Improved purchasing has played an important role in US hospitals’ efforts to cut costs and raise profit margins in the competitive market of the past decade. Given that a multihospital system with a $1 billion operating budget spends $300 to $350 million a year on medical supplies and purchased services, it is easy to see why. Improving purchasing can, moreover, reap significant savings without the need for job losses.

To date, many of these savings have been made by channeling purchases through group purchasing organizations (GPOs). The buying power of large GPOs is impressive: the three biggest (Premier, VHA/UHC, and AmeriNet) each bought goods worth more than $4 billion in 1997, giving them the clout to exert price pressure on suppliers, particularly for products in lower demand. And as GPOs have consolidated, manufacturers have offered bigger discounts to hang on to their contracts. None the less, hospitals have so far only scratched the surface of a much larger supply management opportunity.

Compared with the sophistication of supply management in some other industries, supply management in US hospitals is undeveloped. The automotive, electronics, and aerospace industries, for example, have earned billions of dollars in pre-tax profits during the 1990s by...