Supply chain management

From HMCwiki

Supply chain management is often an overlooked subject in healthcare even though it holds great potential for direct cost savings. Many organizations focus almost exclusively on clinical areas when addressing performance improvement opportunities, thereby short-sighting their goal to improve overall operations.

With median operating margins running at a 1.8% deficit^[1], hospitals must aggressively look for new ways to reduce operating costs. Hospitals able to develop supply chain plans that are both comprehensive and favored in the allocation of resources and technology will yield significant savings within each management area of the supply chain, including:

• Product Selection
• Product Sourcing
• Product Distribution

Review and analysis of current systems and processes surrounding these elements will reveal the impact of supply chain savings opportunities for a particular organization.

Planning

Because labor is the largest expense type within healthcare, staffing is typically the key component in a hospital's plan for cost reduction. Labor reduction is a viable solution in areas having excess productivity, however, potential disruptions to reporting relationships, culture, and knowledge-base challenge organizations. An exclusive focus here often leads to lingering decisions and organizational fatigue.

Though labor is the largest expense type, about 25% of hospital costs are supply-related ^[2]. Despite the magnitude of these expenses, senior management decision-making rarely gives the supply chain leadership prominent influence.

A collaborative plan detailing how an organization will standardize, source, and distribute supplies should be a component of any hospital’s road map to success. This requires senior management to make difficult decisions in pursuing best practices and making capital investments (eg. electronic medical records, computerized physician order entry (CPOE), systems for tracking patient bills, supply identification technologies). Investments in clinical applications are important, however, appropriations for materials management initiatives should be given a high priority considering the size of expenditures related to supplies.

Product selection

Identifying items accounting for the largest portion of supply costs by vendor reveals products with the largest bottom-line impact from utilization and standardization initiatives.

Establishing demand-matching criteria is an effective way to control supply utilization by addressing practice and purchasing patterns. To acquire the transparency necessary for a full understanding of these patterns, hospitals should pursue efforts to create and maintain standards for product descriptions.

Standardizing supplies is key to preventing supply costs from spiraling out of control. A lack of standardization protocols burdens organizations with a proliferation of items and vendors, overwhelming materials management resources. Hospitals should critically evaluate vendor and supplier contracts regularly for opportunities to reduce the number of similar or redundant supplies. Substituting like items through standardization consolidates volume, therefore providing greater leverage with suppliers.

Physician preferences challenge an organization’s ability to standardize items, especially high-dollar items. Recruiting physician support early and often in the standardization of as many items as possible is essential. Physicians have a major stake in an efficient supply source so that their patients will receive better care by having the right product at the right place, at the right time. Despite this need, there is often perceived disconnect between the benefits of improving a supply chain and physicians' stake in its success. Physician gainsharing can help to engage physicians in their role as part of the supply chain.

Product management can have its greatest impact for hospital systems by revealing pricing inequities. An occurrence of an OR and Cath Lab purchasing the same stent but at different prices, not only between departments but potentially between hospitals in the same system, demonstrates the need for transparency to drive better negotiations with suppliers.

Product sourcing

Standardizing items increases the volume a hospital has with a group purchasing organization (GPO) or supplier resulting in better pricing. Hospitals, however, often maintain multiple GPO relationships in an effort to selectively acquire the best deals. This approach directly opposes the advantages of establishing a strong relationship with a primary GPO, an ideal way to gain consistent long-term pricing advantages^[3].

Evaluating renew dates of vendor contracts, particularly on high cost items, provides another opportunity for cost reduction. If contracts renew automatically without formal review, organizations, in turn, forgo a significant opportunity to determine if more favorable pricing can be negotiated.

Hospitals should also conduct continuous audits to ensure that they are in fact getting the contracted pricing agreed to. Hospitals can over pay for contracted medical and surgical products by 2% to 7%^[4].

Reviewing purchase patterns from within an organization is crucial to preventing purchases that can lead to a proliferation of items not found in the product management protocols. It is helpful to establish gatekeepers in an organization through which purchase orders must be approved.

Product distribution

Expanding distribution options yields savings by displacing intermediaries that add little to no value to the procurement process. One approach is to investigate the financial benefits of purchasing supplies directly from manufactures. Direct purchasing is becoming increasingly easier through e-procurement and supply networks such as the Global Healthcare Exchange.

Direct purchasing is one component of a multi-channel distribution strategy. Establishing a distribution center to support a complex distribution network can only be justified for large systems with the scale to support it. Large systems should seriously weigh the benefits and costs of this option. Another way to manage the complexities of a multi-channel distribution strategy is to seek a third party logistics provider to facilitate warehousing and transportation of products. When evaluating distribution options, hospitals should evaluate postage and freight expenses in their analysis.

Technology

Healthcare lags behind other industries in supply chain efficiencies. Healthcare's comparatively low investment in IT, on average 3.5%^[5] of total operating cost, contributes greatly to this deficiency. Therefore, large opportunities exist for hospitals to make great gains in efficiencies though IT implementations.

Generally, technology has its greatest influence on inventory tracking and the replenishment of inventories. Barcode technologies are commonly used to effectively support inventory management. Wireless technologies and handheld devices provide steroids to boost this technology's impact.

Radio frequency identification (RFID) is an up and coming technology, and, though expensive and still in its infancy, it may be worth investigating particularly for organizations that anticipate bypassing barcode technology, leaping to an inventory control technology with greater penetration in the overall operations of an organization.

While technology is an important element in gaining greater supply chain efficiencies, it is not a requirement to make large strides in expense reduction. Large savings opportunities can be found through a disciplined approach in managing and sourcing supplies.

Summary

By actively managing the selection, sourcing, and distribution of supplies uncover numerous savings opportunities in supply chains. Organizations should focus on developing an overall plan that addresses each of these management points. Because improvements through supply chain planning can yield a significant competitive advantage, senior leadership should seriously consider giving supply chain initiatives a high priority in an organization's overall strategic road map. Leveraging technology and investments that enhance operational processes in order fulfillment and product replenishment ultimately reduce operating costs. Quick hit improvements can generate the momentum to pursue more involved solutions.

References and resources

1. ^ Healthcare Financial Management Association, 2003
2. ^ Byrnes, Jonathan, "Fixing The Healthcare Supply Chain", HBS, Apr. 2004
3. ^ UPS Supply Chain Solutions, "Supply Chain Improvement Opportunities", 2005
4. ^ Task Force on Supply Chain Management, "Improving Supply Chain Management for Better Healthcare", Nov. 2001
5. ^ Based on The Healthcare Management Council's comparative data

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