Over the past few decades, a perfect storm has been brewing in healthcare. As M&A activity continues, consolidated healthcare systems are serving larger communities, managing bigger spends, and coordinating more complex business operations. It’s more essential than ever to render efficient health services while maintaining—or improving—patient outcomes.
One part of this ongoing complexity is exponential growth in the number of SKUs hospitals must manage. In fact, the number of individual supply items has mushroomed from a few thousand to upwards of 60,000—and that number grows every day.
The problem is that physical hospital space was never set up to handle this volume of product. In addition, clinicians do not typically receive training or education in supply chain best practice, and the negative ramifications on clinician efficiency, patient care, and cost control are becoming increasingly evident.
The Opportunity: Visibility and Control
Achieving end-to-end IDN supply chain visibility and understanding true perioperative item SKU costs is key as health systems strive to meet these unprecedented demands and identify operational efficiencies without sacrificing patient outcomes.
Because hospitals operate on tight margins, there’s little room for waste. And yet, as operations have ballooned to encompass these 60,000+ supply items, supply chain costs are now the second largest expense after payroll.
Salaries for clinicians and staff can’t be cut, so the key to cost reduction is to take a closer look across all aspects of the supply chain to identify new cost-saving opportunities. Not all healthcare costs are controllable, but with the right data and planning, most supply chain expenses are.
Streamlining Purchasing and Distribution
An increasing number of healthcare organizations are looking to achieve more efficient logistics and buying patterns in their efforts to reduce costs. It’s important to know that supplies purchased from distributors often represent 30 percent of a health system’s budget, with an additional 20 percent in hidden costs because of clinical and supply chain staff looking to expedite delivery of products. That’s a pretty hefty spend.
The reality is only a small portion of the 490 health systems (which spans 7,000 hospitals) manage their own supply chains. Your organization can recognize significant savings by foregoing total reliance on expensive GPO, 3PL, and distribution services and managing some or all of your own operations.
Zeroing in on Inventory Management at the Point of Use
In addition to more efficient logistics, it’s critical to take a fresh look at purchasing. Doing this requires you to generate a clear view of supply usage throughout the health system. In particular, you need visibility into exactly which supplies are used at the point of care. Other industries such as retail and automotive have used the disciplines of demand planning since the 1970s. For healthcare and the IDN supply chain, it’s time to come of age and use these proven models to drive the huge savings they can make possible.
What About Electronic Health Record (EHR) Systems?
The goal of EHR systems is to record legal clinical information; most lack supply chain functionality. So, they do a poor job of providing tools to simplify tracking of items consumed at the point of use. In some cases, during a procedure nurses will take stickers from individual items as they’re used and put them on their vests to be logged in the system after the procedure. That is archaic!
By contrast, a POU solution paired with proven technologies, such as RFID-enabled item tracking, frees nurses to return their focus to patient care. As a bonus, using RFID to collect this data in real time helps you produce case costs as the operation is happening.
More Efficient Buying Based on Consumption Data
Distributors typically sell their own manufactured products, so they are essentially determining the product mix for their customers across med-surg items, perioperative supplies, and pharmacy/drugs. Once you have solid data about which supplies your organization uses and in what quantities, it’s time to reevaluate what you’re spending with distributors.
Consignment vs. Buying in Bulk
Sixty-five percent of a hospital’s supply expenses are generated by three departments, namely the OR, Cath Lab, and IR. And 5 percent of these items can represent 85 percent of the spend. Many hospital supplies are purchased on consignment and subject to a list price. With better visibility into supply usage over time, it’s possible to find new opportunities for bulk purchases. For example, if your point-of-use system shows you use a large number of stents each month, it may be beneficial to negotiate a reduced rate versus buying at list price on consignment.
Economies of Scale for Costly Implantables
Because medical device manufacturers teach doctors how to use their products, physicians develop preferences for certain brands. These may not be the most cost-effective options available. However, when hospitals lack insight into what’s being used, they can’t aggregate this data to pinpoint where to change buying strategies to find lower-cost alternatives or buy in bulk.
For example, if there’s a $10,000 differential between the cost of supplies physician A uses for a hip replacement compared to what physician B uses, the discrepancy should be investigated. The goal is a full OR, but if an operation can be done well AND at a lower price, your facility could become a destination for that particular procedure.
There is a bill of materials (BOM) to pick on a case cart for each procedure—and these are often fraught with inaccuracy due to their reliance on outdated EHR information. Although the goal is to keep the OR door shut at all times to minimize the risk of contamination and infection, nurses often have to run in and out for supplies if the BOM is inaccurate.
With the right POU technology, the correct supplies are in the room before the operation begins. Case carts need to be continually enhanced with the model of what’s needed for the operation (the predictables).
Overcoming Two Common Barriers to IDN Supply Chain Transformation
- Knowledgeable Supply Chain Professionals: While it sounds great to achieve supply chain visibility, cut out 3PLs, and save 30 percent on supply costs, it can be difficult to find supply chain professionals who know how to lead the initiative. Purchasing reps aren’t trained to spearhead these kinds of large-scale supply chain initiatives. Hospitals are now learning to hire supply chain experts from other industry sectors (automotive, etc.) with the skillsets needed to accomplish their goals.
- Cross-Department Collaboration: Another vehicle necessary to driving long-term supply chain success and cost control is cross-departmental collaboration. When all branches within an IDN work together in the interest of this shared organizational goal, a new level of performance becomes possible. Stakeholders need to fully understand the value of transformation to make it a reality. It’s an operational change as well as a cultural one that needs to be championed.
Moving Toward the Clinically Integrated Supply Chain
Clinical and supply chain personnel must work in tandem to drive change. IDNs that are leading the way in this regard have adopted an integrated and consolidated approach to their supply chains and have invested in their ability to deliver supply chain excellence despite shifting market conditions.
It’s possible to save an estimated 30 percent in supply chain costs with the right technology in place to manage this critical element. This is because you can start to determine when you actually require products. You can also figure out when you can buy direct from manufacturers, buy in bulk, standardize, reduce vendors, and achieve up to 20 percent price point improvements. At this point it becomes possible to reduce logistics costs by 10 percent by managing your own distribution.
Ready to Begin?
Determine your IDN’s readiness for supply chain transformation with this powerful new IDN supply chain assessment tool, the only one of its kind in the industry. This adaptable framework empowers you to pinpoint gaps and map your journey toward a centralized, consolidated supply chain.