli, MBA, RN, CNOR, CSSM, director surgical services, who views their role as a positive one. “It was scary at first because as the OR, we want what we want when we want it,” she says. “But having the regional distribution centers allows us to free up space in the OR because we don’t have to store as many supplies.” Obtaining supplies from the centers, which have been in use for several years, has not been an issue.

Other healthcare systems are consolidating supply chain ordering and distribution on a smaller scale while still reaping benefits. For example, Maricopa has a warehouse on campus that buys in bulk and distributes supplies to clinics. “You can eliminate the 2% to 5% you pay to the middle man for distribution,” Jones says.

These trends may affect the role of distributors, although many of these companies are implementing strategies to better support customers, such as providing front-end portals, allowing customers to order only a few units (instead of bulk), and creating implant management programs, Downey says.

Another business that may be affected by CSCs and Amazon Business is the GPO. Direct purchasing sometimes means that the role of GPOs is diminished, and Palcich says that GPOs may suffer as market-based pricing becomes more common. This trend will require hospitals to respond quickly and be able to order approved substitute products, not those on a GPO contract.

GPOs aren’t likely to fade away, however. “GPOs still provide purchasing power,” Palcich says. Jones notes that GPO contracts provide the ability to purchase one or only a few of a particular item, without paying a higher price. She sees the possibility of GPOs turning to Amazon Business for items that are easy to ship to save money. She adds that GPOs and vendor contracts come with services unlikely to be available through Amazon Business, such as training and presentations to value analysis teams.

“If you look at where the GPO is today, it’s about more than just sourcing,” Downey says. “GPOs are doing more performance improvement, training, and support, and some are running customers’ supply chains.” He adds that GPOs are looking at the intersection of cost, quality, and market performance as they help hospitals with clinical improvement and market growth.

 

Considering the future

Downey considers Amazon Business a disruptor. Like Kowalski, he thinks the company will need to determine which products are best for it to handle. “When you think of all the complexities of healthcare supply chain, there are a lot of controls,” he says. “The industry has built that into place, and Amazon Business is learning its way.”

Vendor sourcing, product storage and transport, and pricing (compared with traditional sources) will be key factors for Amazon Business to address as the company strives to deepen its impact in the surgical supply chain. Given the company’s history, however, it’s likely Amazon Business is in the market to stay. ✥
Cynthia Saver, MS, RN, is president of CLS Development, Inc, Columbia, Maryland, which provides editorial services to healthcare publications.

References

GHX. GHX supply chain leaders survey finds healthcare industry targeting data-driven improvements in 2018.  https://www.ghx.com/news-releases/2018/ghx-supply-chain-leaders-survey-finds-healthcare-industry-targeting-data-driven-improvements-in-2018/.

Kacik A. Amazon primed to streamline healthcare supply chain. Modern Healthcare. 2018.  https://www.modernhealthcare.com/article/20180929/NEWS/180929919

Kacik A. Hospitals have an unrealized $25.4 billion supply chain opportunity. Modern Healthcare. 2018. https://www.modernhealthcare.com/article/20181018/TRANSFORMATION02/181019894/hospitals-have-an-unrealized-25-4-billion-supply-chain-opportunity.

Palcich M. A hospital story: Going Amazon, Pt. 1. J Healthcare Contracting. 2018. http://www.jhconline.com/a-hospital-story-going-amazon-pt-1.html

Pifer R. Amazon Business’ medical supply chain ambitions: 4 things to know. Healthcare Dive. 2018. https://www.healthcaredive.com/news/amazon-business-medical-supply-chain-ambitions-4-things-to-know/526985/.

Reaction Data. Amazon as a medical supplier. Executive summary. 2018. https://www.reactiondata.com/wp-content/uploads/2018/05/ReactionDataAmazonAsMedical-Supplier.pdf.

Schneller E. 2018 healthcare supply chain trends/issues. Healthcare Purchasing News. 2018. https://www.hpnonline.com/2018-healthcare-supply-chain-trends-issues/.

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