October 2021 | John Strong
If you add up all the expenses that could be controlled by a healthcare provider’s supply chain, it amounts to over 40% of all expenses within a facility. In fact, it is rapidly approaching the cost of labor as a controllable expense. Unfortunately, many healthcare executives continue to allow decentralized control of expenses within their organization, leading to unnecessary costs as well as sub-optimal service.
A new study by Huron surveyed 306 healthcare executives from a variety of healthcare organizations1. The authors note that the number six “Top Trend” impacting provider organizations in the next three to five years is “cost reduction/optimization.” 27% of respondents noted that the third largest “Current Challenge” is “supply chain transformation” and 34% reported a current initiative about “optimizing supply chain”.
The good news here is that because of the global pandemic this is probably the most attention supply chain has received by senior healthcare executives—ever. Coming in number nine in the survey of “Cost Savings Measures” is “Supply chain cost reductions.” In the future, this must mean looking beyond the price of products.
The price of goods and services has been the knee-jerk reaction going all the way back to the early 1980’s when DRGs were first launched. Now is the time for “cost” to move beyond the purchase price of goods and services by looking at process costs and outcomes. Well run and strategic supply chains are viewed by other industries as meaningful strategic assets.
What is the cure? For years now we have talked about using “better technology”, “value analysis” and “more training” for staff. All necessary, though they require a strategy first and tactics later.
Start with the basics
Controlling spend comes first. This includes controlling almost everything a provider buys, including goods, services, and capital equipment. Too often there is no real control of procurement, and it is viewed as a political asset. Except for pharmaceuticals, everything else should be handled using a consistent policy that runs through the purchasing department. You might be surprised how much cost can be cut with this simple policy alone.
Once purchases are controlled and transparent, move on to additional strategies that will foster further control and include your plans for growth and better service across your organization.
All entities should use your central supply chain
Rapid growth and entrepreneurial spirit sometimes demand fast action, and supply chain functions, including stores, purchasing and transportation, get overlooked. As new provider locations mature within a healthcare system they should all be brought under the supply chain umbrella. Goods and services can be standardized. So can accounts payable mechanisms, fostering additional control and transparency. Your prices and process costs will drop.
Control capital spending
Unbelievably, some hospitals and other healthcare providers do not include supply chain—specifically the purchasing department — in their capital equipment decisions. Expectations should be high for their participation, including calculations for Total Cost of Ownership (TCO), determining in-house service cost vs. OEM or independent service and repairs and the profitability of adding new capital equipment.
When you are ready to purchase, a skilled negotiator from purchasing should be a part of the discussions and control the negotiations. Train them, make them good at it, and allow them to handle almost all supplier negotiations. They likely already have tools that will make a good negotiation far better.
Use real Value Analysis efficiently
In the 1980’s or earlier, healthcare providers operated “New Products Committees” to review products to be selected for use throughout a hospital. Today we have adopted the term “Value Analysis” from industry. Unfortunately, the meaning of true value analysis has become blurred, overlooking process costs and outcomes. Executive sponsorship is a key to success.
When price is the only or the primary driver of the decision, the outcome frequently is keeping new, “expensive” products from consideration. In some cases, a higher cost product can significantly reduce other costs. Changing processes to reduce variation is a critical element of VA that often gets overlooked.
Examination of processes and their true cost is exactly what VA should be about. Evaluations fail because price becomes the only consideration. Well-functioning VA committees ask questions including:
Triaging products for the VA committee is critical. Look for the ones with the largest impact on outcomes, cost, and process.
If you ask executives in other industries, supply chain is usually a key part of their business strategy. It is time for healthcare providers to look at their supply chains as a strategic advantage—not as a tactical department to shave another nickel off the cost of disposable gloves.
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1”Huron 2021 Healthcare Executive Research: Thriving in a Changed Healthcare Market”, © 2021 by Huron Consulting Group, Inc., and affiliates.
John Strong has spent his entire 45-year career working across the healthcare supply chain. He is a co-founder and Chief Consulting Officer at Access Strategy Partners Inc. ASPI accelerates the introduction of new and valuable technology for suppliers and simplifies the acquisition of new products with strong clinical and economic value for providers.
