Baxter Healthcare/American Hospital Supply

      Hospitals use a large amount of routine supplies such as bandages and antiseptics. Originally, they purchased them from various suppliers, held them in inventory, and distributed them throughout the hospital as they were needed. This relationship is shown in Figure 1.9. American Hospital Supply (AHS) was one of these suppliers. To gain advantage over their competitors, AHS created a new system and made an offer to the hospital managers.AHS placed computer terminals in hospital locations where the supplies were used (emergency, operating rooms, nursing stations, etc.). As shown in FIgure 1.10 these terminals were connected to the AHS computer.

     

      As hospital personnel removed supplies, they recorded them on the terminals. The computer kept track of the amount of supplies in each location. A list would be printed at the warehouse, and drivers delivered the necessary supplies to each location in the hospital.  Monthly usage statistics were sent to the hospital.

      The hospital gained because the facility did not need to maintain extra inventory, which saved money and space. Fewer hospital employees were needed, because the supplies were delivered directly to the needed locations. Additionally, the hospital received detailed usage records.

      To offer this service, AHS incurred higher costs --largely the cost of creating and maintaining the information system. What did AHS gain in return? As long as it was the only company offering this service, AHS gained a competitive advantage by providing a new service. Hospitals were more likely to choose AHS over the rivals. But what would happen if a competitor created in a similar system? Would the hospitals stay with AHS or switch to the rivals?

      Although the answer depended on the prices, hospitals had a strong incentive to stay with AHS. They would encounter various switching cost if they chose another supplier. For example, daily operations would be disrupted while the system was changed. Employees would have to be retrained  to use the new system. A rival would have to offer strong price advantages to overcome these costs.

     Eventually, Baxter Healthcare, a large manufacturer of supplies, purchased AHS. Of course, over time Baxter had an incentive to cut its costs to maintain higher profits. In the process their delivery service might suffer. Some hospitals apparently experienced problems and returned to in-house stock rooms to eliminate shortages of basic supplies.

     

Figure 1.9 and Figure 1.10