David Zimba didn’t have to go far to find a business to emulate in his drive to fuel greater efficiency within West Penn Allegheny Health System’s $1.4 billion organization or $400 million supply chain. No farther, in fact, than a local grocery store.
The vice president of corporate contracting began talking with the store’s on-site vendors, employees and manager. They discussed the grocery industry’s supply chain infrastructure, customer service and vendor relationships. In subsequent visits, Zimba learned about the grocery industry’s genesis of once-stiffly resisted shelf-fees, why vendors now universally pay them and how this revenue helped fund supply chain infrastructure improvements to decrease costs.
He chatted with bread and soda vendors to get their supply chain perspectives. After church one week, he sought out a couple of executives from the grocery store and gathered their insights. Soon, Zimba began connecting the pieces to a complicated puzzle that many in the health care supply chain still struggle to understand. Many of the lessons Zimba learned were melded into the deployment of a strategic and IT framework that helped West Penn Allegheny, Pittsburgh, net more than $7 million a year in financial improvements while boosting efficiency and raising customer satisfaction to 96 percent.
E-source solution
By adopting an electronic supply chain covering three core areas—e-sourcing, e-procurement and e-materials—West Penn Allegheny has transformed materials management operations across its six acute care hospital campuses. These efforts earned Zimba and West Penn Allegheny Health System the 2006 Most Wired Supply Chain Innovator Award.
Among West Penn Allegheny Health System’s achievements are:
- An average bid savings of 21 percent and a 70 percent reduction in bill completion cycle time, thanks to software used in the system’s e-sourcing program.
- More than 1.3 million purchase order lines are administered electronically (89 percent via electronic data interchange and 7 percent via electronic fax) over the system’s e-procurement platform. The engine that drives the savings: a distributed MMIS that supports 800-plus purchasers using Web-based requisitioning and covering 135,000-plus items.
- Automated processes that have reduced complexity and increased supply chain reliability from less than 70 percent to greater than 99 percent.
What makes West Penn Allegheny’s experience in modeling the grocery industry particularly noteworthy is that Zimba and his team went beyond the all-too-often cited analogies and generalities to assimilate this information and develop effective strategies to drive significant process changes and savings.
Grocery stores and health care systems, Zimba concluded, deal with diverse customers, high product turnover and a continuous stream of product introductions. But when it came to customer service satisfaction, automating processes, reducing variability and implementing IT solutions for the supply chain, Zimba saw a continental divide.
“What we did not share, in our particular instance, were the high levels of customer satisfaction and supply chain reliability that grocery stores had attained,” Zimba wrote in his essay “e-Materials Strategy: Bringing the Grocery Store Model to Health Care.”
A case for change
Results from an annual survey conducted in 2001 of the not-for-profit health care system’s supply chain customers proved that both customer service and supply chain reliability were lacking.
Survey data revealed that more than one in four respondents expressed dissatisfaction with the supply chain and products often were not delivered on time by vendors.
“You need to develop a case for change, and our case for change was 28 percent dissatisfaction and more than 30 percent unreliability,” Zimba says.
Armed with the survey data, Zimba and his team set out to learn what was causing dissatisfaction with the supply chain so that they could begin to affect positive change. During the process, they learned about the frustrations and lack of reliability in existing processes and procedures. Their analysis showed these issues were a function of deficits in internal process knowledge, dedication to activity, conflicts with core patient activities, lack of communication, product variability and elements inherent to manufacturer and distributor supply chains. Uncovered were the following contributing factors:
- Fragmented vendor pool: West Penn Allegheny Health System was doing business with more than 2,200 vendors. Twenty had business interests with the system exceeding $1.5 million annually, 80 had business ranging from $100,000 to $1.5 million annually and 2,100 were doing less than $100,000 annually.
- Complex ordering processes: In examining the purchasing process from the patient to the manufacturer, the team found that a med-surg supply item and/or medication required 20 to 26 steps to complete the order, distribution, charting, charging and replenishment process—many of which were performed by people who were never educated or trained in supply chain processes.
- Low fill-rates: Direct supplier shipment fill-rates were less than 70 percent when compared with the expected receipt date. This performance had been masked by the use of rush-order processing, freight and excessive inventory.
- Incomplete electronic data: West Penn Allegheny’s materials management information system was severely underpopulated in the items its end-users routinely used and did not represent all the items that its contracting process enabled. Only about 35,000 of the 135,000-plus items the system had contracted to purchase were included in the MMIS item file.
Zimba and his team came to the stark realization that West Penn Allegheny simply had too much variation in its supply chain.
“We had variability in understanding throughout the organization of the supply chain, variability in the products being used and variability in vendors,” Zimba says. “We even had variability in the description of products. We needed to affect all of these different degrees of variability to improve the supply chain outcome.”
A call to action
With a much clearer idea of the system’s supply chain problems, the team focused on developing a better model for streamlining operations. Again, Zimba’s grocery-store research paid dividends. The team identified four techniques that made the grocery model successful. “First, the grocery store placed responsibilities on distributors and manufacturers to shelve products to ensure timely availability,” Zimba’s paper noted. “Second, grocery stores rely on customers who have two responsibilities: product selection and product utilization. Third, the grocery store uses an electronic cash register to charge customers, decrement inventory and create automatic replenishment requests to distributors and manufacturers. And finally, the grocery store assessed distributors and manufacturers shelf-fees to help pay for these investments.”
West Penn Allegheny wove variations of these four techniques into their plan. To create customers who had two responsibilities—product selection and product utilization—the team developed a compelling case for change. This message was relayed to senior management, end users and materials management. The team then engaged key end-users—chief nurses, pharmacy directors and materials managers.
“[They] helped define the complexity of the existing operating scenario, the benefits that could be gained, the need for end-users to relinquish significant portions of these responsibilities to the professionals—our materials managers—and the need for our professionals to accept these responsibilities,” Zimba’s paper notes. In some cases it was a tough sell, but Zimba’s team convinced end users that they would need to trade off autonomy in product selection and adopt vendor and product standardization in exchange for relinquishing materials management tasks such as ordering, inventory management and charging. Through role playing and other efforts they convinced senior management of the economic benefits the electronic supply chain would reap. Ultimately, the team requested and received approval to add $8.4 million in incremental annual expenses for IT investments that would be offset by $15.4 million in annual economic improvements, Zimba says.
No more layers
Obtaining C-level financial commitment to help fund the infrastructure was a critically important success, but a major potential stumbling block remained. The team had to get distributors and manufacturers to shelve products to ensure timely availability. Once again, dialogue and perseverance won out. Zimba argued convincingly that suppliers basically dropped the existing system on them.
Products were not always delivered on time, leaving West Penn Allegheny with a less than 70 percent fill rate, and product nomenclature was constantly changing, Zimba explains.
“We’d receive one big box and then we’d have to unpack all the items and do all that handling. That (system) was unreliable,” Zimba says.
To improve reliability, the team determined that the health system would need to decentralize supplies and pharmaceuticals and oversee a far greater number of inventory locations, many of which had been managed by various clinical departments. To facilitate this change, a low unit of measure (LUM) distribution system was implemented for both med-surg products and pharmaceuticals. Zimba notes that this system essentially moved the process of unpacking orders downstream, putting the onus on vendors to deliver products to assigned locations.
Today, the coordinated LUM distribution systems deliver 99 percent fill rates by significantly reducing time and effort in picking and filling inventory locations throughout the organization, even though not all distributors and manufacturers have been enabled to shelve all products.
In trying to mimic the grocery store cash register model to charge customers, credit inventory and create automatic replenishment requests to distributors and vendors, West Penn Allegheny deployed electronic cabinetry for med-surg supplies and pharmaceuticals. The equipment has been installed in four of the health system’s six hospitals, with the remainder to be completed next year. Each cabinet is interfaced with the MMIS and directly communicates orders to manufacturers and distributors without manual intervention. Each cabinet also enables inventory management and facilitates patient charging when appropriate.
The suppliers’ covenant
The team had been thus far successful, but the biggest potential stumbling block still remained: how to get vendors to pay shelf fees to help fund the needed supply chain IT improvements to drive the more efficient system. The proposed solution was known as the Primary Business Partner program (PBP).
The PBP covered more than 20 manufacturers that were delivering multiple lines of business exceeding $1.5 million annually, Zimba explains.
“We established a covenant with these suppliers that in exchange for economic, operational and philosophical support of this model that we in turn would consolidate vendors and standardize products throughout our organization,” Zimba says.
It was hardly an easy sell. Many vendors initially balked, upset that they were already paying fees to GPOs.
“We went to the vendors and said, ‘Yes you’re already paying fees, but that gave me the supply chain we have,’” Zimba says.
“We said that this is a joint problem that we both created and we’re going to have to work it out. So we’re going to contribute some money and we want you to contribute some money to it as well. But to get you to contribute, we will drive business to you.”
Some vendors resisted, saying they had heard about this type of partnership pitch before only to be left with the same or a lower level of business from the client.
To address this concern, Zimba says contracts were written so that vendors could easily extricate themselves from the agreement. Clear rules were established for how the health system would drive more business to PBP members. Finally, the team gave a firm vow to these vendors. “We said measure us by what we do, not what we say,” Zimba says.
West Penn Allegheny followed through on its pledge, shifting almost $40 million in products to its primary business partners, according to Zimba. As was the case in the grocery industry, vendors gradually committed to the program.
In the ensuing weeks and months, the health system worked with the PBP to target product categories for standardization and engaged 10 functionally organized supply chain teams to evaluate opportunities and facilitate systemwide implementation. The group also standardized selection to consistent stock-keeping units to further reduce supply chain variability.
Reflecting on how far West Penn Allegheny has come in its supply chain operations, Zimba encourages other organizations to embrace the grocery industry model. “You must have the courage to explore. It’s one thing to talk about the grocery-store model, it’s another to find out how it works,” he says.
Bob Kehoe is the executive editor of Materials Management in Health Care magazine.
About the award
The 2006 Most Wired Supply Chain Innovator Award, launched this year, is jointly sponsored by Hospitals & Health Networks’ Most Wired Magazine, Materials Management in Health Care and the Association for Healthcare Resource & Materials Management.
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