Cover Story

Building a better supply chain has definite rewards

by Curt Werner

The basic idea is simple: Every hospital in the nation wants to cut costs. The question of how to do that is even simpler, but increases exponentially in difficulty when actual answers are considered. With supply expenses pegged in the neighborhood of 20 percent of revenue for the typical facility, tipping the needle even slightly in an advantageous direction can mean fewer layoffs, better equipment, expansion or even pay raises. Materials managers, of course, know this. Managers who have the clout, the ability and the inclination to do more than simply spend hours at the bargaining table trying to hack pennies off supply contracts are looking to the supply chain to tighten the logistical systems that support product purchasing and use. It’s what many professionals call “second-dollar costs,” the money spent on nudging product from the receiving dock or warehouse to the end-user.

For a variety of reasons, little is being done to smooth out the supply chain in many hospitals, says Jack Anderson, a veteran materials management consultant and president of Materials Resources, a small firm based in Raleigh, NC. “There isn’t much that’s new,” says Anderson. “I just don’t see a lot of innovation.”

Anderson is convinced that hospitals that attempt to beat the supply chain at its own game by installing internal distribution systems are doomed. (Nick Toscano’s Virtua Health System in New Jersey is one that has tried and succeeded, Toscano says, and his story is contained in this month’s Newsmaker Q&A feature.) “Internal distribution costs are far higher than for paying distributors,” says Anderson. “A hospital that self-distributes may think it’s doing it for around cost-plus 5, but once product hits the storeroom, it can be paying as much as cost-plus 35.” Additionally, he says hospitals tend to get bad fill rates, use unreliable labor to operate their distribution systems and run everything through substandard materials management information systems. Anderson calls such attempts “duplicate distribution systems.” 

Anderson says he still sees such dual systems fueled by other cash-draining customs as over-replenishing a par system, and tells of hospitals where par levels are taken and refilled on a daily basis even though only 10 percent to 15 percent of items are being used each day. He also points a blaming finger at too-frequent distributor deliveries, equal handling of chargeable items and nonchargeables by bulk stores, and an inability to accurately calculate turnover rates, which leads to over-buying as other costly practices that should be stopped.

Anderson is also opposed to use of what he calls “lockers,” the popular but expensive “vending machines” that lock up product and report on product use. “It has been overkill of these lockers,” he says. “The reports they provide are ignored and hospitals misuse the machines by packing in a 90-day inventory and store both charge and noncharge items inside, again creating a dual distribution system. Plus, hospitals usually don’t re-engineer their labor force when they gain labor reductions that might result from using these lockers. Open systems make more sense.” He mentions such an open system offered by Atlanta-based Per-Se Technologies as a type of system that does make sense.

“Hospitals think they are being progressive when they put in systems that make sense, but they don’t use them correctly or to the full extent of their capabilities,” he says.

Supply chain can lead to a slippery slope

Jamie Kowalski, a consultant who has advised hospitals for many years on materials management and supply chain matters, has a somewhat different view than Anderson. Kowalski, who heads Kowalski-Dickow Associates, a Milwaukee-based consulting firm, says very often it is a hospital’s culture, political environment and cues from top level management that set the tone that determines whether the hard work of streamlining a supply chain will proceed. He agrees with Anderson that stifling inertia often sets in when it comes to making supply chain alterations. “There are organizations out there that deal in a time warp,” he says. “They feel that if their reimbursement situation is OK and their finances don’t hurt badly enough, they really don’t want to make changes, especially changes that require hard work and usually make someone unhappy.”

And few hospital administrators are willing to take on the appearance, says Kowalski, of “Chainsaw” Al Dunlap, the former CEO of Sunbeam Corp. who fired thousands of workers as his way of improving the supply chain and impressing investors, but ruining people’s lives in the process.

Some hospital entities have summoned up the gumption to make the changes required to save costs. “The hospitals and the managers in them that are doing well are bringing it forward despite the risks,” says Kowalski.

To begin with, Kowalski says those successful efforts start by determining the proper measurements and sticking to them. “Hospitals are still fooling around with the metrics,” he says, “which just turns light gray into darker gray. The standard measurements that are needed just aren’t out there.” His firm makes use of three standards: cost per adjusted patient discharge, cost per adjusted patient day and costs as a percentage of total expenses. They also drill down further in specific departments to find data such as supply costs per cath lab procedure, per lab test, per OR procedure and per radiology procedure, each adjusted for acuity levels. “That way, even if volume increases, costs per procedure shouldn’t change,” he says.

Kowalski says once that issue is settled, materials managers should work on identifying areas that are skewing performance. “Go visit the OR, the cath lab and places like that and do the value analysis, the work for standardization, and make sure the hospital is utilizing contracts properly in terms of accuracy and pricing,” says Kowalski. “Get everyone doing things in virtually the same way.”

One factor that can sap the energy and take the focus of any hospital or network away from supply chain changes is the materials management information system. Kowalski believes that most systems on the market today can do the job, as long as the system is being used properly and to the maximum of its capabilities. But he cautions that hospitals sometimes look for too much out of their MMIS. “Don’t let the perfect spoil the perfectly good,” he says. “Hospitals sometimes get too picky and want to get data suited to the way they have always got it rather than the way it’s presented. You cannot customize everything. And if no one connects the dots and makes it all part of a management report, then the system is not being fully utilized.”

In his experience, hospitals have also gone overboard in their MMIS investment, and made the mistake of underestimating their outlay in time and resources. For example, he talks about a large integrated delivery network that took two-and-a-half years and hired 80 people to complete the installation. The cost of an information system can run into the seven-figure realm, says Kowalski. “That expense can be justified, but hospitals are capital short and underfunded in terms of information systems, so they have to approach the project carefully.”

Another critical factor in rebuilding a hospital’s supply chain, Kowalski says, is people. “The recruitment and retention of personnel who work well in basic supply chain jobs in hospitals is no better than it is at McDonald’s, Sears or Wendy’s,” he says. “You can see the dearth of quality employees even though pay has gone up.”

He is also convinced that it is not a reach to say that the quality of a hospital’s supply chain activities has an impact on the institution’s ability to attract and retain skilled nursing personnel. Says Kowalski, “The effectiveness and efficiency of the supply chain as an actual nursing satisfier or dissatisfier. Nurses spend too much time chasing supplies, and that burns them out faster. Chasing supplies in some hospitals has become a routine part of their jobs. If changing the supply chain can design out three trips a day by three nurses in three departments, then you can raise productivity.”

Self-contracting, self-distribution could work

Kowalski is among those who take classes at the school of thought that says an organized, well-conceived hospital or IDN can do its own supply contracting and distribution, and save money doing it. Depending on the business model of the IDN, he says between 12 and 20 IDNs have the critical mass and the right geographics on their side to allow a self-contracting and self-distribution strategy to flourish. “The IDN also has to have the management skills, the motivation and the aversion to risk,” along with what he calls “a degree of one-enterprise thinking.” In fact, Kowalski points out that should those 12 to 20 IDNs move successfully in that direction, they could amount to self-contracting, self-distribution and advanced supply chain strategies representing as much as a third of the nation’s healthcare supply chain spending. 

But for hospitals and IDNs that are as yet unwilling or unable to follow suit, he says that today’s med-surg distributors are ready to play an important role in streamlining a hospital’s supply chain if they are asked. “Distributors offer good services,” he says, “but they are not always the best alternative. Distributors are trying to improve and bring real value and make themselves relevant, however, and if they don’t, they’re dead.”

Consultant Anderson’s assessment of the supply chain and med-surg distributors isn’t completely bleak. He says that activity-based costing systems such as those offered by Owens & Minor Inc., the Richmond, VA-based distributor, are “really fine.” Plus, he says he has seen hospitals that have saved by consolidating distribution responsibilities and instituting replenishment systems that respond to demand rather than just automatically adding product to the system every day regardless of usage patterns. Other hospitals use electronic requisition systems for both stock and nonstock items.

As a pure-play distribution company, Owens and Minor has historically taken note of the savings possible in second-dollar costs, and recently announced a plan to ramp up its offerings in this area. Owens named James E. Grieger, an executive experienced in third party logistics with Allied Worldwide, to serve as the company’s point man in hospital distribution logistics.

To be sure, Owens is not the only company targeting supply chain and logistical issues. A number of somewhat lesser-known players have flocked to the party, among them SciQuest Inc., Research Triangle Park, NC, a company that is offering a suite of e-procurement and materials management solutions to help organizations cut costs and improve supply chain quality. Bigger names such as St. Paul, MN-based developer Lawson Software, which has gained a strong reputation over the years for expertise in materials management systems, has chipped in with several offerings, while Lawson competitor PeopleSoft Inc., Pleasanton, CA, says several large IDNs have adopted its suite of solutions including materials management, financial management, human capital management and enterprise performance management to help hospitals optimize administrative systems and improve operations. One PeopleSoft customer, Valley Baptist Health System, an IDN based in Harlingen, TX, is replacing its paper-based materials management system with an online, real-time PeopleSoft system. This will allow purchasing managers to improve contract negotiations with key suppliers and purchase medical and business supplies as needed, meaning reduced inventory costs. Lawson, PeopleSoft and others in that segment have signed up dozens of hospitals and networks anxious for supply chain help on the technology side of the equation. 

Broadlane offers alternatives

As sort of a hybrid GPO and e-commerce play, San Francisco-based Broadlane has merged its two seemingly split personalities into an offering that is aimed at helping hospitals trim supply chain costs. In fact, Broadlane executives like David Ricker, the longtime hospital supply industry veteran who was recently elevated to the CEO post following the departure of Trevor Fetter to parent Tenet Health, prefers to call attention to the company’s supply chain solutions as its biggest strength.

In particular, Broadlane’s strategy is aimed at hospitals and networks that are willing to turn over their complete supply chain to Broadlane, which will install a homegrown contract portfolio and move in the people to run the necessary departments. It’s a confident approach that has gained appeal and a willing audience in several big name systems. An example of the Broadlane strategy is a contract signed in February 2002 with the Health Alliance of Greater Cincinnati, an IDN that operates six hospitals and 40 locations in and around Cincinnati and northern Kentucky. 

As is typical with Broadlane’s supply chain customers, The Health Alliance turned over complete contracting responsibility to Broadlane and agreed not to stray from the relationship for any supply contracts in what Ricker calls “a practical approach for people interested in controlling the supply spend.” The supply spend for Health Alliance is approximately $200 million, and Ricker says that since implementing Broadlane supply chain solutions, the network has saved about $9.4 million from a base of $107.7 million for a 9 percent gain. Broadlane charges customers like The Health Alliance on a formula based chiefly, but not exclusively on savings. “We’re very bullish on this model for hospitals,” he says.

Reaching that 9 percent savings figure does not come easy or quickly. Another Broadlane IDN customer is New York’s Continuum Health System, where a throng of about 100 Broadlane employees focuses on the big network’s supply chain operations. Ricker says that in 2001, Continuum picked up $9.5 million in recurring savings, and then added another $15.5 million to that in 2002 with a goal of saving the system a robust $45 million through 2004. “The supply chain,” says Ricker, “can be part of a very important strategy to help manage a much healthier P&L statement.”

As an aside, with Broadlane’s parent Tenet Health suffering through a trying period, questions have come up regarding the relationship between Broadlane and Tenet and whether Tenet’s trouble might threaten the viability of Broadlane. According to Broadlane spokesman David McAdam, Broadlane is a privately held company founded in December 1999 that today employs nearly 300 people in five offices (New York, Cincinnati, Dallas, San Francisco and Oakland). Broadlane is owned not just by Tenet, but also by Kaiser Permanente, Universal Health Services, Community Health Systems, and other healthcare provider organizations, as well as by individuals. Tenet, however, is the majority owner.

Broadlane, says McAdam, “is in strong financial condition.” In this past year, McAdam says the company recorded its first two consecutive quarters of positive cash flow from operations as well as its first three consecutive quarters of positive EBITDA, and he expects these trends to continue. He added that Broadlane revenues from existing customers alone “will preclude any need for additional financing to support our overhead and growth.”

HPN

January