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Supply chain management presents enormous opportunities for health care executives seekingto reduce costs across the organization and gain new efficiencies. But to make it a long-termsuccess, they need a program that will consistently measure and track savings.

Even though industry executives know they need to cut costs, it has been difficult for health care organizations to adopt money-saving solutions at the same pace that other industries have. The entire health care sector faces daunting challenges unlike any other – regulatory pressures; declining volume and revenue with a shift to higher copays and deductibles; record malpractice insurance rates and settlements; and HIPAA requirements. In the face of these hurdles, health executives are looking at all aspects of their operations to uncover cost savings and efficiencies. For a growing number of these executives, the most promising area for cutting costs is the supply chain.

Supply Chain Management Solutions Significantly Impact the Top and Bottom Line

For a hospital, the largest expense is labor, and health care facility administrators are well aware of the direct correlation between staffing and patient satisfaction. Therefore, clinical staff headcount is the last area anyone wants to cut. Supply costs, which represents a third of a hospital’s budget, is the second largest expense in a hospital. Inefficient supply chain management has many consequences, from obvious ones such as paying the wrong price for contracted products, which happens an estimated 50 percent of the time, to unintended but serious consequences such as disrupting surgeries, which can happen when proper supplies are not on hand. Lack of accurate information in the supply chain, such as having the incorrect – and often higher – price for a contracted product, also leads to higher costs for the patient, as costs are passed on in the billing process. Ultimately the insurer, which is responsible for reimbursing the hospital at prenegotiated contracted coverage rates for patient care, pays higher rates to cover the patient. Supply cost reductions have a trickle-down effect – once reduced, they are likely to result in lower reimbursement payouts for insurance companies.

In fact, supply chain management impacts not just costs and top-line revenue, but also staffing and patient outcomes. As a result, hospital executives and directors of materials management are coming to look at supply spending as far more strategic and business-critical than ever before. Indeed, over the past few years many hospital executives have come to regard patient care and supply spend as inextricably linked because every dollar saved from the supply chain is a dollar that can be devoted to preserving staffing levels, maintaining current medical technologies, and so forth. With supply spend of $100 million at a single hospital, for example, simply saving 3 percent in supply costs can equal the salary of up to 40 nurses.

Hospitals that do not employ proven supply chain management practices typically experience large supply inefficiencies because the very nature of a hospital drives complex supply needs: As advancements improve and expand care, supply staffs are charged with buying thousands of different items; and the urgency of supplies often requires hundreds of “one-off ” purchases. Meanwhile, administrators lack visibility or information needed to understand the total supply spending or make better decisions about cutting costs. For example, it is common to find hospitals that have millions of dollars of excess stock in inventory, originally ordered to ensure enough of a needed supply would be on hand because the hospital had no accurate way to predict inventory needs.

Also, hospitals that are not taking advantage of electronic connections to suppliers are forced to spend several hours a day on paper-based, task-oriented manual processes that require significant rework to confirm product and order information. Inaccurate data in materials management information systems is a significant problem in hospitals as well. The 2001 Andersen report, “The Value of eCommerce in the Healthcare Supply Chain,” shows that hospitals overpay 2 to 7 percent for contracted medical/surgical products because they are paying the wrong price. In addition, inaccurate product information leads to errors in order transactions that require significant hospital staff time to resolve, adding inefficiency and lost productivity to an already burdened health care supply chain.

Supply Chain Success Defined

Many industries have adopted supply chain management initiatives to transform the way they deal with suppliers, partners, and customers. Companies such as Boeing, FedEx, and Procter & Gamble – whose livelihood depend on strong supply chain management programs – have long invested in supply chain management solutions and have clearly documented value while also gaining insight into the cause and effect of supply spend. In most cases, these supply chain management efforts focused on creating new opportunities to collaborate with other internal and partner organizations, and also leveraged data to drive greater efficiencies and to make better business decisions. Now that similar automation capabilities are tested and ready for health care providers, many hospitals have begun to make investments in the supply chain as part of overall strategic initiatives to drive cost savings that can be redirected into patient care. With these investments, hospitals are now able to leverage technology, information, and services to turn data into “actionable information” – a critical success factor for supply chain improvement.

Obtaining and leveraging data as actionable information is the key to a successful, long-term supply chain management program. It allows directors of materials management and hospital executives to measure performance of the different links in the supply chain, including manufacturers, distributors, and an executive’s own supply department through the metrics of order accuracy, delivery time, and total cost.

Documenting Value Is Imperative To a Hospital’s Financial Health

Measurement is a core principle of effective supply chain management. Because the health care industry has only recently embraced Web-based supply chain automation, many hospital administrators have questions about what kind of ROI can be expected from deploying such solutions. To that end, health care organizations are urged to adopt a method of measuring the impact of implemented technologies on their supply chains in order to really understand the worth of such measures. In one successful example, as part of a pilot study to measure and document the value of supply chain initiatives implemented by VHA Inc. and University HealthSystem Consortium (UHC), 31 hospitals identified more than $12 million in savings, including nine hospitals that documented more than $500,000 in supply spend savings.

The pilot study, conducted by Neoforma and Novation, produced overwhelmingly positive results, proving that hospitals that take advantage of supply chain management initiatives, including adopting Web-based supply chain solutions, can achieve significant savings. In addition, hospitals in the study saw an average 75 percent reduction in confirmation review time and an 80 percent reduction in order discrepancies and suspended invoices. All hospitals were ultimately able to automate critical processes that were previously paper or phone based.

A few highlights:

• Willis-Knighton Health System, a four-hospital system in La., identified $2.6 million in savings in group purchasing organization (GPO) contract utilization opportunities that were previously hidden;
• Premier Health Partners Inc., a two-hospital system based in Dayton, Ohio, has re-engineered its procurement processes and as a result, achieved cost avoidance and savings of over $1.36 million and has been able to automate processes that used to take 36 hours down to a mere two hours; and
• University of Colorado Hospital saved more than $100,000 and an estimated 1,155 staff hours a year with its initial 10 connected suppliers, and has seen a 66 percent reduction in suspended invoices.

The study results point to the compelling fact that hospitals have the opportunity to realize significant value by leveraging an integrated approach to supply chain management, utilizing a combination of technology, information, and services while also implementing a way to measure results. Where this is done, hospitals have been able to redeploy full-time employees that were previously focused on manual, labor-intensive tasks to other positions where their skills are more likely to generate value for the hospital, such as contract administration and negotiation, or even support roles for capital projects. In general, using effective supply chain management technologies and services designed specifically for health care allow a materials staff of seven to act more like a staff of 10.

Measuring and Analyzing Processes Will Identify Pain Points

Industry executives and consultants talk about the importance of total cost management. Few hospitals, however, have been able to measure value and success of adopted supply chain initiatives in a meaningful way that can be regularly used to monitor progress or identify areas of needed improvement. As any health care materials management professional can attest, pulling a single lever within the supply chain process directly impacts the rest of the chain. Therefore, it is essential that hospitals understand where their trigger points are. At every step of the supply management process – from evaluating, contracting, purchasing, and receiving products to storing, distributing, and using them – materials managers must have visibility and control to effectively contribute to the hospital’s strategic cost management initiatives. Using a simple value documentation tool that embodies proven supply chain methodologies can help provide exactly this kind of visibility, helping hospital administrators and materials teams capture their baseline data for these supply processes. With this knowledge in hand, administrators can identify and prioritize problem areas, and then attack inefficient expense points as needed. By having the ability to identify and monitor various trigger points or levers, materials personnel are empowered to immediately improve their supply chain.

One such value documentation tool was recently launched to select VHA and UHC hospitals that use Marketplace@ Novation®, an online health care supply exchange. Using the graphical Web-based tool called Neoforma Success Tracker™ (patent pending) as an example, we can evaluate how hospitals that leverage such resources can more accurately measure and track performance along the entire supply chain.

Hospitals using the tracking tool, including many in the pilot value documentation study, have been able to document improvements and trends in the many areas of the supply chain, including inventory and obsolescence, distribution, freight, EDI, employee redirections, pharmacy, and contract savings. The hospitals have been able to leverage graphs and other visuals to highlight pain points in the supply chain that affect availability and costs (see Figure 1). The software is flexible as well, offering the ability to view progress for individual facilities or at the systemwide level. Materials managers have used the tool to enter and track individual and overall accomplishments, and it tracks savings by contract, supplier, department, or whatever category is most helpful to the user.

Figure 1. Total Inventory Spend Including Inactive Inventory

Setting Industry Standards for Value Measurement

There are many measurement tools available for gauging supply management efforts. These tools, however, are often either too complex to use or too constricted in the scope of factors measured. More importantly, none is specifically designed for the unique and highly demanding health care environment, which is why hospitals have not used them. In evaluating a tracking tool, hospitals should take into account that they have little time to measure and consistently monitor progress, so they should look for a tool that works with a minimum amount of data readily available from a hospital’s general ledger or budget reports. Once a user establishes baseline data, it should only take them a few minutes to enter this data and about five minutes a month to enter performance data for a given month. Hospital administrators and materials directors are urged to research their options and find a tool that enables them to quickly generate information- rich reports for accurately evaluating the health of their supply chain. In addition, the tool should be offered by a technology provider that understands the unique complexities of the health care supply chain and that has built the tool with the hospitals’ business needs in mind.

By regularly using an easy and flexible tool, hospitals can document and measure improvements across the entire supply chain. Having an easy-to-use graphical interface for assessing the impact of implementing new supply chain management initiatives, including the adoption of supply chain management technology, process re-engineering, and staff redeployment, makes value analysis a simpler proposition. Understanding how each lever of the supply chain affects the overall process enables better decision making, enhances communications and supports employee satisfaction.

Some initial steps hospital executives can take to drive supply chain efficiencies across the organization include the following:

Step One – Identify and empower a supply chain champion, usually a vice president of supply chain or director of materials, to take a strategic view of supply chain activities, including evaluation of supply chain management technology, review of supplier connectivity and identification of improvement opportunities across the supply chain.

Step Two – Have the supply chain champion work with finance and operations to enter baseline supply chain data. By getting a complete “before” picture, users will learn where to start making changes to gain a more healthy supply chain.

Step Three – Have the supply chain champion drive connections with your suppliers electronically. These connections and automated order management capabilities will immediately free up resources that were previously dedicated to manual, labor-intensive areas to focus on areas within the hospital that need more “arms and legs.” Automating certain materials processes, such as order management, is akin to adding power to your staff, increasing the impact that your team has on driving day-to-day activities.

Step Four – Have the supply chain champion redeploy buyers onto higher-value savings opportunities such as gaining the proper contract tier price, streamlining the flow of supplies through the hospital, managing inventory effectively, and driving standardization in the organization.

Step Five – Measure your supply chain progress monthly. The goal is to identify pain points, track continuous improvement, and identify best practices that ultimately save you time and money.

Conclusion

The supply chain represents a third of hospital’s total spend, second only to labor. According to a 2001 Andersen report, inefficiencies are great: Hospitals overpay 2 to 7 percent for contracted medical/surgical supplies; half of hospital purchases are made without using a GPO, further contributing to the price variance; manual processes take 40 percent of buyer time and even more in accounts payable; and there is a tremendous amount of rework – up to 35 percent – due to errors in order transactions.

Measuring and documenting the progress of supply chain management initiatives are critical to helping alleviate a heavily burdened process. Understanding the cause and effect of current or newly implemented processes can lead to the adoption and proliferation of best practices to help drive down costs and increase efficiencies across the entire supply chain. Having a supply chain champion to make decisions as part of overall strategic initiatives can lead to best practices, and drive cost savings and visibility of supply chain improvement across the organization. The ultimate results are savings at the bottom line and opportunities to improve overall quality of care.