Supply chains are one of the largest categories of operating expense for most health systems in the United States – second only to labor costs – and represent anywhere from 13% to 30% of total spending.
The supply chain provides a large number of items in five areas that are key to operations: Physician Preference Items, Pharmacy Drugs, Purchased Services, Commodities, and Logistics. Because these represent such a high and growing percentage of costs, health systems are recognizing that there is both an opportunity and a need for reducing and optimizing supply chain costs, particularly as the industry shifts from fee-for-service to value-based care models. As a result, organizations are engaging in new partnerships and strategies for improving their supply chain performance.
Expanding Supply Chain Options
Many health systems have long relied on a single national Group Purchasing Organization (GPO) to supply their needs, but health system CFOs and supply chain officers are beginning to question this single-source approach.
Health system management teams are realizing that national GPOs may have strengths in a few of the five major categories mentioned earlier, but there are few GPOs that are strong in all categories. Therefore, many health systems are shifting away from relying solely on a single GPO for their supply chain strategy, but instead are using a portfolio model for purchasing that includes multiple vendors. In response, many of the GPOs, and even some of the health systems themselves, are investing in new approaches and innovations to improve supply chain performance and costs.
The options are evolving rapidly, and there will likely be continuing changes in the months and years ahead. Among the options available to date:
• Some of the national GPOs have created regionally focused purchasing collaboratives, to leverage local relationships and optimize costs. Examples of this model include Vizient's relationship with Partners' Cooperative in Atlanta, and Premier's relationship with the Catholic Contracting Group.
• Separate from the GPOs, some healthcare providers are creating their own collaboratives, focused on specific pieces of the supply chain. An example of this model is Initiant, a regional GPO owned by five health systems in South Carolina – Greenville Heath System, Palmetto Health, McLeod Health, Medical University of South Carolina and Self Regional – which handles physician preference items and purchased services. The Texas Purchasing Coalition, another provider-owned regional GPO, was developed to negotiate physician preference items for its members and now has expanded into purchased services and some commodities. A forerunner of the model is the Healthcare Purchasing Alliance started by Orlando Health a decade ago. They've generated tremendous benefit by concentrating on purchased services and physician preference items to complement the work done by the national GPOs. In addition, specialized organizations such as Aviva are providing their members with leverage in negotiating capital purchases and select items in the operations supply chain.
• Systems are developing innovative partnerships with non-traditional players. University of Pittsburgh Medical Center is working with IBM to leverage IBM's Watson computing capability. The goal of this partnership, named Pensiamo, is to help health systems manage their supply costs in several supply chain categories, including distribution.
A Strategic Plan with KPIs
With so much change going on, many health system leaders are seeking guidance on strategies to deal with the dynamics affecting this major portion of their operating expenses. In Huron's experience, there are three key variables that must be considered for a realistic assessment of supply chain strategy.
Size – Size of the purchasing entity (which may encompass health systems, health collaboratives, clinically integrated networks, and others), and how much leverage it has in the market is the major variable. The system's location, number of facilities, and the proximity of the facilities to one another are major factors too. Size will determine how much strength the system will have to negotiate contracts, with or without its national GPO. It will also determine if the system has sufficient scale to develop its own provider-owned GPO. Generally speaking, a system needs to have $1 billion in annual spend in order to have the scale to seriously consider developing a provider-owned GPO, but there are many other options available to smaller organizations.
Technology – How strong are the organization's supply chain technology and data management capabilities? Many supply chain organizations don't have the technology that is needed to compile and analyze data to make the right decisions to drive optimal pricing. The problem can arise from not having an effective Enterprise Resource Planning system or the appropriate tools to analyze data. The problem also arises when the organization doesn't have a consolidated item master and clean data for their value analysis teams to make appropriate decisions.
Leadership capabilities – Some organizations don't have the leadership or bench strength to do the work. Because of this weakness, the number of companies that offer full supply chain outsourcing also continues to grow.
These variables should be taken into consideration when developing the supply chain strategic plan, which will serve as the foundation for improving core functionality around contracting, procurement and other key drivers. The strategic planning process can also help the system improve pricing and standardization by focusing the management team, their GPOs and their clinicians on generating those improvements.
As an integral part of the strategic plan, systems must be able measure and monitor key performance indicators (KPIs) for each of the major business process areas of a supply chain.
Some examples of the KPIs to be measured on an ongoing basis include:
Comprehensive KPIs
• Ratio of supply chain expense to total operating expense
• Ratio of supply chain expense to total net revenue
• Savings implemented year-to-date vs. target for the year
Contracting KPIs
• Percentage of total on contract
• Percentage of spend running through GPOs
• Percentage of spend running through ERP system
• Cycle time for new contract creation
Logistics KPIs
• Number of stock outs
• Number of backorders
• Receiving error percentage
• Inventory turns by location and system-wide
Data Management KPIs
• Number of new items added
• Inactivated items & updated Items
• Percentage suppliers in master inactive (no activity for specific time)
Procurement KPIs
• Number of special requisitions
• Percentage of purchase orders with change orders
• Time to release the purchase order
Health systems should build a data management capability into their supply chain organizational chart and structure. This capability should sit directly in the supply chain function or should be integrated closely if is in another part of the health system. The data must be accurate with a tight governance structure. If the health system does not have good data and reporting – the basis of any improvement around pricing, standardization or logistics – the selection of optimal partners for the supply chain will be less impactful.
Health systems that are not generating the benefit or lift that an optimized supply chain can create should assess their supply chain strategies in light of the new and emerging options available. A solid strategic plan, careful attention to detail and guidance from experienced partners can make the transition much easier.
Daniel May, Managing Director, Huron
Dan has more than 25 years of experience managing large performance improvement consulting engagements for integrated health systems, academic medical centers, and children's hospitals. His extensive knowledge of supply chain and deep experience in strategy and healthcare operations provides the required skill set to manage comprehensive process redesign and margin improvement engagements. Dan can be reached at DMay@huroconsultinggroup.com or 678-576-0408.
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