An examination of materials management and the supply chain

with Jamie Kowalski

Jamie Kowalski, who is president of Kowalski-Dickow Associates, a materials management consulting firm based in Milwaukee, has since 1972 developed and practiced a specialization in healthcare and hospital supply chain management. His hospital line management background includes experience as director of supply chain management and assistant vice president for support services in community and tertiary hospitals. Kowalski also served as a marketing manager and logistics analyst for a national hospital supply manufacturer/distributor, giving him experience in the for-profit segment of the industry and knowledge of the entire supply chain.

HPN: You have followed the development of materials management in hospitals for years. How would you say the profession has developed and where do you expect it to go in the upcoming years?

Kowalski: In healthcare, the materials management profession has evolved significantly. There are more educated leaders in the hospital setting, greater degrees of collaboration between business partners, and recently, greater innovation for simplifying and removing expense from the supply chain. E-commerce has finally started creating real value for business trading partners.

However, there is yet much to be done in the basics: Applying value analysis to selecting, standardizing and utilizing products; contracting; physical supply chain; and the application of e-commerce tools to allow optimum performance in the above foundation components of the supply chain infrastructure. Here it is 2003, and healthcare is still behind other industries; products have not yet been completely barcoded for ease of tracking and identification and management of costs. That is an embarrassment.

I am not sure where supply chain management/materials management is going to go in the next three, five or 10 years, given that we still have these infrastructure issues as recently as today. However, with the appropriate recognition and support from senior executives regarding how supply chain management can affect healthcare’s overall cost effectiveness, much more can, and needs to be accomplished. There is still a very strong argument for recognizing supply chain management as the way in which healthcare expenses can be reduced without any negative effects on the quality of care provided. Think of an effective supply chain as a nurse “satisfier,” and you can see value beyond just savings, although nurse recruitment and retention can also save money.

HPN: Of the recent trends in materials management such as self-contracting and self-distributing, which do you believe holds the most promise in the future?

Kowalski: It has already been proven that IDNs with the appropriate characteristics (size – smaller than most people would [want to] believe, geography, degree of integration and information technology support) have been able to reduce total supply chain and supply expense by 8 percent to 20 percent through self-contracting and distribution. So, if an IDN has these characteristics, this would be a very good way to achieve millions of dollars in savings.

At the same time, the application of value analysis for product selecting, standardizing, and utilizing, will bring equal or probably greater reductions in supply expense than contracting or distributing can. However, because this involves interaction with and support from clinicians and physicians, it is much more difficult to pursue than changing the distribution chain or utilizing an e-commerce tool. It still remains the opportunity with the greatest potential benefit.

HPN: Under what conditions can strategies like self-contracting and distributing best flourish?

Kowalski: In addition to the appropriate characteristics mentioned above, self-contracting and distributing require experienced, informed leadership, a plan, an appropriate execution of that plan and the undying commitment of senior executives and the rest of the management team.

It might also be said that an IDN with the appropriate “motivation” (i.e., self-preservation) will more likely develop the willingness to take on this initiative and see it through to successful completion.

HPN: What does it take for a materials manager to make gains in supply chain management at his/her hospital or system?

Kowalski: Supply chain leaders must thoroughly know the operations and economics of the healthcare supply chain. That leader must be able to articulate those to all levels, to all participants in the supply chain, and from that develop a plan of action that recognizes but is not constrained to the status quo. It takes initiative. It is also a lot of work. But, it is arguably work very well worth undertaking, given the return.

The supply chain leader also needs senior executive support, and in some cases enough (startup) financial support to make the appropriate changes. Finally, change management skills (either from themselves or from some other person in the organization) will be essential in order to make the entire organization make such a significant transition and improvement in supply chain management.

HPN: Why have some materials managers succeeded in trimming supply chain costs while others have failed?

Kowalski: Some leaders have attacked the wrong facet/link of the supply chain. Negotiating better contracts (i.e., beating up the suppliers on unit price) or automating a purchasing transaction is not the best strategy for reducing supply chain and associated expenses. Better tactics require the application of value analysis to determine the right item for which to have a contract and a supply chain process that gets it from the point of origin to the point of use at the lowest total cost. This means understanding, educating and collaborating with clinicians and physicians, something about which many supply chain leaders are unskilled or intimidated.

Other failures have been the result of a lack of initiative. Such initiative requires an intelligent questioning of the status quo and the development of viable alternative approaches that can be implemented and that will lead to the desired success. Such an initiative implies risk; risk the plan may be found inappropriate, the organization will reject it, or it is not well executed. If it fails, that will jeopardize the individual leader employment status. That is scary. Humans are generally risk averse. 

HPN: What are the best-organized hospitals and IDNs doing to reduce supply chain expenses?

Kowalski: Challenging the status quo. Evaluating every aspect of the supply chain from a value perspective. Evaluating every product and/or drug, as well. Identifying the appropriate role of all business partners and utilizing it as indicated. This includes manufacturers, distributors, GPOs, etc. Measuring quantitative and qualitative aspects of every facet of the supply chain, tracking and reporting positive (reductions in expense) changes to every one of the components, to customers and senior executives.

HPN: What has been the effect on materials management and materials managers, of the recent controversies involving group purchasing organizations?

Kowalski: Fundamentally, not much. GPOs are continuing to work with hospitals and vice versa. However, the recent controversies have served as a needed wake-up call. Growth and success can lead to complacency and sloppiness. There is evidence of that in the healthcare supply chain. By conducting due diligence on all business partners, hospital and IDN materials management leaders can make sure that their organizations are in compliance with both the spirit and the letter of laws, guidelines, ethical practices, etc. Holding the business partners accountable for any lapses in ethics, illegal activities, etc., will make sure that fundamental, permanent changes will take place.

HPN: Has the role of group purchasing been diminished by GPO controversies of 2002?

Kowalski: There has been an increase in the scrutiny of GPOs. Many individual hospitals and IDNs are evaluating their current or historic GPOs relative to others that they may chose to work with. They are using a more formal process and qualitative and quantitative measurable tools. Some are changing GPOs. Some have even chosen to separate from any GPO and proceed with self-contracting.

This provides GPOs with both a challenge and an opportunity. If they change their structures, processes, business models, policies and ethics, they will continue to be recognized as a viable, valuable participant in the supply chain. If they do not, they will not survive. 

HPN: What do you believe is the role of medical supply e-commerce, if any, in shaping good supply chain practices?

Kowalski: E-commerce must be recognized for what it is: A valuable tool that enables the design and execution of an optimally efficient and effective supply chain. E-commerce is a strategy; e-commerce is not the strategy.

E-commerce can provide visibility and information that allows supply chain management leaders with the ability to make fundamental infrastructure changes that will better utilize resources, shorten lead times and reduce total supply chain expenses.

Caution must be exercised so that a fundamentally flawed infrastructure or process is not automated through e-commerce in hopes of fixing it. That will just increase transaction processing speed, giving garbage in-garbage out more quickly.

HPN: Materials managers’ salaries seem to have lagged behind other hospital managers’ salaries. Why is this, and do you foresee a turnaround?

Kowalski: If salaries include those of IDN and GPO executives, there is no evidence that they are lagging behind other hospital managers’ salaries. In fact, these positions are extremely well compensated through both base salary and performance bonus.

With so many hospitals being part of an IDN, it is possible that at the hospital level, the materials manager is relegated to executing daily transactions, with the development of strategies, tactics and global initiatives occurring at the IDN/corporate level. If that is the case, they are probably paid less than other hospital managers that do not have a “corporate” leader. Any salary catch-up or relative improvement will be tough to justify.

At the individual hospital level, for those not affiliated with an IDN, once senior executives are aware of the impact of appropriate supply chain management performance (and it is up to the individual managers to make sure that they are so informed and educated), then the supply chain leaders can begin to lobby for a better total compensation package, one that includes some risk for performance compensation in addition to a base. Such a degree of risk is not acceptable to many people. Those who can accept it will have a better chance at being more highly rewarded financially.

HPN

February