Purchasing will continue to be largely a consolidation game this year. But with a twist: Suppliers, buyers and group purchasing organizations will concentrate on consolidating economic gains from becoming so big so fast.
Economies of scale, the driving force behind so many deals last year, may translate into immediate increases in purchasing or sales flow that make for quick pricing fixes.
But to sustain pricing improvement, raw volume goes only so far. It takes time for suppliers and purchasers alike to fully digest mergers or acquisitions. So this year, look for suppliers and purchasers to work at eliminating inefficiency as they try to turn theoretical synergies into reality.
For purchasers, that means achieving promised commitment levels in purchasing contracts will be more important than ever. Whether carrots, sticks or both are used to ensure that hospitals stick to negotiated contracts, purchasing executives will have to work harder to get promised results.
Standardizing product lists and getting hospitals to stick to them only becomes harder as healthcare systems grow larger. But leaving recently absorbed hospitals to do as they like simply won't work.
As for suppliers, a big part of consolidating gains will be capturing information on product use and feeding it back to customers. Proper supply utilization can mean a more expensive item saves money if it is more effective or replaces several "cheaper" supplies. But successfully making that case takes facts that are often hard to come by. In principle, bigger suppliers and group purchasing organizations will have more data to work with. Making sense of it, however, only gets tougher as the data get deeper.
Also this year, look for "activity-based costing," or ABC pricing, to come into its own. Almost everyone agrees the traditional approach of aggressively negotiated base pricing plus a razor-thin markup leaves potential savings on the table.
Instead of price plus a fixed percentage for handling, ABC promises to quantify the true cost of getting a product where it's used. That could shave costs for more expensive but easy-to-ship items while making sure that bulky crates of disposable diapers, for instance, pay a full share of their own freight.
The convoluted hospital supply chain still has room for a few more mergers and acquisitions. But because size alone hardly guarantees pricing or service superiority, look for deals that diversify offerings. Mixing core functions rather than increasing volume by smashing two like companies together may prove the smarter approach.
Drug distributors, for instance, may scoop up medical-surgical companies to fill out their product lines and come closer to offering one-stop shopping.
And Bergen Brunswig Corp.'s proposed merger with generic drugmaker Ivax Corp. points to renewed interest in vertically integrating distribution and manufacturing. Whether it spurs imitation remains to be seen.