I interviewed Ashok Muttin who discussed Healthcare Supply Chain and Amazon.
Can you first provide a background of this topic about Amazon entry into the healthcare supply chain and why is this relevant?
Thank you, Dustin. It's good to speak to you. I think the entry of Amazon is very relevant because of multiple reasons. The healthcare supply chain has been complicated and complex for a variety of reasons — either because of the multiple players that are in there, such as a GPOs, and manufacturers, the distributors, and then the providers are, for any number of those reasons, healthcare supply chain has been unnecessarily complicated. With Amazon coming in with the firepower and their ability to attract multiple suppliers all over the world and their ability to drive measureable cost savings and to bring in a sense of transparency to the whole supply chain is very, very relevant in more ways than one.
Obviously, it remains to be seen that the efforts that Amazon is making and the tremendous investment that they are making is going to bear fruit because supply chain, while it's complicated, it's also necessary that Amazon goes through this whole process in a very simplified way and brings a sense of transparency.Otherwise, Amazon will continue to face the same challenges that other folks in the past have faced. So it's going to be an interesting next 18 to 24 months to watch.
Can you talk about how this impacts the players in the supply chain?
That's a very interesting question, Dustin. If you really look at all of the players that we have today, we have the manufacturers — global as well as national and regional manufacturers. Then we have distributors. Obviously the there large ones being the Cardinal, the Owens & Minor, and Medline.And then there are literally hundreds of smaller local distributors that are working in the supply chain. Then there are the providers along with the group purchasing organizations.
Who each one of the players in this supply chain obviously are going to be impacted in multiple ways. I think the biggest impact is going to be on the group purchasing organizations because, as we have seen over the last couple of months or almost a year or a year and half, the significance of the GPOs continues to decrease and their value continues to be questioned.
So if they continue to be simply a contracting organization and not do anything else, then I think they are the ones that are going to be impacted the biggest. So there is an argument that is going out there that Amazon could possibly partner with the group purchasing organizations, and I, unfortunately, haven't been able to come up with one single reason to say that Amazon would partner with them. It's almost like saying would Amazon partner with someone like a Borders, which was, as both of us knew, was a leading book chain, or a Blockbuster for that matter. Would Amazon do that? Probably not.
So in the same way, it's very difficult to think that Amazon would actually partner with a GPO, and I would think that the GPOs would be in the square, in the center of the crosshairs of Amazon, and they probably are going to be the ones that have the biggest impact.
The second one, I think, are the distributors. There are a lot of small and mid-sized distributors today that don't have a tremendous amount of scale or the sophisticated operations like someone like an Amazon can bring. My sense is that a lot of those small distributors are going to be impacted in significant ways, and I expect some kind of a consolidation to happen in that area.
Now, it remains to be seen whether the big three or the big four, as we call them when we include the McKesson in that group of the big four, whether they will go ahead and acquire smaller distributors to build muscle or some of these smaller distributors will go out of business. That's an area that is very interesting and remains to be seen. As far as the manufacturers are concerned, I don't really foresee myself thinking that Amazon is going to go ahead and acquire someone like a Medtronic or a Johnson & Johnson, Smith & Nephew, Stryker, or any one of these guys.Manufacturers who have very clear advantages, who have invested tremendously in research and development, and they have a significant product pipeline... I don't really see anything happening to the manufacturers except the fact that because now Amazon is going to come in, muscle their way in, obviously they are going to start with something very simple — things like the consumables, which they had already started in some small way. I see a huge expansion of that happening. And then that expansion leading to servicing the non-acute care would be a cakewalk for Amazon. That is still a significant supply chain business in the healthcare area.
So manufacturers, I think, are very well placed, as long as they are the ones who are truly developing products, who are investing in research and development. I don't really see any impact on them, at least in the near to medium terms.
I think another constituent that I think is going to be affected issome of the healthcare management consulting companies that have been there. So if you really look at the five or six of these big consulting companies, unfortunately, every one of these consulting companies has never really invested in any core technologies or core analytics or any one of those enabling things for the providers. They continue to recycle the same consulting work that they do. Obviously, every year they come up with a new name for that consulting or some sexy variant of the previous one.But really, they haven't really come up with anything new for the providers.
And once Amazon comes into the picture and they bring in a tremendous amount of transparency, at that point in time, I think the CFOs and some of the heads of supply chain who are hiring these consulting companies are probably going to ask themselves the question, "Do we really need these guys?" If Amazon is doing all of those things that a consulting company is supposed to do in terms of analytics, in terms of driving down the cost, in terms of providing the transparency, in terms of showing the visibility into the supply chain, then that, I think, is interesting to see how it will affect the so-called healthcare management consulting companies.
So if I were to really look at it, you have the GPOs. They are probably going to have the highest impact as far as we can read the situation.
Second one, I think all of the smaller and the medium-sized distributors, they will have a significant impact. Manufacturers really don't see an impact happening, and then, obviously, the management consulting companies are, I think, going to be significantly impacted. That's how we read the situation. We have been following this very thoroughly in the last five months, and Amazon, obviously, has created multiple pilot programs based upon publicly available information. And they seem to be in a very good position. And also, as you are very well aware, Amazon has hired some of the best and the brightest from the group purchasing organizations.
What that means is those guys are going to bring a tremendous amount of knowledge, a tremendous amount of insight, into the inner workings of the group purchasing organization. And by leveraging that knowledge base, leveraging that insight, I have a feeling that Amazon will attack the GPOs very directly.
Is there any more you can say about some of the things the affected parties should be looking at?
We have always talked about this very openly, and I have personally expressed my opinion multiple times. GPOs did have a huge opportunity to reinvent themselves. I still think the window of opportunity is not closed entirely, but they really have to think about literally re-engineering themselves, transforming themselves into more of a technology company, more of a platform company, more of an enabler than they are today. As we all know, the majority of the expertise that the GPOs bring to the table is all in the contract management area. Having said that, if Amazon were to come in and bring in a new paradigm, a new business model, I don't know how valuable is that, just the contract management capabilities. But if leveraging all of the data that the GPOs have, leveraging all of the insights that they have about the buying patterns, the demand curves, the highs and the lows, leveraging all of the relationships that we have with the providers, GPOs could probably reinvent themselves. I still think that every day that they don't do it, the time is clicking. But if they were to really think outside the box... If they do some kind of constructive destruction within their own organizations and are willing to let go of this 4% commissions that they easily get, then I think they have an opportunity to put of a viable competition to someone like Amazon.
What that also means is the GPOs would have to partner with a technology provider, maybe someone like and create what we call or what we've been evangelizing as a private marketplace. And that private marketplace could put up significant competition to Amazon because, while Amazon is very capable, has significant amounts of dollars to invest, an almost unending supply of capital, but Amazon still needs to learn the complexities of the last mile of the supply chain which is integrating with the provider systems, working around the recalls and the replacements, physician preference items — these are all the areas that GPOs have a tremendous amount of expertise and insight. They could leverage all of that, package that into a platform. And if they were to take that platform to the market and be bold enough to say that we will not anymore depend on the 4% commissions; we will go ahead and create a new paradigm, then that's a good opportunity of the GPOs.
Now, as far as the distributors are concerned, it's tough to compete with someone like Amazon when they come in with all their guns blazing. They have such sophisticated infrastructure, they could easily bundle their Amazon Prime subscription to serve all of those non-acute care facilities whether they are owned by an or they are independent entities out there. Amazon is going to come in heavy and high.
So the only way that the distributors could do is to probably band themselves together and create some of these coalitions and gain in strength in terms of both their ability to get mass and their ability to reinvent some of their operations. Because if Amazon comes in and brings in the drone technology and turns the distribution upside down by bringing in just-in-time systems, then it’s really going to be a tough battle for the smaller distributors.
The big guys, I guess they will survive because they have already very strong existing relationships with the providers, and the provides have been locked into multi-year agreements with the distributors. So they still have a 10- to 12-month window to react to be able to put in a viable competition for Amazon.
Can you discuss some of the challenges that these other parties will face?
It's going to be significant challenges, Dustin. As you can see, Amazon always goes after those industries where there is a significant inefficiency in the system, where the few are profiting at the cost of others, where the margins tend to be high, where there is complicated, multi-tiered contracts, pricing and sales strategies. And then there is a whole lot of confusion. And if you look at the healthcare industry and the healthcare supply chain, all of those factors are there. So if Amazon were to look at one industry that is huge, that is a viable entry for Amazon... So each of the constituents, each one of the affected parties would have to look inside themselves. And every one of them would have to — to use the old, clichéd word —“think outside the box” and be able to evaluate their core strengths and weaknesses and be able to design some kind of mechanism to put up a viable fight with Amazon.
It is very obvious that each one of the constituents, leaving apart the manufacturers, will become more of a technology company than they are today. It's not about how many trucks do you own, how many distribution centers do you own, how many drivers do you own, and how they are located. Amazon is better at doing all of those things. So each one of the affected parties would have to think about an entirely different business model that would leverage their core strengths, their knowledge of the providers, their knowledge of the physician-preference items. Then they can probably create new models that can become viable competitors to Amazon.
Thanks, Ashok, for sharing today.
Thank you very much, Dustin.
About Ashok Muttin
Purpose Driven Entrepreneur Reinventing Healthcare Supply Chain