E-ORDERING IN THE PHARMACEUTICAL SUPPLY CHAIN

Explaining Standardisation from a Collective Action Perspective

Stefan Schellhammer, Kai Riemer and Stefan Klein

European Research Center for Information Systems (ERCIS)

Department of Information Systems, The University of Münster

Leonardo-Campus 3, Münster, Germany

Keywords: Pharmaceutical Industry, Collective Action, Standardisation, Interorganisational Information System (IOIS).

Abstract: In this paper, we discuss a unique case of industry-wide standardisation, i.e. the proliferation of an elec-

tronic ordering protocol across wholesalers and community pharmacies in the Republic of Ireland. The exis-

tence of multiple parties involved in the standardisation process and the nature of the standard lead us to

study the case from a collective action perspective. In doing so, the emergence and the diffusion of industry-

wide standards are being studied as distinct but connected set of dilemmas. The case leads us to theorise that

strong industry associations play a significant role in the initiation and success of such standardisation ef-

forts on the industry level. Due to space restrictions this short paper can only provide a snapshot of our en-

tire argument; a long version can be obtained from the authors.

1 INTRODUCTION

The formation of interorganisational information

systems (IOIS) has been widely studied in the IS

literature. Typically, the purpose of an IOIS lies in

supporting, facilitating, or improving inter-

organisational (business) transactions, with elec-

tronic data interchange as the core building block. In

this paper, we specifically focus on vertical informa-

tion systems (VIS) that promote data exchange and

business process coordination between business

partners along the supply chain. In doing so, we

concentrate on the development of core standards as

a prerequisite for the development of interoperable

systems among the business partners. The core stan-

dards encompass communication protocols, message

syntax and semantics, such as product codes. De-

spite the large body of literature on standardisation

and IOIS it still remains unclear why in some indus-

tries open standardised IOIS have emerged whereas

in others competing systems developed.

IOIS are sometimes regarded as a strategic de-

vice to improve customer retention through lock-in,

while in other cases IOIS may serve as a means to

collectively reduce transaction costs. In this paper,

we will concentrate on the second type and briefly

juxtapose it with an example of the former type. Our

case covers the standardisation process in the crea-

tion of a universal electronic ordering system in the

Irish pharmaceutical distribution, which took place

during the 1980s. In contrast to the standardised

Irish solution, in the British pharmaceutical distribu-

tion industry several competing electronic ordering

system have emerged.

Our data shows that the resulting differences

cannot be explained by environmental factors like

regulation or by the needs of their users; most of

these factors are strikingly similar. The question

arises what triggered the set up of the Irish system in

this unique way. We will argue that an industry as-

sociation has played a significant role in this proc-

ess, and that the role and importance of associations

for the emergence of IOIS has not been studied suf-

ficiently (Damsgaard & Lyytinen, 2001).

We are facing two challenges: (1) How can we

explain that the initiators or sponsors of electronic

ordering solutions (in our case the wholesalers) par-

tially suspended their competition and agreed on

standards to be used for electronic ordering? (2)

How can we explain the adoption and diffusion

across a heterogeneous and fragmented group of

business partners, i.e. the pharmacies. We will ap-

proach this effort from a collective action theory

perspective. In our analysis we draw on earlier work

conducted in this field (Markus et al., 2006).

Schellhammer S., Riemer K. and Klein S. (2008).

E-ORDERING IN THE PHARMACEUTICAL SUPPLY CHAIN - Explaining Standardisation from a Collective Action Perspective.

In Proceedings of the First International Conference on Health Informatics, pages 20-25

 SciTePress

In the next section we present the Irish case. Af-

ter this we introduce collective action theory before

we analyse and discuss the case.

2 IRISH PHARMACEUTICAL

DISTRIBUTION INDUSTRY

In this section we document how EDI standards

emerged in the Irish pharmaceutical distribution

between wholesalers and community pharmacies.

We begin by introducing our method and give a

brief overview of the pharmaceutical industry in

Ireland. This is followed by a description of the

emergence of the standard itself and its subsequent

use by the actors.

2.1 Method

A case study design has been chosen to conduct the

research, because of the complexity of the research

question and its focus on a rich real-life context

(Yin, 2003). Four semi-structured interviews have

been conducted, two with a representative of one of

the Irish pharmaceutical wholesalers, one with lead-

ing managers at the Irish body of community phar-

macists (IPU) and one with a manager of a large

software system vendor. All interviews were tape

recorded, transcribed, coded and analysed. The data

was evaluated independently by two researchers.

Furthermore, several other data sources were used

for the study – among these are web sites, standards

documents, systems documentations etc.

2.2 Market Structure

The task of the pharmaceutical wholesalers is to

provide a national wholesale service for pharma-

ceuticals for community pharmacies and hospitals.

The relevant market is demarcated by the national

borders. As a result of a consolidation process over

the past 10-15 years, the market in the Republic of

Ireland (R.I.) is nearly evenly divided between three

wholesalers. All Irish wholesalers operate as na-

tionwide full-line suppliers.

On the customer side more than 1400 community

pharmacies exist in Ireland. Irish pharmacists are

represented by a professional body, the Irish Phar-

maceutical Union (IPU), which represents 90% of

all Irish pharmacists. The mission of the IPU is to

promote the professional and economic interest of its

members. This incorporates conducting negotiations

on behalf of the members and the development and

maintenance of a “constructive dialogue with gov-

ernment, agencies and other groups in relation to

matters of mutual interest.” (IPU, 2006)

Three software vendors serve the pharmacy mar-

ket. Their product, the “patient medication record”

(PMR) incorporates the EDI standards as basis for

the ordering module. Around 1300 pharmacies work

with computer systems (typically with electronic

point of sales systems (EPOS) and dispensary soft-

ware).

The wholesale prices for drugs are fixed as is the

margin for wholesalers. However, the wholesalers

de facto pass on a significant part of their margin to

the pharmacies via rebates, bonus schemes and other

price incentives (Fingleton et al., 2002). These pre-

scription drugs are paid by the patients or they are

reimbursed to the pharmacies through a variety of

state-administered schemes (GMS, DPS, LTI).

As a result of these regulations the use of pricing

policies by wholesalers and pharmacies is very re-

stricted. As wholesalers typically offer volume dis-

counts, pharmacies generally use one wholesaler as

the primary supplier and a second one to split pur-

chases and as a fall-back when supply of a particular

product cannot be obtained (Fingleton et al., 2002).

While the wholesalers compete for becoming a

pharmacy’s preferred supplier, the pharmacies use

their bargaining power as a result of low switching

costs: The possibility to switch between wholesalers

alleviates the problem of stock shortage on the

wholesalers’ side, because they risk loosing pharma-

cies in case of repeated stock shortages. Swift deliv-

ery is a crucial element of the pharmaceutical supply

chain. Consequently, most pharmacies operate on

very small stock. This is made possible by extensive

logistics operations. Pharmacies can rely on very

short delivery times and deliveries two times a day

by each of the wholesalers. Wholesalers will ship on

the same day all orders that are received by the cut-

off time late in the morning.

2.3 Emergence of the Standard

In 1984 United Drug (UD), one of the wholesalers,

studied the emergence of electronic ordering sys-

tems (McKesson, see (Johnston & Vitale, 1988)) and

intended to adapt one of the U.S. solutions for the

Irish market. The Irish pharmacies, in dispensing

medicines, only kept handwritten records at the time.

Because pharmacy market regulation varies sig-

nificantly across countries, UD decided to develop a

new solution from scratch. In doing so, UD played

with the idea of developing a proprietary ordering

system; the strategic rationale being to lock-in

E-ORDERING IN THE PHARMACEUTICAL SUPPLY CHAIN - Explaining Standardisation from a Collective Action

Perspective

pharmacies and subsequently to increase market

share. The idea was to take the UK market as a

blueprint where American Hospital Supply had suc-

cessfully established ordering software to lock-in

hospitals.

While the wholesalers claim that they ultimately

realised the shortcomings of a proprietary solution it

was the Irish Pharmaceutical Union (IPU) who

strongly engaged in the process and came out with

an open solution. While the IPU regarded the move

from placing orders over the phone to submitting

electronic order files as a clear administrative advan-

tage for the pharmacies (faster, less errors etc.), key

actors at the IPU emphasised the benefits of a stan-

dardised solution over a number of proprietary solu-

tions for the pharmacies.

As a result, the IPU facilitated negotiations

among the wholesalers to develop both a standard-

ised order data transfer protocol and a common

numbering system (based on EAN). While whole-

salers in the UK were introducing product number-

ing based on the PIP code, IPU had been negotiating

with EAN (at that stage it was EAN UK, today it is

GS1 Ireland) to use its numbering scheme. The idea

was to administer a central product identification

number that does not differ between wholesalers, as

was (and is) the case in the UK (Chemist&Druggist,

2007). In order to facilitate the introduction of EAN

numbering codes, the IPU itself applied for and was

granted manufacturer status in order to be able to

assign EAN numbers to pharmaceuticals.

In parallel, the IPU facilitated negotiations

among the wholesalers and system vendors. Consen-

sus on a common protocol was achieved after about

6 months. At the time, half a dozen system vendors

developed pharmacy solutions and all of them in-

cluded the electronic ordering standards into their

packages. Conceptually, this led to the proliferation

of different IOIS, all of which are using the same

standardised EDI components (see Figure 1).

2.4 System Usage and Maintenance

The diffusion of electronic ordering happened

gradually over a 10 year period; today, all pharma-

cies are able to order electronically and the transac-

tions between wholesalers and pharmacies are still

based on the same system. Surprisingly, even the

modem-based communication protocol has survived

virtually unchanged. Electronic ordering (eOrdering)

accounts for 90 percent of all orders.

The wholesalers’ systems accept incoming or-

ders (wants lists) via a modem connection and send

back an order confirmation. If all items on the

“wants list” can be supplied no response is sent. In

any other case the systems send back a list with un-

available items. Furthermore, bonus items are re-

ported back to the pharmacist in this way. The

pharmacy can then immediately turn the list of out

of stock items into an order with one of the other

wholesalers.

The IPU-product file is a complete list of all

products available in an Irish pharmacy. It identifies

each item by an IPU-number. Furthermore, the file

also contains characteristics of the product (package

size, ingredients and toxic class), consultation ad-

vices, prices and additional codes for reimburse-

ment. For maintenance and administration of the

file, the IPU operates a dedicated department. The

IPU distributes the product file on a monthly basis to

all pharmacies, wholesalers and system vendors.

The order protocol uses the IPU product file for

product identification and the IPU communication

protocol called IPUCOMMS v 2.4a for the modem

dial-up link from the pharmacy to the wholesalers.

order

module

codes,

protocols,

messages

order

module

IOIS

wholesaler system pharmacy system

non-standardised

components

standardised

components

Figure 1: Components of the IOIS.

3 COLLECTIVE ACTION

The case presented above shows the development of

common EDI standards, which are the cornerstone

of the electronic ordering system that is still used in

Ireland today. We argue that the presented phe-

nomenon of joint standard development can be in-

terpreted as a case of collective action.

The Theory of Collective Action deals with the

provision of public goods. It explores the market

failures where individual rationality and self-interest

do not lead to an efficient provision of public or col-

lective goods. Please note that, in our case, we are

looking at standards as an instance of non-pure pub-

lic goods, i.e. club goods that belong to a sub group

of the market (they are excludable (Kindleberger,

1983)), but share similar characteristics.

Markus et al. have studied the consequences that

collective good characteristics have on standardisa-

tion. (Markus et al., 2006) They differentiate the

HEALTHINF 2008 - International Conference on Health Informatics

development and the diffusion of standards as two

distinct dilemmas. They come to the conclusion that

for a successful standardisation both need to be

solved at the same time.

The dilemma of the development of a standard

refers to the different areas of conflict that exist

when a standard is developed in a consortium: Con-

flicts of interest refer to the heterogeneity of inter-

ests among the actors; conflicts of alignment refer to

the cost of aligning internal systems to the new stan-

dard; and conflicts of appropriation result from dif-

ferent cost/ benefit structures of the actors (Müller-

Tengelmann, 1995). Mechanisms have to be found

to solve these conflicts to ensure successful stan-

dards development.

The dilemma of the diffusion of standards refers

to the incentive to delay the adoption of a standard

until a critical mass has been reached. The diffusion

of public goods (e.g. communication standards) is

often hampered by what is called the penguin effect

(Farrell & Saloner, 1987): Early adopters cannot

capitalise fully on the standard as long as no other

actor adopts the standard (negative network effect).

The interconnection between both dilemmas has

been described by Markus et al.: “…standards con-

tent can be seen both as an outcome of the mecha-

nisms employed by a VIS standards-setting consor-

tium to resolve collective action dilemmas and as an

input to diffusion on the VIS standards devel-

oped.”(Markus et al., 2006)

The successful development of a standard is the

conditio sine qua non for its diffusion. However, it

does not guarantee the success of the standard in the

market. To the contrary, strategies to solve the de-

velopment dilemma can turn out to be counterpro-

ductive for its diffusion. Hence, the dual dilemma

situation can only be solved if both dilemmas are

targeted simultaneously.

4 CASE ANALYSIS

In this section we analyse the driving factors behind

the standardisation process in the Irish case using

collective action as the conceptual framework.

4.1 Standards Development

While different actors claim ownership of the idea of

a standardised product code, the IPU certainly has

been one of the most vocal advocates of standard-

ised solutions at a time when some of the wholesal-

ers were still considering proprietary solutions. Their

rationale was threefold: a single standard in the Irish

market would facilitate the existing practice of order

splitting and thus maintain the lever by which the

pharmacies executed their (small) power vis-à-vis

the much bigger wholesalers. Secondly, standards-

based electronic ordering would be the most effi-

cient way of ordering and would help to reduce

transaction costs. Thirdly, the Irish market is too

small to justify competing solutions.

Moreover, the IPU clearly played a crucial role

in facilitating and moderating the negotiations be-

tween the wholesalers. The IPU provided a neutral

venue and drove the negotiations without being per-

ceived as partisan. In effect they facilitated joint

action of the wholesalers. The negotiations took

about six months which were regarded as efficient

by the participants.

In doing so, the IPU played a triple role: Next to

the moderator or broker role, the IPU represented

the pharmacists and their interests. Given that they

represented the overwhelming majority of pharma-

cists, they had a strong mandate to articulate their

constituents’ interests. Through this representative

participation, they not only pushed hard for a stan-

dardised solution but also shaped the design of the

standards. Moreover, the IPU provided some initial

assurance that the solution would be adopted by the

pharmacies, the prospective adoptors: the IPU de

facto overcame the fragmentation of the pharmacies

and ensured that the new system would perpetuate

and indeed facilitate the established practices of or-

der splitting. Thirdly, the IPU became the secretary

of the standardisation process; in particular they

agreed to take the role of developing and maintain-

ing the product codes (IPU product file). Thereby

they ensured the sustainability of the chosen solution

and reinforced their role in the market by securing

an additional revenue stream based on the license

fees for the product file.

All in all the IPU managed to contain the con-

flicts of interest among the wholesalers (horizontal

conflicts of interest) as well as potential conflicts of

interest between the wholesalers and the pharmacies

(vertical conflicts of interest).

The alignments required of the internal systems,

as another potential area of conflict, could be kept to

a minimum by developing a product code that con-

forms to the EAN-13 standard that was already be-

ing processed by the wholesalers. Thus, no major

alignments were required. With respect to the order-

ing protocol, the negotiating process has been de-

scribed as very cooperative in the sense that differ-

ent needs of the participants were accommodated.

Under the prime aim to hammer out a common pro-

tocol, the wholesalers tried to make sure that it

E-ORDERING IN THE PHARMACEUTICAL SUPPLY CHAIN - Explaining Standardisation from a Collective Action

Perspective

would dove-tail with their systems. Furthermore, the

scope of the solution was kept lean so that align-

ments were kept to a minimum.

Conflicts of appropriation are the third area of

potential conflict. Our data reveals no indication of

this type of conflict. Ordering protocol and product

file are administered and maintained by the IPU. The

IPU refinances these activities through licensing fees

from wholesalers and manufactures. Our data does

not indicate that this division of tasks has ever been

challenged by the actors.

The case shows a successful development of a

standard. This is especially interesting as in other

countries with similar characteristics like the UK

(but also Australia) proprietary solutions exist. Good

reasons can be found for either option: competitive

advantages and customer lock-in on the one side,

efficiency and swift diffusion on the other.

However, in the Irish case it was the IPU who

facilitated the development of a joint solution. As

the wholesalers are the main beneficiaries from elec-

tronic ordering, the IPU was in a position to articu-

late requirements on behalf of the pharmacies while

providing assurances of the adoption and diffusion

of the solution. Today, the product numbering

scheme can be seen as a new power basis for the

IPU. The IPU succeeded to preserve that power ba-

sis against the PIP-code solution of the wholesalers.

Thereby the IPU was able not only to satisfy needs

of its members but also to bring itself in a better po-

sition for future negotiations. In the end, the whole-

salers made themselves dependent on the IPU and its

product code.

4.2 Standards Diffusion

While the literature reports cases where the parties

involved in the standard development later blocked

or delayed their diffusion, the Irish pharmaceutical

wholesalers embraced and supported the new stan-

dards. All wholesalers have integrated the new or-

dering standards into their own systems. The same is

true for the system vendors supplying the pharma-

cies with the software.

While the IPU encouraged its members to install

and use the new electronic ordering facility, it is

reported that in the beginning pharmacists have been

reluctant to use the new technology; they saw the

advantages of the new system on the wholesalers’

side. The wholesalers initially responded with dis-

counts on electronic orders. Today, about ninety

percent of all orders reach wholesalers electroni-

cally.

The high implementation ratio of wholesalers

can be explained by the low costs of alignment and a

lack of feasible alternatives due to the bargaining

power of the pharmacists represented by the IPU. No

wholesaler tried to impede the development process

openly. And any attempt to promote a proprietary

system by an individual wholesaler afterwards

would not have been tolerated by the pharmacies,

but would likely have encouraged them to switch to

the other wholesalers. Furthermore, all system ven-

dors took part in the negotiations. A multiplicity of

proprietary standards would not have been in their

interest, because pharmacists would have pressured

them to build software incorporating all different

standards.

Several factors can be identified that favoured

the industry-wide standard and ultimately triggered

its success: First, the IPU has a strong standing to-

wards the wholesalers. The wholesalers were very

aware that anything that would run against the inter-

est of the pharmacists would face strong and painful

opposition by the IPU. Furthermore, the IPU was not

taken by surprise when the wholesalers started to

develop electronic ordering solutions. Rather, the

IPU was aware and attentive towards these new

technologies and their implications for its members.

This set the IPU in a position to intervene at an early

stage, where the different stakeholders had not yet

firmly committed themselves nor invested into a

particular technology. Timing was critical and the

IPU clearly used it to its advantage.

Another factor that facilitated the industry-wide

standardisation can be seen in the relatively small

group of wholesalers operating in a small and con-

fined market. Regulated prices and margins pose a

high pressure on wholesalers to optimise their proc-

esses and save costs in warehousing, delivery and

order processing. Therefore a high incentive existed

to get such a system working and thereby streamlin-

ing the order process.

5 CONCLUSIONS

While we are interested in the ordering system as a

VIS or IOIS, our analysis has focused on the under-

lying standards as core prerequisites of interorgani-

sational solutions. The Irish case reinforces the no-

tion that standardisation processes for VIS are in-

deed precarious. Proprietary solutions have been

considered by the initiators and have been chosen in

other countries with plausible strategic motives.

Our data supports the notion of a dual dilemma

of standardisation, which needs to be addressed si-

HEALTHINF 2008 - International Conference on Health Informatics

multaneously. The dilemma implicitly also ad-

dresses the need to overcome horizontal competition

(among wholesalers) and vertical conflicts of inter-

est (among wholesalers and pharmacies).

With respect to our research questions we have

found theoretical explanations for the unique case

situation. The single most important part of our ex-

planation rests on the role, power and reputation of

the IPU. The IPU facilitated to initiate and moderate

collective action initially among the wholesalers and

subsequently with an increasing mandate and role

for themselves as party to the negotiations. By repre-

senting the overwhelming majority of the pharma-

cists they overcame the fragmentation of the market

and changed the power dynamics in the negotiations.

Moreover, they provided assurances with respect to

the adoption of the standards. The IPU established

themselves successfully as standards keeper. The

availability of widely accepted standards like EAN

product coding schemes clearly helped to build

credibility and to enhance the acceptance of the cho-

sen solution.

The wholesalers as initiators of ordering systems

agreed on common standards because they saw (or

were alerted to) the obvious interests of the pharma-

cies as potential adopters.

However, the constellations of actors, historical

and regulatory environment has been quite unique.

While we have found theoretical explanations for the

outcome ex post, similar developments are still far

from predictable. The notion of causality remains

contested: too many contingencies and considera-

tions are at play, which could have lead to another

outcome. Hence we have tried to establish plausible

reasons.

The specific actor constellation, in particular the

multiple roles which the IPU played successfully,

explain the achieved consensus. However, there

were a number of facilitating contingencies, which

have not determined the outcome but help to explain

it: The historical coincidence of standard develop-

ment in a technological “virgin market”, where the

business partners had not yet invested in their own

systems, convinced all parties – including the soft-

ware vendors – to pursue the chosen standards. The

area of consensus building (product code, order

message, communication protocol) facilitated the

consensus building. The standards guaranteed inter-

operability between the applications yet in a model

of loose coupling.

In the end, the strong role(s) of the IPU, in com-

bination with the economic benefits (and incentives)

of electronic ordering and the existence of one un-

contested standard, lead to wide adoption and a sus-

tainable solution.

ACKNOWLEDGEMENTS

The study described in this paper is part of a re-

search project (no. 1328/2-2) funded by a research

grant of the DFG (German National Science Foun-

dation) and is concerned with the question of how

institutional and national factors influence structures

and evolutionary paths of IOISs.

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E-ORDERING IN THE PHARMACEUTICAL SUPPLY CHAIN - Explaining Standardisation from a Collective Action

Perspective