With greater margin pressures and declining revenues on both the buy and sell side of the healthcare equation, trading partners are increasingly focused on the overall survival of the industry. Providers and suppliers are seeking new and effective ways to streamline processes and gain greater visibility into their operations in order to lower costs and improve patient care. To do so, they are significantly changing the way they do business, both within their own four walls and in their interactions with one another.
Parties that have traditionally been viewed as adversaries are coming together to understand each other's pain points and determine how their combined efforts can achieve mutual benefit. One area in which collaboration has proven to yield considerable cost savings is the supply chain. Considering supply chain costs are the second largest area of expense for providers, and suppliers bear the burden of selling, general and administrative expenses costs that are nearly twice those of companies in other industries, the supply chain is clearly ripe for reform.
Because the supply chain crosses organizational boundaries, it presents common ground where healthcare trading partners can collaborate to improve operations and reduce costs for themselves and each other. The decisions made by one party in the supply chain affect all the other parties with which it transacts. As a result, the healthcare industry cannot address supply chain challenges by focusing on just one side of the equation. The key to collaboration is that it takes costs out of the entire system, rather than shifting them, benefiting all parties involved.
Breaking down barriers and establishing trust
In most cases, collaboration is'’t easy because of conflicting priorities, segmentation and lack of communication inherent in the healthcare supply chain. It requires healthcare providers and suppliers to fundamentally change how they view their own organizations, their trading partners' businesses and their interactions with one another.
A balancing act
"In the traditional buy/sell relationship, each party is trying to outwit the other," said Gene Kirtser, president and CEO of Resource Optimization & Innovation (ROi), St. Louis-based Mercy Health’s supply chain division. "But we are at a point in our industry where that is simply not sustainable. Providers and suppliers must learn to work together to find ways to reduce costs. That's the only way we will all survive."
Mercy and its suppliers are reducing supply chain costs and inefficiencies by collaborating on a number of key initiatives, including perfect order, vendor-managed inventory and global data standards. Recognizing that supply chain inefficiencies on the provider side increase supplier SG&A costs, Mercy's ROi is working to become its suppliers' lowest cost/higher profit customer and asking that suppliers pass along a percentage of their savings to the organization in return for the effort.
"We look for inefficiencies that ROi and our suppliers can collaboratively work to fix," said Mr. Kirtser. "We tell suppliers that if we can eliminate an inefficiency to save them a dollar, they can keep 70 cents and give us 30 cents."
According to Mr. Kirtser, trust, transparency, aligned incentives and accountability are the keys to successful collaboration. He notes that providers and suppliers must come together, put their desires and issues on the table and have a transparent conversation about what both partners need to earn to maintain and grow financial contributions for their respective organizations. By working together, trading partners can reduce costs for all parties involved and help protect margins without depending on product price increases.
"Data sharing is critical to supply chain reform and we have to work toward greater transparency," he said. "Change is coming to the healthcare supply chain because stakeholders are demanding it. Suppliers have an opportunity now to be proactive in this area and reduce costs for their customers without necessarily reducing product price."
Mr. Kirtser points to supply chain collaboration as a way for suppliers to differentiate themselves from the competition and notes that ROi encourages suppliers to suggest new approaches that can improve the traditional trading partner relationship.
"When we’re at the negotiation table, so many suppliers tout their product as the best," said Mr. Kirtser. "That is difficult to validate for a provider. What stands out are the suppliers that are willing to have a conversation outside of the norm around how we can work jointly to reduce costs and improve efficiencies. Unfortunately, those conversations right now are not happening frequently enough and we hope that more suppliers will want to have those types of discussions."
Internal collaboration
Even collaboration among individuals within the same organization can be challenging, since different functions often operate independently. On the provider side, there is often a disconnect between clinical and supply chain staff, while on the supplier side, sales and operations seldom sit at the same table. Participants are beginning to reap the benefits of cross-functional collaboration. Today's challenging economic climate is propelling previously disengaged — and sometimes conflicting — parties to share information and ideas on how they can work together to reduce the cost of doing business and increase revenue.
Hanging together
When Dale Locklair, vice president of procurement and construction for Florence, S.C.-based McLeod Health, first joined the healthcare system, supply chain managers were disengaged from frontline caregivers, which led to process inefficiencies and significant revenue leakage, including $3.2 million a year in lost revenue as a result of not capturing product usage at the point of care.
"Within organizations, people tend to develop cliques and become isolated in their work," said Mr. Locklair. "Putting people with different backgrounds together and enabling them to understand each other’s issues and develop relationships is a key element to enacting change."
With this philosophy in mind, McLeod's senior leadership assembled a multidisciplinary team to analyze supply chain processes, identify points of revenue leakage and put processes and systems in place to address them. The goal was for these individuals to work together, develop relationships and understand how they affect each other's work. The CFO, CIO and hospital administrators served as champions for the work.
The McLeod transformation team has gained visibility into lost revenue and put into place measures to address it, implemented operational improvements to streamline workflows and reduce waste, and transitioned from a manual to automated procure-to-pay process to reduce errors, contain costs and improve contract compliance.
According to Mr. Locklair, facilitating internal collaboration across multiple functions within an organization requires a cultural shift in how individuals view themselves, their colleagues and how their actions and interactions affect the organization as a whole. It also requires ongoing support and motivation.
"So much of our success has centered around how we look at the business of our healthcare system," he said. "Instead of thinking of ourselves as people who exist outside of the organization, we now see ourselves as existing because of the organization."
Value vs. price
To make better-educated purchasing decisions, McLeod Health is also working to develop a value analysis team comprising clinicians, clinical effectiveness staff, infection control practitioners and other hospital personnel. This team evaluates products not just on cost, but also on whether or not they will generate clinical improvements that have the potential to improve patient outcomes while reducing overall costs for the healthcare system.
"In the battle to reduce costs, many healthcare organizations have mistakenly focused on lowering the price of goods as the primary means of creating value," said Mr. Locklair. "But consider, for example, that products used in giving an IV infusion may be the cheapest products available, but also may contribute to elevated occurrences of costly and potentially deadly blood stream infections. It’s evident that we need to shift our thoughts from price to value. At McLeod, we are working to measure cost in correlation with outcome for both the physical health of our patients and the financial health of our organization."
Conclusion
Healthcare trading partners function in a symbiotic manner. As separate entities that rely on each other for survival, the financial health and operational performance of one party has a direct impact on all of its business partners. As a result, parties to the healthcare supply chain should work together to leverage this interconnectivity for the benefit of themselves, each other and the industry.
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Parties that have traditionally been viewed as adversaries are coming together to understand each other's pain points and determine how their combined efforts can achieve mutual benefit. One area in which collaboration has proven to yield considerable cost savings is the supply chain. Considering supply chain costs are the second largest area of expense for providers, and suppliers bear the burden of selling, general and administrative expenses costs that are nearly twice those of companies in other industries, the supply chain is clearly ripe for reform.
Because the supply chain crosses organizational boundaries, it presents common ground where healthcare trading partners can collaborate to improve operations and reduce costs for themselves and each other. The decisions made by one party in the supply chain affect all the other parties with which it transacts. As a result, the healthcare industry cannot address supply chain challenges by focusing on just one side of the equation. The key to collaboration is that it takes costs out of the entire system, rather than shifting them, benefiting all parties involved.
Breaking down barriers and establishing trust
In most cases, collaboration is'’t easy because of conflicting priorities, segmentation and lack of communication inherent in the healthcare supply chain. It requires healthcare providers and suppliers to fundamentally change how they view their own organizations, their trading partners' businesses and their interactions with one another.
A balancing act
"In the traditional buy/sell relationship, each party is trying to outwit the other," said Gene Kirtser, president and CEO of Resource Optimization & Innovation (ROi), St. Louis-based Mercy Health’s supply chain division. "But we are at a point in our industry where that is simply not sustainable. Providers and suppliers must learn to work together to find ways to reduce costs. That's the only way we will all survive."
Mercy and its suppliers are reducing supply chain costs and inefficiencies by collaborating on a number of key initiatives, including perfect order, vendor-managed inventory and global data standards. Recognizing that supply chain inefficiencies on the provider side increase supplier SG&A costs, Mercy's ROi is working to become its suppliers' lowest cost/higher profit customer and asking that suppliers pass along a percentage of their savings to the organization in return for the effort.
"We look for inefficiencies that ROi and our suppliers can collaboratively work to fix," said Mr. Kirtser. "We tell suppliers that if we can eliminate an inefficiency to save them a dollar, they can keep 70 cents and give us 30 cents."
According to Mr. Kirtser, trust, transparency, aligned incentives and accountability are the keys to successful collaboration. He notes that providers and suppliers must come together, put their desires and issues on the table and have a transparent conversation about what both partners need to earn to maintain and grow financial contributions for their respective organizations. By working together, trading partners can reduce costs for all parties involved and help protect margins without depending on product price increases.
"Data sharing is critical to supply chain reform and we have to work toward greater transparency," he said. "Change is coming to the healthcare supply chain because stakeholders are demanding it. Suppliers have an opportunity now to be proactive in this area and reduce costs for their customers without necessarily reducing product price."
Mr. Kirtser points to supply chain collaboration as a way for suppliers to differentiate themselves from the competition and notes that ROi encourages suppliers to suggest new approaches that can improve the traditional trading partner relationship.
"When we’re at the negotiation table, so many suppliers tout their product as the best," said Mr. Kirtser. "That is difficult to validate for a provider. What stands out are the suppliers that are willing to have a conversation outside of the norm around how we can work jointly to reduce costs and improve efficiencies. Unfortunately, those conversations right now are not happening frequently enough and we hope that more suppliers will want to have those types of discussions."
Internal collaboration
Even collaboration among individuals within the same organization can be challenging, since different functions often operate independently. On the provider side, there is often a disconnect between clinical and supply chain staff, while on the supplier side, sales and operations seldom sit at the same table. Participants are beginning to reap the benefits of cross-functional collaboration. Today's challenging economic climate is propelling previously disengaged — and sometimes conflicting — parties to share information and ideas on how they can work together to reduce the cost of doing business and increase revenue.
Hanging together
When Dale Locklair, vice president of procurement and construction for Florence, S.C.-based McLeod Health, first joined the healthcare system, supply chain managers were disengaged from frontline caregivers, which led to process inefficiencies and significant revenue leakage, including $3.2 million a year in lost revenue as a result of not capturing product usage at the point of care.
"Within organizations, people tend to develop cliques and become isolated in their work," said Mr. Locklair. "Putting people with different backgrounds together and enabling them to understand each other’s issues and develop relationships is a key element to enacting change."
With this philosophy in mind, McLeod's senior leadership assembled a multidisciplinary team to analyze supply chain processes, identify points of revenue leakage and put processes and systems in place to address them. The goal was for these individuals to work together, develop relationships and understand how they affect each other's work. The CFO, CIO and hospital administrators served as champions for the work.
The McLeod transformation team has gained visibility into lost revenue and put into place measures to address it, implemented operational improvements to streamline workflows and reduce waste, and transitioned from a manual to automated procure-to-pay process to reduce errors, contain costs and improve contract compliance.
According to Mr. Locklair, facilitating internal collaboration across multiple functions within an organization requires a cultural shift in how individuals view themselves, their colleagues and how their actions and interactions affect the organization as a whole. It also requires ongoing support and motivation.
"So much of our success has centered around how we look at the business of our healthcare system," he said. "Instead of thinking of ourselves as people who exist outside of the organization, we now see ourselves as existing because of the organization."
Value vs. price
To make better-educated purchasing decisions, McLeod Health is also working to develop a value analysis team comprising clinicians, clinical effectiveness staff, infection control practitioners and other hospital personnel. This team evaluates products not just on cost, but also on whether or not they will generate clinical improvements that have the potential to improve patient outcomes while reducing overall costs for the healthcare system.
"In the battle to reduce costs, many healthcare organizations have mistakenly focused on lowering the price of goods as the primary means of creating value," said Mr. Locklair. "But consider, for example, that products used in giving an IV infusion may be the cheapest products available, but also may contribute to elevated occurrences of costly and potentially deadly blood stream infections. It’s evident that we need to shift our thoughts from price to value. At McLeod, we are working to measure cost in correlation with outcome for both the physical health of our patients and the financial health of our organization."
Conclusion
Healthcare trading partners function in a symbiotic manner. As separate entities that rely on each other for survival, the financial health and operational performance of one party has a direct impact on all of its business partners. As a result, parties to the healthcare supply chain should work together to leverage this interconnectivity for the benefit of themselves, each other and the industry.
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