Experts agree that superior supply chain management is a critical success factor for health systems aiming to improve patient care yet reduce total costs. What's more, it's possible to achieve supply chain excellence without making a major capital investment.
1. Leverage low-cost tools for product standardization. Some health systems operate their own warehouses to ensure that clinicians have access only to approved products. Fortunately, it's possible to achieve the same result without spending millions. Most distributors can support a custom formulary and provide custom ordering tools to ensure that everyone ordering within the system can see and access only products on the formulary.
2. Get involved in contracting. Organizations that achieve major reductions in their supply chain spend typically do so through product standardization — buying more of the same items rather than spreading their purchases out among multiple vendors. Selecting products on which to standardize requires a vigorous value analysis process. Negotiating the pricing gains that can result from this standardization requires contracting expertise, either by working with a local or regional contracting coalition or by self-contracting. Some experts estimate that the payoff from self-contracting compared to the cost can be as much as 7:1; compare that to an ROI from self-logistics (which requires a large fixed investment) that averages only about 1:1.
3. Devote a disproportionate share of supply chain management effort to PPI. Physician preference items constitute the lion's share of supply chain spending in hospitals. In addition to the standardization and contracting steps mentioned above, some organizations have done more to control PPI costs, such as finding ways to move PPI products through their regular distribution model. Since typical cost-plus pricing doesn't work well for high-dollar preference items, some distributors offer a "shelf fee" approach which allows some PPI to be distributed in the same fashion as typical commodity products.
4. Consider adopting a JIT or LUM model. "Just-in-time" or low-unit-of-measure programs allow hospitals to receive products at the loading dock already packaged in totes for delivery directly to point of use. Hospitals using such models report costs per line received of 10-20 percent less than hospitals not using these programs.
5. Maximize the spend through a prime vendor distributor. Most hospitals buy a portion — often 10-30 percent — of their med/surg supplies directly from manufacturers. These orders cost more in terms of staff time, freight costs, and inventory holding costs. A recent study showed that on average, the cost to place an order with a manufacturer was more than three times higher than the cost to place an order with a distributor, in part because most distributors (96 percent) can receive orders electronically while most manufacturers (67 percent) cannot.
Elizabeth Hilla is executive director of the HIDA Educational Foundation, an affiliate of the Health Industry Distributors Association. The Foundation is devoted to education and research that increases efficiency and effectiveness within the healthcare supply channel. She also serves as a senior vice president at HIDA.
Non-Labor Cost Reduction Best Practices
1. Leverage low-cost tools for product standardization. Some health systems operate their own warehouses to ensure that clinicians have access only to approved products. Fortunately, it's possible to achieve the same result without spending millions. Most distributors can support a custom formulary and provide custom ordering tools to ensure that everyone ordering within the system can see and access only products on the formulary.
2. Get involved in contracting. Organizations that achieve major reductions in their supply chain spend typically do so through product standardization — buying more of the same items rather than spreading their purchases out among multiple vendors. Selecting products on which to standardize requires a vigorous value analysis process. Negotiating the pricing gains that can result from this standardization requires contracting expertise, either by working with a local or regional contracting coalition or by self-contracting. Some experts estimate that the payoff from self-contracting compared to the cost can be as much as 7:1; compare that to an ROI from self-logistics (which requires a large fixed investment) that averages only about 1:1.
3. Devote a disproportionate share of supply chain management effort to PPI. Physician preference items constitute the lion's share of supply chain spending in hospitals. In addition to the standardization and contracting steps mentioned above, some organizations have done more to control PPI costs, such as finding ways to move PPI products through their regular distribution model. Since typical cost-plus pricing doesn't work well for high-dollar preference items, some distributors offer a "shelf fee" approach which allows some PPI to be distributed in the same fashion as typical commodity products.
4. Consider adopting a JIT or LUM model. "Just-in-time" or low-unit-of-measure programs allow hospitals to receive products at the loading dock already packaged in totes for delivery directly to point of use. Hospitals using such models report costs per line received of 10-20 percent less than hospitals not using these programs.
5. Maximize the spend through a prime vendor distributor. Most hospitals buy a portion — often 10-30 percent — of their med/surg supplies directly from manufacturers. These orders cost more in terms of staff time, freight costs, and inventory holding costs. A recent study showed that on average, the cost to place an order with a manufacturer was more than three times higher than the cost to place an order with a distributor, in part because most distributors (96 percent) can receive orders electronically while most manufacturers (67 percent) cannot.
Elizabeth Hilla is executive director of the HIDA Educational Foundation, an affiliate of the Health Industry Distributors Association. The Foundation is devoted to education and research that increases efficiency and effectiveness within the healthcare supply channel. She also serves as a senior vice president at HIDA.
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