Cost control
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| When searching for ways to improve your supply chain, there are many theories in the industry as well as advice from some consultants with an “ideal” plan. But, you can achieve supply chain efficiency simply by relying on basic, fundamental practices. These steps have been proven successful after being executed by several supply chain pioneers. Included is ensuring that administration grasps the value of a successful supply chain as well as the importance of understanding and taking advantage of contracts. |
Every hospital and health system recognizes the importance of reducing supply costs, especially for physician preference items and other surgery products that typically comprise 30 percent of hospitals’ contracted supply expenses. And there’s no shortage of consultants to tell you what they think you should do.
But the last thing you need is more advice when all you want to know is: What supply chain strategies are effective at health care facilities facing comparable challenges and what can I learn from those who have successfully implemented strategies that could be immediately applied to my situation?
Following are insights, lessons and core principles gleaned from the experiences of supply chain executives at leading academic medical centers.
Sharing fundamentals
Pioneering leaders in the supply chain share a common approach to solving supply chain issues.
Successful executives take into account the myriad elements comprising the supply chain—personnel, operational processes, products, clinical practices, organizational culture, technology infrastructure, etc.—when developing strategies tailored to their specific organization.
Although these leaders’ strategies and tactics can vary greatly, their approach in tackling supply chain challenges often will be fundamentally similar.
For example, they all work closely with key stakeholders, particularly physicians, to understand how products fit into the end-users’ worlds. They also use and leverage the power of data-driven performance benchmarks to prioritize initiatives and secure participants’ buy-in.
The following are four fundamental points integral to successful strategies, along with examples showing their applicability in solving real-world problems.
In the beginning
Too often, administrators and even materials managers fail to grasp the fact that the sole purpose of the supply chain is to efficiently and effectively serve end-users. Consequently, the best strategies are about more than getting the lowest prices or reducing inventory costs, and address such key issues as:
- Finding out the needs and expectations of clinicians and physicians
- How products are being used
- Whether product differences affect the quality of care and if that is opinion or based on scientific evidence
- How the use of these products impacts delivery time, OR turnaround, inventory control, reimbursement, etc.
Tina Latimer, director of quality and operations improvement at The Ohio State University Medical Center, Columbus, closely examined end-user practices and concerns to develop standardization strategies for her facility’s cardiology labs.
An analysis of pacemakers, for example, found that clinicians were using basic models on only 16 percent of procedures, and could save as much as $1,400 per device by using lower-level devices when clinically appropriate.
Also, they were performing more intravascular ultrasounds (IVUS) than their peers at comparable health systems, which added 13 to 22 minutes to the length and $625 to the cost of each catheterization procedure.
OSU’s comprehensive strategy to lower cardiology device costs included:
- Purchasing lower-level devices when clinically appropriate
- Negotiating neutral, flat pricing for like models of pacemakers and automatic implantable cardioverters/defibrillators (AICDs)
- Developing and enforcing clinical guidelines for use of IVUS
- Creating a matrix grid to facilitate standardization and guide the purchase of cardiac devices featuring emerging technologies
“This broad, holistic approach to product selection saved us more than $2 million the first year, and we continue to realize yearly savings of nearly $1 million,” says Latimer.
“By working with the clinicians and understanding their needs, we’ve also become more proficient in monitoring and managing the use of these devices.”
Details drive smart decisions
Just because your GPO has negotiated favorable pricing doesn’t mean your health system is taking full advantage of all the cost benefits available through its purchasing contracts.
The top supply chain strategists know they are leaving money on the table. But they see this as an opportunity to generate fast, significant savings through improvements in how their organizations use and manage hundreds or even thousands of contracts.
The key to maximizing contracts is to focus on the big picture (e.g., reducing expenses for clinical preference items), but know all the contractual details in each product category. Supply chain executives targeting improvements in this area will delve deep inside their contracts for data to help them answer some simple questions such as:
- What percentage of purchases (by product, category, department, vendor, physician, etc.) are off-contract?
- How much could be saved by improving contract compliance by “X” percent?
- Are purchases aggregated when feasible to get tier pricing discounts?
- Are new contracts taken advantage of as soon as they’re available?
Stony Brook University Hospital, Long Island, N.Y., took this approach to optimize the value of its contracts for spine supplies.
In partnership with UHC, it compared its purchase prices with a survey of major national hospitals and a local teaching hospital in its geographic region.
The hospital also analyzed pricing structures by purchase method (direct, consignment or loaner) to understand actual in-use costs (not just prices), evaluate different lease/buy models and determine overpayment for various product lines.
Armed with this data, Stony Brook negotiated a 13 percent volume pricing discount with its primary vendor and lowered its costs for spine supplies by nearly $1 million.
Focus on priority goals
With limited resources and time, supply chain executives must be minimalists. A fundamental principle of effective strategies is to focus on making the greatest impact on supply chain costs and efficiency with the least amount of effort.
Rather than reinvent the wheel, start with a project that leverages your existing strengths, aligns with a key operational or financial goal and can quickly achieve results of evident value.
This principle is a variation on the old 80/20 rule of business (80 percent of profits come from 20 percent of customers) and forces you to set measurable and achievable priorities. The idea is to deliver results and build momentum.
Once you prove you are capable of implementing changes that have a positive impact, you’ll find it easier to gain support for your next initiative.
For example, after a quick assessment of its orthopedic product line, the Medical University of South Carolina, Charleston, altered its buying practices to take better advantage of tier pricing on hip and knee implants. This simple change resulted in an annual savings of $113,000.
In 2005, the Office of the President at the University of California Health System (UC), Oakland, decided that reducing supply expenditures was a strategic imperative.
Instead of entirely revamping supply chain processes, the UC operations team focused on two key initiatives: Leverage the aggregate purchasing power of the system’s five medical centers and launch small, well defined projects focusing on cost reductions for nine high-spend products that could be quickly executed.
In just six months, this targeted approach enabled UC to reduce costs by more than $1 million.
“We felt it was important to hit the ground running and prove that we could deliver immediate financial benefits,” says Kathy Kim, executive director, health care operations and technology.
“These successes paved the way for our phase II initiatives, which have achieved even greater savings through product standardization and custom contracting enhancements.”
Achieve unified goals
Ultimately, supply chain projects are about people working together to accomplish shared goals.
These individuals, however, often are stretched to the breaking point fulfilling their other responsibilities; some may even have conflicting agendas that would undermine team unity.
To keep projects moving forward, supply chain executives must collaborate (especially during up-front planning), compare performance against the plan as well as peer benchmarks, and constantly communicate to all project participants about progress, obstacles, successes, milestones and practical tips for executing the project’s various components.
The first step in creating a smooth functioning team is getting everyone to agree the project is the right thing to do, the right people are involved and the implementation plan is sound and doable.
Because many initiatives require purchasing controls and processes on clinical preference items, it’s important to collaborate with end-users early and often. In a 2005 Healthcare Financial Management Association survey, respondents indicated that physician/clinical buy-in represented their greatest opportunity for supply chain improvements.
Collaboration also means getting information from other sources including suppliers, administrators, CFOs and best practice leaders and incorporating their feedback into the plan.
Project managers should make sure the team meets regularly to review progress and, when necessary, assist in resolving conflicts between the clinicians’ vision and the realities of the supply chain.
Although the plan must be sufficiently flexible to accommodate changes from end-users, it also must establish meaningful benchmarks by which team members can measure performance.
This process typically begins by using national, regional or peer-oriented databases to evaluate how hospitals compare with top performers.
Project leaders can then identify the most promising savings opportunities that support their priority goals.
Analysis of the comparative data also helps the team set realistic performance targets, which can be incorporated in balanced scorecards and tracked on an ongoing basis.
When you pay careful attention to engaging the team in planning and establishing comparative measures aligned with priority goals, participants will be ready and eager to join the effort.
Their enthusiasm, however, will be short-lived unless you follow through on the third team-building component—frequent communications that reinforce the value and importance of the project will help keep participants committed to its success.
The key here is to demonstrate continuous progress by highlighting specific accomplishments such as expense reductions or service improvements.
Communication also is necessary to keep team members apprised of schedules and how upcoming changes might impact inventory, operations or clinical practices.
They should be timely and interactive to remind everyone that their actions are critical to the project’s success.
Communications also should reiterate why and how this particular initiative delivers significant benefits to end-users and patients.
Grady Health System of Atlanta used all three elements of effective team-building in implementing a supply chain strategy that cut expenses for exam gloves by $544,000 while moving the organization to a latex-free environment.
The project team collaborated with UHC consultants and vendors to collect and analyze comparative data from multiple internal and external sources.
To lay the groundwork for a smooth transition, the team solicited input from various departments and allowed clinicians to try the proposed exam gloves.
“Working and collaborating with our physicians and clinicians was critical to our success,” says Valerie Ramsey, director of Grady’s value analysis program.
Because of strong executive-level support, the team was able to implement its exam glove standardization program for all employees in April 2005.
The launch included an e-mail blast announcement and information in Grady’s Friday Update newsletter. After an initial transition to two types of exam gloves, the team was successful in moving the entire organization to one product—a powder-free, latex-free, purple nitrile exam glove.
This new glove not only offered equal or better protection than the former gloves, but also is expected to lower worker compensation costs related to latex allergies. “We made certain to always keep the lines of communication open and, as a result, created a win-win program that benefited the entire health care system,” says Ramsey.
Meet the challenge
Supply chain executives are under increasing pressure to play a pivotal role in contributing to their organizations’ financial well being.
As health care supply chains grow increasingly diffused and complex, it becomes even more imperative that they have a clear vision of how to accomplish this. Executives who are able to plan and execute successful strategies adhere to basic principles to keep their projects focused.
They understand customer (i.e., end-user) needs. They pay close attention to the details of their contracts to identify opportunities and guide their planning. Even though executives are action-oriented, they never lose sight of the big picture, and make optimal use of their resources to deliver fast results aligned with their organization’s strategic objectives.
Executives know that success is always a team effort as well as a work in progress. Through collaboration, communication and an intense focus on key metrics, they create a climate of trust and performance to foster continuous improvements throughout the supply chain.
John Cunningham is Vice President, Supply Chain, for University HealthSystem Consortium (UHC), Oak Brook, Ill.
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