It’s well past midnight and many of the staffers and clinicians at Montefiore Medical Center in the Bronx borough of New York, are fast asleep at home. Others are logging overnight shifts. And the health care center’s purchasing system is wide awake and hard at work.
A drug in the pharmacy has reached a low supply level, automatically generating a purchase order. A requisition is issued. A new price from a vendor is calculated. Early that morning, the product arrives with a receipt. The pharmacy bin balance is updated. By 4 p.m., an invoice has been received and paid.
At first glance, the process seems ordinary. A product was needed, so it was ordered, shipped and paid for. Nothing unusual about that, right? Maybe—except that the entire cycle took less than 24 hours. Years ago, the same process might have lasted 24 days or nearly 40 if a glitch appeared.
But if that isn’t remarkable enough, consider this: The process sailed smoothly from order to payment without the intervention of a single human being.
That’s because Montefiore, one of the nation’s largest health care institutions with three hospitals, $2.3 billion in annual revenue and more than 13,000 employees, has a nearly completely automated purchasing process. It’s helped the health care system transform everything from its supply chain efficiency to its management philosophy. Far from making executives nervous, the automation has given them complete control—and absolute confidence—over the supply system. It works so well that the center has expanded it far beyond the $70 million in drugs it buys each year. With the help of resource planning software from Germany-based SAP, Montefiore completely overhauled its purchasing processes and policies. Now it uses automated purchasing for everything from clinical supplies to copy machines, from sutures to the soda in the cafeteria. The result has been a savings of almost $90 million over 11 years.
“What we accomplished here was a cultural shift,” says Charles Agins, Montefiore’s vice president of finance and executive director of business and information systems. “We were able to own the material procurement process from cradle to grave.”
All this from software?
Montefiore has taken the SAP software further than even its manufacturer imagined. The software allows Montefiore to a keep an account of every purchase. The hospital system uses that information for hardball contract negotiations with vendors. Montefiore can standardize longer-term contracts under one supplier by negotiating the terms of payment. In return, suppliers get higher-volume business.
Instead of changing suppliers every few months, Montefiore has multiyear deals that keep prices low and improve the quality of service.
Or, as Agins, the man who spearheaded the automation process, puts it, “We are better buyers. We, not vendors or anyone else, are in total control of the way the medical center does business.”
Goodbye mavericks
Montefiore wasn’t always a model of purchasing efficiency. In the mid-80s, the hospital center suffered some of the same problems as countless other health care institutions—rising costs, shrinking budgets and government oversight. “There were times when the hospital didn’t know if it would make payroll,” Agins recalls.
And like other hospitals, Montefiore made severe budget cuts. “Everyone was in a silo thinking, ‘How do I cut my budget?’” Agins says. “You cut 5 percent one year. And 3 percent the next, which meant making short-sighted decisions and shooting ourselves in the foot.
“Radiology, for example, would cut the evening or weekend shifts. But then the late-to-stay costs would go up and that would reduce our revenue.”
Agins vowed to control costs by taking the reins of the biggest hospital cash drain—supply chain management.
His idea was to standardize practices and products. At the same time, he’d eliminate “maverick” ordering—clinicians purchasing off-contract or over-budget items. In the past, “maverick” spending plagued Montefiore. Frustrated by ordering delays, doctors or nurses simply picked up the phone and ordered supplies directly from vendors, whether it fit into pre-existing pricing arrangements.
But first Agins had to get a handle on the hospital’s purchasing data. For that, he turned to SAP. In 1996, Agins’ staff drafted a 200-page RFP for software contracts. The proposal was more like a script with real Montefiore numbers. Agins wanted to see how a handful of firms would flow that data into a totally automated environment. Of the firms he approached, SAP was the only one to accept the challenge.
SAP didn’t provide everything Montefiore wanted, but the technology was top-notch, Agins says. And the company worked to customize its business software to Montefiore’s specifications.
“The product is one thing, but where it matters most is how customers implement it,” says David Arturo, SAP account executive. “An organization such as Montefiore, or any organization, must have an executive with vision, a leader who is going to run the system and make the tough decisions regarding business processes and change. That’s why Montefiore has done it better than other places and seen greater returns.”
The right way or the highway
Success depended on rigid adherence to the system that Agins and his team constructed. Grappling with supply chain data yielded huge pricing discounts.
But that wouldn’t help Montefiore if it couldn’t control in-house ordering. More than 800 Montefiore staffers, from clinicians to clerks to department heads, order supplies through the SAP system. If maverick spending continued, the savings from contract discounts would be nullified.
Instead, Agins “didn’t give the internal customer the option to buy just anything they wanted,” he explains. The software was customized to only allow purchases of approved products from prenegotiated contracts. It also prevents users from buying items outside the department’s budget. Despite the restrictions, Agins soothed discontent by making the process easy and flexible. At the hospital’s numerous software stations, users merely point-and-click on an item to buy it. The system automatically generates a purchase order at a negotiated price. And most users are authorized to spend as much $10,000 without approval—up from $300 with the previous system.
Eliminating paperwork and bureaucratic approvals slashed delivery lags. Rather than taking nearly a month to receive supplies, products now arrive in about 19 hours. And seeing purchases in real time lets the hospital track what was ordered and who ordered it, Agins says.
“We sold this by improving the process and reducing the time it took for the doctors and nurses to get what they wanted,” he says.
Risks and rewards
Montefiore initially invested about $3 million in the SAP system, two-thirds of which went to implementation costs. Installing the software took about seven months, which was much quicker than the SAP average of 10 to 12 months.
Montefiore designed its own in-house training program to bring staffers up-to-speed. And since the initial implementation, Montefiore continues to tweak and modify the software. Initially, for example, the system wasn’t designed to let Montefiore replenish supplies in the middle of the night. But Agins’ IT team added new technological twists. “It’s really snazzy, but SAP wasn’t even aware it could do this,” he says. The system paid for itself within three years, Agins says.
Most of the monetary savings have come from negotiated vendor discounts. Montefiore saves $26 million a year on drugs, $4.2 million on copying and printing, and millions more on other supplies.
Indeed, the medical center has garnered savings on almost every individual item, from X-rays and diagnostic films ($600,000 saved a year) to catheters ($300,000).
The savings could be even greater, Agins says, if he enforced higher ordering compliance rates among clinicians. “In some areas, I want 98 percent compliance,” he says.
But Agins reasons that happy clinicians will be more likely to follow the compliance code if he allows flexibility, which means permitting compliance rates to fall to as low as 80 percent to 85 percent. “If you are a doctor and you really want something, we get it for you,” he says. “We cannot hold back health care. We give the physicians what they want.”
And freeing physicians from ordering supplies, Agins says, gives them more time to spend with patients. The system also aids compliance with the Joint Commission’s regulations by keeping careful inventory of pharmaceutical items.
The Montefiore experiment has been widely hailed throughout the health care industry. Agins’ team even won a Smithsonian Award for Innovation in Healthcare.
Agins contends that all health care institutions could benefit from the Montefiore example, saying that he maintains that he has the recipe for controlling the supply chain: Team technology with strict adherence to a strong purchasing process.
“It’s all about reengineering and getting people to focus on process,” he says. “We want our people to think in a different way.”
John DiConsiglio is a freelance writer based in Arlington, VA.
This article first appeared in the June 2008 issue of Materials Management in Health Care.
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