Supply Chain
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Hospitals and health systems need to focus on achieving operational cost structures similar to some of the nation’s most efficient retailers. For most health care organizations, this will require significantly reducing the percentage of supply chain spending on logistics. To get a firm handle on what your organization spends in this area, start by performing an assessment that focuses on key elements of the supply chain. This will help shift your focus on logistics from the manufacturer to your organization, so you can better manage these costs. |
Within the past several years, the term “supply chain” has become part of our daily vernacular. Even though health care was somewhat late to the game of supply chain management, the key elements have nonetheless become frequently practiced.
Now is the time to step up our supply chain practices particularly in light of the economic crisis.
We in health care spend way too much time on price (i.e., 70 percent of all GPO contracts are renegotiated) and not nearly enough energy and focus on the logistical aspects of supply chain management.
The 1996 Efficient Healthcare Consumer Response Study (EHCR) pointed out that other industries have far lower logistics costs in their supply costs than health care.
For example, two highly efficient industries—retail and electronics, respectively—devote 2 percent and 5 percent of their supply costs to logistical costs while health care spends a whopping 38 percent in this area.
Since the 1996 study, nothing has really changed to lower the logistics costs of supplies in health care. There are still far too many manufacturers that ship direct (443 per health care organization) instead of using a more highly efficient distribution partner.
Distributors are forced to deal with far too many manufacturers and SKUs to accommodate everyone’s preferences.
If the health care supply chain won’t change, then each health care organization has to be better prepared today to deal with the intricacies of the world we live in. One way of doing that is by developing a supply chain plan that has a significant focus on logistics.
When implemented correctly, logistics can deliver operational efficiencies, a competitive advantage and enhanced value—if you doubt this, take a few minutes and study Wal-Mart or other large retailers.
Once a purchasing decision is made at Wal-Mart, there is no additional renegotiation of price at each store, no sales reps visit each store and sell directly to a manager or department head on the features and benefits of their product.
After a manufacturer has received the order from Wal-Mart, the rest of the selling process is based on logistics, fulfillment and continuous replenishment all the way back to the manufacturer’s raw materials suppliers.
To have significantly lower operational cost structures, eventually the health care industry needs to get to the levels of a Wal-Mart, Nokia, Dell or other highly efficient retailers and their suppliers.
But in the meantime, we need to do as much as we can with the elements we already have during these economically challenging times. That is where being prepared comes in and having a supply chain plan in place that focuses on logistics and taking advantage of the different channels available in health care.
A supply chain plan with a focus on logistics will provide a health care organization with the ability to manage its procurement, order placement/management, receiving, warehouse and moving of all key suppliers through an entity at the lowest total delivered cost.
This ensures providers have the right product at the right time to deliver the highest quality health care.
Developing the logistics plan for your supply chain requires accounting for the key elements of supply chain, including:
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Sourcing
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Procuring
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Ordering
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Order management
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Freight (direct or distributed)
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Receiving
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Warehouse/storage
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Product movement (internal)
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Accounts payable.
Identifying the key elements to focus on requires a basic assessment of your organization’s capabilities—both current and future—with that of your current and future needs with regard to the following:
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Receiving dock/space
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Warehouse/storage
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Materials team resources (human and technological)
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Physical/geographical locations of the entities you serve and their service requirements.
Once the assessment is complete you will have a clear picture of what you can and can’t do from a logistics standpoint. For example, if you do not have at least 30,000 to 40,000 square feet of dedicated warehouse space, the chance of implementing self-distribution and replacing your med-surg distributor isn’t good.
| Percentage of logistics costs per industry segment |
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Source: Efficient Healthcare Consumer Response (EHCR) Study, 1996 |
Taking control
With the information your assessment provides, you can focus on how to deal with what the manufacturers require of us.
On average, each health care organization uses 1.5 med-surg distributors and deals with 443 manufacturers direct as per a 2005 hospital procurement study sponsored by the Health Industry Distributor’s Association.
Not only is this an extremely high number of direct suppliers, they all ship differently and from a variety of different points. The best logistics solution is to take advantage of both direct or distributed channels.
Work with your distributor to manage as many of your suppliers as possible. Keep them efficient and manage your direct channel to its fullest without mixing them or having crossover. The same study shows that maximizing each channel will lower operational costs.
In the table on page 28, you can see where mixing or crossing products that should be distributed by purchasing them directly can cost your organization significantly in additional handling or process costs.
In the study, a benchmark of $1 million per spend was used to measure health care organizations that maximized their distributor for those items that are best distributed versus those items that are traditionally distributed directly.
Costs and the time spent to acquire items bought directly were two to five times greater than for distributed items. Adding this extra cost can’t be justified.
When a sales rep says he will ship the product directly instead of using your med-surg distributor—with the justification that you will save cost plus the markup—what you are really doing is adding costs and inefficiencies.
We still have to deal with manufacturers who force us to buy from them directly because they can. (This is virtually unheard of in any other industry.)
In this instance, make sure to implement an inbound freight management program. Such a program can save literally hundreds of thousands of dollars a year in inbound freight costs.
But more importantly, using an inbound freight program will provide you with key information you will need for future negotiations to get to the lowest total delivered cost.
Price is not the end game of cost—it is the total cost that needs to be the focus if we are to make significant gains in decreasing costs and keeping them down.
Having this detailed in your logistics plan is key. Identifying each supplier/product and how you will procure/source it will help you stay on track and resist those short-term temptations. (See long-term negative impacts to the left.)
The goal of focusing on logistics is to shift control of the supply chain from the manufacturer to your organization. Until that happens, you will always have to deal with inefficiencies and lack of control, both of which add significant operational costs.
There are many sources of information available on developing efficient and culturally aligned supply chains. One Web site (www.tompkinsinc.com) that I recommend for review is Tompkins Associates, Raleigh, N.C. Jim Tompkins explains in detail the Six Levels of Supply Chain Excellence. The synopsis of these are as follows:
Level 1—Business as usual
This is when an organization works hard at doing its individual functions well. Each organizational element (e.g., finance, IT, human resources, clinical and materials management, etc.) attempts to function well within their individual silo.
Level 2—Link excellence
Before an organization can begin thinking about supply chain excellence, the organization needs to evolve its individual links to make them the most efficient, effective, responsive and holistic it can be. Only after the links achieve performance excellence can an organization begin to pursue supply chain excellence.
Level 3—Visibility
The first step to achieving supply chain excellence is to provide visibility among the links of the supply chain.
Visibility provides the information so that the links understand the ongoing order status and, therefore minimize supply chain surprises. Level 3 is primarily a plan that synchronizes the link demands with their suppliers through the use of technology.
Level 4—Collaboration
Once visibility is achieved, the process of collaboration to understand how to best meet the demands of the marketplace can be pursued. Collaboration will allow the supply chain to work as a whole to maximize customer satisfaction—clinical supremacy while minimizing inventories.
Level 5—Synthesis
When collaboration is achieved, then the continuous improvement process of synthesis should be pursued to allow the supply chain the ability to harness the energy of change. It is from synthesis that true supply chain excellence is achieved.
Level 6—Velocity
The last step to achieving supply chain excellence is to continue with synthesis, and to do it with speed. Synthesis with speed is the process that will help you achieve supply chain excellence and maintain that performance level.
Take a moment and see what level you are at in your organization. That will help guide you where to focus your supply chain plan to get the most bang for your buck.
The experts make supply chain sound so easy. In reality, it is not. In fact, it is far from easy. In health care, supply chain excellence is complicated and hard to achieve.
Remember, supply chain success requires synchronization and agility drivers, following the six levels of successful supply chain, developing a supply chain plan with a strong focus on logistics and proceeding with an “eyes wide open” approach.
| Function | Distributed | Direct |
| Creating/placing orders | 54 hrs. per $1M spend | 119 hrs. per $1M spend |
| Receiving orders | 56 hrs. per $1M spend | 162 hrs. per $1M spend |
| Freight cost | $102,964 inbound freight | $305,908 inbound freight |
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General order problem solving |
51 hrs. per $1M spend | 204 hrs. per $1M spend |
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Supplier negotiations |
51.6 hrs. per $1M spend | 259.4 hrs. per $1M spend |
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Source: Health Industry Distributor’s Association’s Hospital Procurement Study, 2005 |
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Core competencies to promote change
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Harness the energy of change.
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Sustain performance.
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Understand customer satisfaction.
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Implement a total supply chain strategy/logistics plan.
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Ensure manufacturers are responsive to the HCO/IDN needs.
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Understand that partnerships evolve and flex.
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Ensure that all partners have the same plans, goals and strategies.
Long-term negative impacts for short-term fixes
Decreases in cash flow Increases in:
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Procurement costs, materials’ time for sourcing
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Number of POs
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Number of receipts at dock
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Physical inventory costs
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Inventory handling costs
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Accounts payable resource time
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Time in order management and problem resolution
This article first appeared in the May 2009 issue of Materials Management in Health Care.
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