Executive Briefings

PREMIER INC.

Herb G. Johnson Executive VP of Supply-chain Services-Premier Inc

Herb G. Johnson is executive vice president of supply-chain services for Premier Inc., a non-profit purchasing alliance of hospitals and healthcare systems nationwide. Currently it represents 220 owners and the 956 hospitals and healthcare facilities that they operate, plus 900 other affiliated hospitals. He also is president of Premier Purchasing Partners, LP.
Johnson joined Premier in September 1999. His long career in logistics includes executive positions with CVS Corp., the $16bn pharmacy chain; Safety First Inc., the $110m maker and distributor of juvenile safety and hardware products; Polaroid Corp., where he oversaw all logistics activities; and Wang Laboratories. In 2000, he served as president of the Council of Logistics Management.


Q.What do you view as your greatest challenge in the year ahead?
A. I'm in an environment that's totally new to me - healthcare. The supply chain for my organization is more virtual than anything else; you don't manage or control most of it. We are charged with the responsibility of aiding our owners, our primary customers, to improve the way they do business.

Unfortunately, healthcare doesn't view the supply chain quite the same as most traditional businesses. So a significant amount of what I have to do in the coming year is to educate, inform and build a case that supply chain is in fact a methodology that's going to save an industry that's in a lot of financial difficulties right now - that this is a way out. Many people see supply chain as a long-term solution, but they're not sure where to grab the handles. My responsibility is to first describe the platform, build some confidence around the fact that they can use this area to change the industry and to get improvements. They need to know that they can put some energy into supply chain and get something back in return for it.

Q.How do you balance the need for improving customer service with that of cutting costs and minimizing inventory, while satisfying the expectations of Wall Street?
A. These all lead to the same functional end point. If you have the right amount of inventory in the right place, you can enhance sales. That does not necessarily mean more inventory. It's a science that has only been grasped by our industry in the last 10 years. It's classically important that you've got enough product to satisfy demand. But the single most powerful influence on inventory is velocity. That's the secret of improving the efficiency of a company's largest line items.

Q. Have inventories typically been high in the healthcare industry?
A. I'm not sure they know how much inventory they have! It's kind of like once it's paid for, it's assimilated into the process.

Q. You would think that an industry that involves so many critical items would need to have a handle on inventory.
A. I believe there are healthcare providers who know this information very well, but it is not the traditional way. I could name owner hospitals of ours that do a very good job of this, but I'm telling you that classically that is not the model.

Q. What is your feeling about top management's understanding of the importance of the supply chain and logistics today, as a tool for competitive advantage and customer service?
A. The proof is in the pudding on this one. Look at organizations with chief logistics officers, then look back five years to see if those positions were even part of the senior management team. This is a revolution that has taken place. I really believe that chief logistics officers have not been brought in to single-handedly prune away the expenses of the organization. Many companies are beginning to see that logistics and supply-chain management are competitive weapons, and that you need highly skilled people in this marketplace.

I can remember a senior executive who had a lot of respect for me, and for the experience I brought to the organization. He was really positive about that. But in a period when we were looking for people to run the distribution facility, he said, in a moment that gave me more clarity about the way things got done in this company, 'We can get anybody to run the warehouse. We can take anybody from any part of the company and do that. That's not a job in which we need any particular skill set .' Here's a guy who clearly placed a high value on logistics, but seemed not to understand how it works.

Q. So how do you get the message across?
A. You've got to prove it with accomplishments. You've got to show them. When I was in that organization - and I left there just short of five years - I did some things that had never been done. And one of the things that happened after I left was that they named a chief logistics officer. But once you get the ear of a chief operating officer or chief executive officer, you cannot go in with lightweight opportunities. You've got to talk about major change and opportunities to improve, and you've got to talk in terms they understand, such as improved service, better sales, and how we're going to make profitability better. And if you don't get at those angles, then the goodness of having some guy who understands logistics, running this piece of the business, isn't going to get you there.

Q. Where is the weakest link in the supply chain today?
A. For healthcare, I'd have to say it's information technology. Most of the hospitals or healthcare providers in general are spending anywhere from 3 to 6 percent of their annual budgets on IT upgrades. In the rest of the world, it's somewhere between 8 and 12 percent. Many of them are operating with woefully inadequate legacy systems that do not have the robustness to operate even on existing platforms, let alone be integrated into larger, more complex systems. That's a significant hitch.

Something in healthcare that's creating a terrifying environment is the whole concept of staying alive, of being profitable, of mergers and acquisitions. A lot of healthcare material managers are operating under a theory of fear. I was at a conference eight weeks ago where the speaker said that 75 percent of senior materials managers, in the top 50 percent of the nation's hospitals, would be in different jobs in 18 months. That's terrifying. That's driving a lot of what's happening on the supply-chain side of a lot of the hospitals - give me five or ten million bucks, and take it out anyplace you can.

Of my two favorite corollaries, the first one is that over the last 25 years, there's been more change in the previous five years than in the 20 before that. The second is that in the five years, there's been more change in the last year than in the previous four. There's a huge amount of technology that is available in supply-chain management. The key is trying to understand exactly how much change you can introduce into an organization at once. Some folks have, quite frankly, gotten themselves way out beyond the amount of change that an organization is capable of managing. Sometimes that can cause more chaos than it's worth. There's a point in time where you've got to make strategic decisions on how much change you can push into an organization at one time.

Q. What is your e-business strategy today, and how are you going to go head-to-head with the newer entries in the market today?
A. E-commerce is not hype anymore; it's real and it's here. There's a lot of business being done there. But I'm not exactly sure how much is real, especially in healthcare. At one point two months ago, there were 2,000 sites, most of them not doing any real business. A fair amount of those have fallen by the wayside.

In terms of our own company, we have an e-commerce company, we've pushed that company out, and ended up with a lot of choices being given to us. What we ended up doing was merging it with another company, called Medibuy.com. Medibuy also acquired a company called Impact Health, the e-commerce arm for Columbia Healthcare. So now we have just under 37 percent ownership in the new company, and we are using this as a non-proprietary portal for our e-commerce activity. It is our intent to use this portal to link to all of our 1,800 owners and affiliates, and also to link to all of our business partners.

On the business partner side, there is a lot of activity. Manufacturers and distributors have all got their e-commerce portals. The key here is how you manage the whole B2B connectivity, and how those portals work. We feel that e-commerce is a significant contributor toward us giving the power of information to our owners. And in e-commerce, that power converts to the buyer. The manufacturing and distributing community is probably somewhat reluctant to give the buyer that much power. So we're going to have quite a changing industry over the next four or five years.

In general, e-commerce has changed the way that supply-chain management is conducted. This is not the game it was 10 or 15 years ago.

Today, most companies can dial into their suppliers' networks, look at inventory and orders, and find out whether they're shipped or not. Healthcare's not quite there. Until we can improve the quality on the healthcare side, we're not going to see the benefits that are being yielded now in the rest of the supply chain. Technology and e-commerce are probably going to drive the greatest, most explosive growth of information management in the supply chain of any tool that's going to come along in the short run.

Q. What is the progress of true collaboration with external partners in the supply chain today?
A. There's a little nervousness on both sides about sharing information. In traditional supply-chain environments, where a customer is only looking at his inventories, there have been huge amounts of sharing that made a lot of sense, in terms of improved efficiency of the business. But in some industries, such as healthcare, where there's a significant amount of competitive pricing and activity between vendors, suppliers have created a marketplace where they have control over the flow of information and data around purchases and purchasing volumes. I'm not so sure that they want to give up anything more than the ability of buyers to order product on their systems. The issue of education and information is creating some uneasiness, as least on the vendor and distributor side of the business.

Collaboration is the only way to go. I've seen far more collaboration in all of the verticals that I worked in previously than I see in healthcare now. I believe this is going to be an evolution - the buyers are going to demand the information. Organizations like Premier, which act as virtual facilitators in the process, will create enough demand for that information, and eventually this whole thing is going to fall. I will tell you that in five years time, pricing is going to be open and readily available on the internet for everybody that does business like we do. I don't think there are going to be any secrets on pricing. People will compare and buy what they want from whom they want, and how they want. That's not where we're at today.

Q. But you wouldn't want a world that was completely governed by price, would you?
A. Price is not the only determinant in buying healthcare products. This is not your CVS/Pharmacy; it's not about the difference in price between candy bars. We're talking about an environment where many buyers in healthcare think that some products are commoditized and they are not. There is a clinical efficacy issue around what works best; it can be proved easily by doing clinical diagnostics and following procedures and seeing what the results are. And that's the thing that scares the living bejeezus out of some of these healthcare manufacturers.

Where we are is that we've got a huge business called Informatics. Supply chain is one of the legs of our system, and Informatics - data - is the other. This year we're building a warehouse to store the data for our supply-chain information. In the long run of things, we're going to be able to tie the clinical information, of which we have a fairly substantial amount, into the actual fulfillment processes. So I can show you that clinically, this was the outcome of this procedure or this particular activity, and guess what? We bought a product at this specific price based on which one yielded the best results! That could be pretty terrifying, couldn't it? Especially if you're a person with a second- or third-tier product that's just marginally acceptable.

Q. If you were entering the business of logistics today, what skills would you have to possess that are different from those at the time you started out?
A. I'll give you at least two of them. First of all, one of the things I don't think anybody in logistics ever figured out is that as these jobs get bigger in the organization, the skill set, especially around professional demeanor, is totally different when you're in the boardroom. That was my big "ah-ha," going from being a vice president or even a senior vice president but two tiers down from the executive team. Now you start to move up to the executive vice president level, where you're interfacing with COOs, making board presentations. There's a whole different skill set around visibility, presence and executive demeanor. What worked in one job was pretty good, but it isn't necessarily the right one at the top end.

At the entry level today, people have a higher set of skills in electronic technology. Most of us had to have it hammered into our heads. Entry-level people grew up with computers; they are absolutely comfortable with it. Some of us old fuddy-duddies had to force ourselves just to stay up to date.

The other thing is that they don't come with a lot of biases. They don't have a reference point of 10 or 15 years ago; they don't talk about how things used to be done. Most of these kids are into very statistically oriented organizations. It's not like me 25 years ago, when I used to walk through the warehouse and say, 'Yeah, I think we've got enough stuff here!' - as opposed to 'show me the velocity report for this particular category of product.' That's very, very different today.

However, this is the one industry where the 28-year-old wonderkids with the MBAs are not going to get the senior logistics jobs in mature companies that understand what they're doing. They're looking for guys and gals that have been around for awhile, that have walked in the trenches and understand the total business. And that's nice.

Q.If it's all about the customer, what's the next big thing that must be done to boost customer satisfaction?
A. We've got to talk to the customer more. We've got to find out what the customer wants. In too many industries, we decide what that is. You know the expression: 'Dammit, I know what the customer wants, and I will beat him to death to convince him that this is what he needs!' That's not in anymore. The thing that organizations have to be careful of in the fulfillment business - and fulfillment is really the heart of the supply-chain business - is that people now have more and more options. If you don't keep up to date in your model of customer demand and customer need, then you're going to become a dinosaur real fast.
Look at the airline industry. Priceline.com killed the airline ticket market on spare tickets. The airlines said, 'Let the agents and the brokers deal with that.' And Priceline.com and four or five other big internet sites absolutely kicked the airlines' butts at their own game. And what are the airlines doing now? They're doing that themselves. I don't know how much you've read of Clayton M. Christensen - he's the guy from Harvard Business School who talks about disruptive innovations and technology. He wrote a book called The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, and it talks about trends in the industry. What he calls disruptive technology are bottom-feeders - they come up from the bottom and pretty soon they overwhelm the industry. He talks about the disk drive business and computers in the '70s, and about steel in the '80s, how they started building these mini-steel smelting factories. That's what the internet is - it's a disruptive technology. It's interrupting the flow and process of the way we conduct business.

There's a lot of technology in supply chain that is disruptive. So you've got to constantly refresh your system, you've got to understand what's going on, and you have to be mindful of what the customer's looking for. We all live and die for one and only one thing, and that is for our customers to come to us to get stuff. And if we don't have a sincere, updated appreciation of what they're looking for, how they favor getting it, and what their new needs paradigm is, then we're likely to lose them to somebody else.

Herb G. Johnson is executive vice president of supply-chain services for Premier Inc., a non-profit purchasing alliance of hospitals and healthcare systems nationwide. Currently it represents 220 owners and the 956 hospitals and healthcare facilities that they operate, plus 900 other affiliated hospitals. He also is president of Premier Purchasing Partners, LP.
Johnson joined Premier in September 1999. His long career in logistics includes executive positions with CVS Corp., the $16bn pharmacy chain; Safety First Inc., the $110m maker and distributor of juvenile safety and hardware products; Polaroid Corp., where he oversaw all logistics activities; and Wang Laboratories. In 2000, he served as president of the Council of Logistics Management.


Q.What do you view as your greatest challenge in the year ahead?
A. I'm in an environment that's totally new to me - healthcare. The supply chain for my organization is more virtual than anything else; you don't manage or control most of it. We are charged with the responsibility of aiding our owners, our primary customers, to improve the way they do business.

Unfortunately, healthcare doesn't view the supply chain quite the same as most traditional businesses. So a significant amount of what I have to do in the coming year is to educate, inform and build a case that supply chain is in fact a methodology that's going to save an industry that's in a lot of financial difficulties right now - that this is a way out. Many people see supply chain as a long-term solution, but they're not sure where to grab the handles. My responsibility is to first describe the platform, build some confidence around the fact that they can use this area to change the industry and to get improvements. They need to know that they can put some energy into supply chain and get something back in return for it.

Q.How do you balance the need for improving customer service with that of cutting costs and minimizing inventory, while satisfying the expectations of Wall Street?
A. These all lead to the same functional end point. If you have the right amount of inventory in the right place, you can enhance sales. That does not necessarily mean more inventory. It's a science that has only been grasped by our industry in the last 10 years. It's classically important that you've got enough product to satisfy demand. But the single most powerful influence on inventory is velocity. That's the secret of improving the efficiency of a company's largest line items.

Q. Have inventories typically been high in the healthcare industry?
A. I'm not sure they know how much inventory they have! It's kind of like once it's paid for, it's assimilated into the process.

Q. You would think that an industry that involves so many critical items would need to have a handle on inventory.
A. I believe there are healthcare providers who know this information very well, but it is not the traditional way. I could name owner hospitals of ours that do a very good job of this, but I'm telling you that classically that is not the model.

Q. What is your feeling about top management's understanding of the importance of the supply chain and logistics today, as a tool for competitive advantage and customer service?
A. The proof is in the pudding on this one. Look at organizations with chief logistics officers, then look back five years to see if those positions were even part of the senior management team. This is a revolution that has taken place. I really believe that chief logistics officers have not been brought in to single-handedly prune away the expenses of the organization. Many companies are beginning to see that logistics and supply-chain management are competitive weapons, and that you need highly skilled people in this marketplace.

I can remember a senior executive who had a lot of respect for me, and for the experience I brought to the organization. He was really positive about that. But in a period when we were looking for people to run the distribution facility, he said, in a moment that gave me more clarity about the way things got done in this company, 'We can get anybody to run the warehouse. We can take anybody from any part of the company and do that. That's not a job in which we need any particular skill set .' Here's a guy who clearly placed a high value on logistics, but seemed not to understand how it works.

Q. So how do you get the message across?
A. You've got to prove it with accomplishments. You've got to show them. When I was in that organization - and I left there just short of five years - I did some things that had never been done. And one of the things that happened after I left was that they named a chief logistics officer. But once you get the ear of a chief operating officer or chief executive officer, you cannot go in with lightweight opportunities. You've got to talk about major change and opportunities to improve, and you've got to talk in terms they understand, such as improved service, better sales, and how we're going to make profitability better. And if you don't get at those angles, then the goodness of having some guy who understands logistics, running this piece of the business, isn't going to get you there.

Q. Where is the weakest link in the supply chain today?
A. For healthcare, I'd have to say it's information technology. Most of the hospitals or healthcare providers in general are spending anywhere from 3 to 6 percent of their annual budgets on IT upgrades. In the rest of the world, it's somewhere between 8 and 12 percent. Many of them are operating with woefully inadequate legacy systems that do not have the robustness to operate even on existing platforms, let alone be integrated into larger, more complex systems. That's a significant hitch.

Something in healthcare that's creating a terrifying environment is the whole concept of staying alive, of being profitable, of mergers and acquisitions. A lot of healthcare material managers are operating under a theory of fear. I was at a conference eight weeks ago where the speaker said that 75 percent of senior materials managers, in the top 50 percent of the nation's hospitals, would be in different jobs in 18 months. That's terrifying. That's driving a lot of what's happening on the supply-chain side of a lot of the hospitals - give me five or ten million bucks, and take it out anyplace you can.

Of my two favorite corollaries, the first one is that over the last 25 years, there's been more change in the previous five years than in the 20 before that. The second is that in the five years, there's been more change in the last year than in the previous four. There's a huge amount of technology that is available in supply-chain management. The key is trying to understand exactly how much change you can introduce into an organization at once. Some folks have, quite frankly, gotten themselves way out beyond the amount of change that an organization is capable of managing. Sometimes that can cause more chaos than it's worth. There's a point in time where you've got to make strategic decisions on how much change you can push into an organization at one time.

Q. What is your e-business strategy today, and how are you going to go head-to-head with the newer entries in the market today?
A. E-commerce is not hype anymore; it's real and it's here. There's a lot of business being done there. But I'm not exactly sure how much is real, especially in healthcare. At one point two months ago, there were 2,000 sites, most of them not doing any real business. A fair amount of those have fallen by the wayside.

In terms of our own company, we have an e-commerce company, we've pushed that company out, and ended up with a lot of choices being given to us. What we ended up doing was merging it with another company, called Medibuy.com. Medibuy also acquired a company called Impact Health, the e-commerce arm for Columbia Healthcare. So now we have just under 37 percent ownership in the new company, and we are using this as a non-proprietary portal for our e-commerce activity. It is our intent to use this portal to link to all of our 1,800 owners and affiliates, and also to link to all of our business partners.

On the business partner side, there is a lot of activity. Manufacturers and distributors have all got their e-commerce portals. The key here is how you manage the whole B2B connectivity, and how those portals work. We feel that e-commerce is a significant contributor toward us giving the power of information to our owners. And in e-commerce, that power converts to the buyer. The manufacturing and distributing community is probably somewhat reluctant to give the buyer that much power. So we're going to have quite a changing industry over the next four or five years.

In general, e-commerce has changed the way that supply-chain management is conducted. This is not the game it was 10 or 15 years ago.

Today, most companies can dial into their suppliers' networks, look at inventory and orders, and find out whether they're shipped or not. Healthcare's not quite there. Until we can improve the quality on the healthcare side, we're not going to see the benefits that are being yielded now in the rest of the supply chain. Technology and e-commerce are probably going to drive the greatest, most explosive growth of information management in the supply chain of any tool that's going to come along in the short run.

Q. What is the progress of true collaboration with external partners in the supply chain today?
A. There's a little nervousness on both sides about sharing information. In traditional supply-chain environments, where a customer is only looking at his inventories, there have been huge amounts of sharing that made a lot of sense, in terms of improved efficiency of the business. But in some industries, such as healthcare, where there's a significant amount of competitive pricing and activity between vendors, suppliers have created a marketplace where they have control over the flow of information and data around purchases and purchasing volumes. I'm not so sure that they want to give up anything more than the ability of buyers to order product on their systems. The issue of education and information is creating some uneasiness, as least on the vendor and distributor side of the business.

Collaboration is the only way to go. I've seen far more collaboration in all of the verticals that I worked in previously than I see in healthcare now. I believe this is going to be an evolution - the buyers are going to demand the information. Organizations like Premier, which act as virtual facilitators in the process, will create enough demand for that information, and eventually this whole thing is going to fall. I will tell you that in five years time, pricing is going to be open and readily available on the internet for everybody that does business like we do. I don't think there are going to be any secrets on pricing. People will compare and buy what they want from whom they want, and how they want. That's not where we're at today.

Q. But you wouldn't want a world that was completely governed by price, would you?
A. Price is not the only determinant in buying healthcare products. This is not your CVS/Pharmacy; it's not about the difference in price between candy bars. We're talking about an environment where many buyers in healthcare think that some products are commoditized and they are not. There is a clinical efficacy issue around what works best; it can be proved easily by doing clinical diagnostics and following procedures and seeing what the results are. And that's the thing that scares the living bejeezus out of some of these healthcare manufacturers.

Where we are is that we've got a huge business called Informatics. Supply chain is one of the legs of our system, and Informatics - data - is the other. This year we're building a warehouse to store the data for our supply-chain information. In the long run of things, we're going to be able to tie the clinical information, of which we have a fairly substantial amount, into the actual fulfillment processes. So I can show you that clinically, this was the outcome of this procedure or this particular activity, and guess what? We bought a product at this specific price based on which one yielded the best results! That could be pretty terrifying, couldn't it? Especially if you're a person with a second- or third-tier product that's just marginally acceptable.

Q. If you were entering the business of logistics today, what skills would you have to possess that are different from those at the time you started out?
A. I'll give you at least two of them. First of all, one of the things I don't think anybody in logistics ever figured out is that as these jobs get bigger in the organization, the skill set, especially around professional demeanor, is totally different when you're in the boardroom. That was my big "ah-ha," going from being a vice president or even a senior vice president but two tiers down from the executive team. Now you start to move up to the executive vice president level, where you're interfacing with COOs, making board presentations. There's a whole different skill set around visibility, presence and executive demeanor. What worked in one job was pretty good, but it isn't necessarily the right one at the top end.

At the entry level today, people have a higher set of skills in electronic technology. Most of us had to have it hammered into our heads. Entry-level people grew up with computers; they are absolutely comfortable with it. Some of us old fuddy-duddies had to force ourselves just to stay up to date.

The other thing is that they don't come with a lot of biases. They don't have a reference point of 10 or 15 years ago; they don't talk about how things used to be done. Most of these kids are into very statistically oriented organizations. It's not like me 25 years ago, when I used to walk through the warehouse and say, 'Yeah, I think we've got enough stuff here!' - as opposed to 'show me the velocity report for this particular category of product.' That's very, very different today.

However, this is the one industry where the 28-year-old wonderkids with the MBAs are not going to get the senior logistics jobs in mature companies that understand what they're doing. They're looking for guys and gals that have been around for awhile, that have walked in the trenches and understand the total business. And that's nice.

Q.If it's all about the customer, what's the next big thing that must be done to boost customer satisfaction?
A. We've got to talk to the customer more. We've got to find out what the customer wants. In too many industries, we decide what that is. You know the expression: 'Dammit, I know what the customer wants, and I will beat him to death to convince him that this is what he needs!' That's not in anymore. The thing that organizations have to be careful of in the fulfillment business - and fulfillment is really the heart of the supply-chain business - is that people now have more and more options. If you don't keep up to date in your model of customer demand and customer need, then you're going to become a dinosaur real fast.
Look at the airline industry. Priceline.com killed the airline ticket market on spare tickets. The airlines said, 'Let the agents and the brokers deal with that.' And Priceline.com and four or five other big internet sites absolutely kicked the airlines' butts at their own game. And what are the airlines doing now? They're doing that themselves. I don't know how much you've read of Clayton M. Christensen - he's the guy from Harvard Business School who talks about disruptive innovations and technology. He wrote a book called The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, and it talks about trends in the industry. What he calls disruptive technology are bottom-feeders - they come up from the bottom and pretty soon they overwhelm the industry. He talks about the disk drive business and computers in the '70s, and about steel in the '80s, how they started building these mini-steel smelting factories. That's what the internet is - it's a disruptive technology. It's interrupting the flow and process of the way we conduct business.

There's a lot of technology in supply chain that is disruptive. So you've got to constantly refresh your system, you've got to understand what's going on, and you have to be mindful of what the customer's looking for. We all live and die for one and only one thing, and that is for our customers to come to us to get stuff. And if we don't have a sincere, updated appreciation of what they're looking for, how they favor getting it, and what their new needs paradigm is, then we're likely to lose them to somebody else.