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| Materials managers are under mounting pressure to cut costs in a supply chain hit hard by the recession. And experts say the situation is going to get worse before it gets better. But by working closely with your GPO and networking with other materials managers, there are creative solutions available. They may not be a panacea for all your financial woes, but they can help stave off a crisis in your department. Everyone in the supply chain is feeling the pressure, so collaboration and communication is more important now than ever. |
For many materials managers, the economic crisis was likely met not with panic or dread, but with a weary resolve and perhaps an eye roll. As the rest of the financial world pondered how to do more with less, materials managers could be forgiven if they whispered under their breath: “So what else is new?” Materials managers have worked with razor-thin operating margins for years. They’ve been short on cash and heavy on credit. They’ve dealt with payers cutting reimbursements and oil prices skyrocketing to as much as $150 a barrel. “There’s no doubt that materials managers are under extreme pressure right now,” says Dan Piro, president of Aspen Healthcare Metrics. “When it comes right down to it, these are tough times and no one knows how long this will last.”
Hospitals have heard dire forecasts before. And, for the most part,the industry has weathered past financial storms. But while materials managers have reason to think that the economy may not capsize their ships, there are some indicators that it could hit health care harder than past blowups. Typically, experts say that health care isn’t immune to economic cycles, but lags six to 18 months behind the rest of the economy.
The typical materials manager “woke up three months ago and had interest income of roughly $4 million a year,” says Mike Alkire, president of Premier Purchasing Partners, Charlotte, N.C. “Today, the interest income on an annualized basis is somewhere around $2.4 million per year. If your interest income is 60 percent of what it used to be, that has to have an impact on your bottom line.” At the same time, the credit crunch has made it more difficult for hospitals to borrow cash and has inflated interest rates. Alkire estimates that hospitals have historically paid about 4 percent in interest, but are now being asked to pay more than 6 percent. That’s made times difficult for health care organizations that rely on financing for capital acquisitions, Alkire says. And revenue streams are shrinking as well. Hospitals fear a drop in elective surgeries if patients wait until the economy recovers. Alkire says state and federal agencies are trying to cut payments as they guard against reduced tax revenues and deficits.
Many medical suppliers say they had no choice but to boost costs to keep up with raw materials, inflation rates and a weak dollar. In announcing price increases, Kimberly-Clark Health Care, Roswell, Ga., said it did “everything possible to avoid increasing prices” in a statement by John Amat, vice president of health care sales and marketing.
Kimberly-Clark isn’t alone. A survey of Premier customers revealed that its suppliers were as much as 40 percent likely to raise costs in the next year. And some have already taken these steps. In addition to surcharges on everything from furniture equipment to fuel costs, petroleum prices have caused spikes on items such as surgical gloves and syringes. Terry Carney, a materials manager at Anne Arundel Medical Center in Annapolis, Md., says his supplier, citing the economic climate and energy costs, “is looking to increase our cost for product by 140 percent.” Carney says delivery fees will push the increase to more than 200 percent.
Even as gas prices drop, a survey by the Health Industry Distribution Association (HIDA) suggests that materials management isn’t likely to see relief any time soon. Andrew Van Ostrand, HIDA’s vice president of policy and research, notes that distributors’ fuel prices are impacted by global forces such as international tax policies, monthly exchange rates and domestic shipping costs.
Under pressure
The pressures on materials managers to meet margins and control costs hasn’t changed either. Struggling with everything from declining reimbursements to rising materials costs, materials managers are under pressure to show instant results.
“Hospitals all over the country are suffering from rapid changes in the economy,” says Liz Veazey, R.N., a clinical consultant with Owens & Minor.
Some health care settings are freezing spending or delaying capital projects. But, ultimately, administrators are looking to the supply chain to cut costs.
“More than ever, materials managers are going to come under intense scrutiny from their CFOs,” says Beverly Slate, a materials manager and associate vice president at Quorum Health Resources (QHR). “They’re looking at how you meet your margins, what kind of creative relationships you develop with your suppliers and data-driven evidence on where to trim the fat in the supply chain.”
And that doesn’t take into account materials managers’ unease about their own jobs. According to a Business Week survey, the health care industry as a whole has increased jobs of late. But not all materials manager feel their positions are safe.
“Materials managers are operational. The department doesn’t make money, it spends it,” says Mary Ann Michalski, AHRMM president and national account manager for the Alabama-based Surgical Care Affiliates. “Usually health care institutions will tend to cut back in operations when they are laying off.” Veazey can point to her own experience. Until recently, she was the business manager for preoperative services at a multihospital system, which she asked remain unnamed. She moved to Owens & Minor when that job was eliminated.
“I think this is going to affect a lot more people if the economy doesn’t have a turnaround in 2009,” Michalski says.
Many materials managers who keep their jobs might find themselves struggling to define their roll within the hospital hierarchy. QHR’s Slate notes that many materials managers are asked to shoulder the blame for supply costs—and come up with creative solutions—without having purchasing decision-making power. Slate says it’s imperative for materials managers to meet with administrators and ensure that they have the clout of internal consultants. “At a minimum, a materials manager has to be seen as the one who can best manage products and pricing.”
Commanding order
Materials managers may be tempted to immediately appeal to suppliers and GPOs for cost management solutions. Indeed, Slate says they should carefully review their supply contracts to make sure they’re receiving all the benefits to which they’re entitled. “You’d be surprised at how few people have actually read the fine print on their supply contracts.”
But while materials will ultimately need to evaluate their relationships within the supply chain, Mark Miriani, president of MedAssets Supply Chain Systems, advises them “to look for more than just price-at-the-pump. If we want the supply chain to work efficiently, it has to be a two-way street.”
The materials staff at MidMichigan Health, Midland, agrees. Before looking to the outside, Jeff Wagner, MidMichigan’s vice president of materials management, made sure his own house was in order. He began by reviewing both his staff and processes, searching for ways to cut inefficiencies. “You want to get lean—and not just in challenging times,” he says. He identified repetitive positions that could be cut without leaving his facility short staffed. In particular, he says, materials handling par level staffing offered opportunities to contract resources.
At the same time, he analyzed each of the hospital’s materials processes and asked himself what could be eliminated. “The distribution process—supplies, equipment, mail, radiology films, lab specimens, areas such as that—is a field that holds a good deal of opportunity for change,” he says.
Wagner took advantage of networking and professional associations such as AHRMM for contacts and educational programming. He also used supply chain listservs for tips from other materials managers and suggests that supply chain managers look beyond product costs for the true savings generated by standardization and clinical utilization management.
He instructed his staff to focus not just on working with suppliers to reduce costs, but also make outcomes-based, data-driven purchasing decisions. “Why buy a 64-slice CT scanner when a 16-slice meets all of your needs?” he says.
In fact, Wagner says the economic collapse may have handed materials staff an opportunity. Priorities such as standardization and utilization assessments may receive greater attention in financial hard times as administrators see that yesterday’s materials management wish list items are now fiscal necessities. “The economy is making our standardization case for us,” he says.
Slate agrees that, revitalized by a cost-cutting mandate, materials managers are better prepared to approach clinical staff about preference items and reducing supply chain variability. But materials staff should be armed with data. Good information systems and master file maintenance can serve as benchmarks for tracking wasteful product use and poor purchasing scenarios.
“Information systems are vital,” Wagner says. “Your [hospital administration] wants to see those cost numbers in black and white.”
The dotted line
Still, materials managers will inevitably look to the other links in the supply chain—vendors, distributors and GPOs. And in each case, experts say, they should be prepared for negotiations, hard sells and compromises. “Everybody [in the supply chain] has to take their share of lumps,” Wagner says. “If we can stick together, we might come out of this a little faster.”
HIDA’s Van Ostrand says that hospitals should collaborate with distributors on ordering strategies. Hospitals can see significant savings simply by packing more items on trucks, he says. But don’t count on distributors to suggest fewer truck runs. More often, it’s the hospital supply side that must coordinate inventory to reduce shipments.
Likewise, hospitals may feel like the economy has made them subject to the pricing whims of suppliers. But Slate notes that the credit crunch has had devastating effects on vendors, too. Materials managers have more leverage than they realize, she says. And now is the time to propose creative options (see sidebar below). Materials managers say they will rely more than ever on GPOs. “This is where GPOs can really make their mark,” Wagner says.
Alkire says GPOs such as Premier are willing to explore nontraditional agreements that reach beyond departments such as pharmacy and med-surg. Creative agreements can offer savings, but require discussions with departments outside of supply chain and materials management, he says.
From the materials management perspective, Slate says hospitals are missing an opportunity to get more from their GPOs. “I want them to come to me with money-saving ideas,” she says. Slate has a standing monthly meeting with her representatives. She instructs them to arrive with cost management solutions, and they often leave with homework.
As the recession continues, materials managers, suppliers and GPOs are likely to eye each other with suspicion. But, Van Ostrand says that mistrust in the supply chain can only make a bad situation worse. Instead, he predicts that the financial forecast will force all players to come together. “We are entering an area of open communication and more effective partnership,” he says.
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| Creativity in materials can pay off |
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Deferred payments: Customers in good standing can trade on their long-term relationships to delay vendor payments or make partial contributions, says Mike Alkire, president of Premier Purchasing Partners. Group buys: These can be major savings drivers—up to 15 percent beyond regular contract pricing, Alkire notes. Group buys also may include special rates for financing, trade-ins, training, services and extended warranties. Risk-sharing: Some vendors may be willing to explore agreements that split economic risks and poor investment returns. Materials managers can share the upside of a robust economy while protecting against downfalls. Calls for consignment: Some vendors offer consignment policies with flexible options. Beverly Slate, materials manager and associate vice president at the Quorum Health Resources, notes that vendors are amenable to consignment plans when hospitals agree to eventually move some items to a more traditional buy. In exchange, hospitals can see major price concessions.—J.D. |
This article first appeared in the January 2009 issue of Materials Management in Health Care.
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