Difference Between Sourcing and Category Management: What Do You Do When Your Leverage Fundamentally Shifts to Your Suppliers?


Leverage is not a constant and those of us who have been in Sourcing/Supply Chain long enough (me) have lived through this multiple times.  And if you are in the process of adopting your favorite version of Category Management, then hopefully you are baking that into your strategy and have built in risk mitigation.  The automotive industry went through this when car companies had uneven leverage and exerted it fully till it started impacting their business and that industry went through some painful corrections.  We are now going through a similar phenomenon in healthcare.

Doctors sometimes have to postpone surgeries or chemotherapy treatments”  because of shortage of medications.  You may expect to hear that about a third world country, but that statement is about the good ole U.S. of A.  Here is the gist of the situation:

  • Acute shortage of generic drugs
  • High prices
  • Government Accountability Office declared 427 drug shortages – 1/3 for simple drugs like sterile saline and sodium bicarbonate (baking soda!!!)
  • Hurricane Maris devastated the industry in Puerto Rico which had a large drug manufacturing base
  • Reduction in number of suppliers (mergers, business ceased, quality issues etc.)
  • Drug price-fixing scandal

All of these have contributed to the dangerous condition where patient care is being significantly impacted.  As a result, the healthcare industry has been very concerned about this and recognized that clearly something had to be done.

What they also realized was that the only way to counter this was to shift the balance of power (Hello alums – anyone remember Porter’s five forces model?).  They recognized that they had to fundamentally shift the leverage and that the only way to do that was to collaborate as consumers.  Voila – all of a sudden, they changed the dynamic of that market.  Consumers collaborating is a recent phenomenon which is starting to take hold.  For example, buying consortiums are a perfect example of this.  As are Group Purchasing Organizations (GPOs) and you can look up Corporate United (an Omnia Partner) as a very successful example of that.  In this case, they went a step further.

500 hospitals represented by 7 large hospital groups representing a large chunk of the demand have collaborated to form Civica Rx – a drug manufacturing company.  Talk about backward integration – this is a whole new definition!  They have already been approved by the FDA and will have their products in the market by 2019 and expect to drastically improve the supply and also reduce the costs dramatically.  The capital is being provided by the hospital groups and they will receive preferential pricing and delivery although the drugs will be made available in the commercial market as well.  “It will put generic manufacturers on notice that even without substantive legislative or regulatory changes, the landscape in which they do business could have a powerful new entrant,” according to Lee.

For those that have been through the collaboration module from Strategic Sourcing/Supply Chain “U”, you will remember a number of examples of similar collaborations.  For example, the East Coast utilities that pooled their demand for renewable energy and used the guarantee of that combined demand to stand up a viable supplier.  Without this, ALL utilities were in significant risk of not meeting regulations.  You may have also heard/read about a similar effort that we (TMG) were recently involved with where the supply market had considerable leverage because of the significant lead time for a highly engineered capital good.  We facilitated bringing a number of competitors together and pooling their risk and managing it collectively.  They are buying a sufficient quantity of these long lead time items and are going to make them available to the consortium members immediately when they need them and not have to wait 15 months!  Voila – they just shifted the leverage back in their favor.

Complex problems require creative thinking and collaboration amongst competitors is clearly an “out of the box” notion that we need to be much more comfortable with.


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