News

How centralizing purchasing and AP can yield significant benefits

by Matt Mayer

Getting supplies and equipment where they need to be, at the right time, in the right quantities, at optimal cost, and doing it all in the most efficient manner possible is the goal of every organization. But historically, the healthcare industry has not had the best track record when it comes to carrying out these tasks with great efficiency.

Paying attention to the mundane tasks of supply requisitioning, purchasing, receiving, inventory control, contract compliance and accounts payable is just not as sexy or glamorous to hospital administrators as negotiating joint ventures, planning new capital projects or putting together new bond issues. But the level of performance of these operational tasks can have as great an impact on the bottom line as any of those higher profile activities. Supplys cost typically consume around 16 percent to 20 percent of an organization’s operating expense budget. Unlike new service revenue, every dollar of savings on acquisition cost, or the operational cost of placing orders and processing payments, goes directly to the bottom line of a hospital’s income statement. 

In recent times, healthcare purchasing and materials management processes have improved. Most facilities have implemented Electronic Data Interchange (EDI) for purchase orders and invoices or are using Web-based solutions and third-party networks to help automate business transactions. Most of the major med-surg distributors now display their product catalogs on the Web and offer the ability to track purchase orders, back orders, and payment/credit status through their Web pages. Today, many group purchasing organizations offer their contract portfolios on the Web. Some also perform quality checks on pricing, thereby improving the pricing integrity and contract compliance of their members.

With all of these improvements and with technology now supporting electronic transactions and networks more than ever before, which new areas might yield additional savings? What are some other ways to help improve an organization’s bottom line by performing these fundamental tasks - acquiring and paying for the supplies and equipment necessary to operate our businesses?

At Sisters of St. Francis Health Services Inc. (SSFHS), a regional healthcare provider in Mishawaka, IN, we faced this question and came up with a rather unique solution: centralize the purchasing and accounts payable activities of the entire corporation for medical supplies and equipment. This would not include pharmaceuticals, food service, or engineering/maintenance supplies and repairs. But it would include approximately $170 million in annual purchases and payments that would be performed centrally. I say a “unique” solution because our health system is not based in just one primary metropolitan locale, as is common with most health system-wide centralized purchasing operations. Our facilities are separated from central purchasing-AP by as many as 170 miles, cover two states and two time zones, and include several large, multi-campus institutions performing the most sophisticated procedures. We also have a busy centralized reference laboratory. It should also be pointed out that our particular solution was entirely investigated, justified and implemented internally, without the use of any outside consultants. 

The benefits of a standardized, mainframe-based purchasing/materials management/AP system using EDI have been well known in our system for many years, thanks to visionary leadership in this area. However, the prior standardized (not centralized) system in place from the mid-1980s through 1999 still operated at the local level for purchasing transactions and AP processing, and did not have a standard item or vendor catalog/database across our corporation. Additionally, it was deemed not Y2K compliant, and thus had to be changed.

SSFHS implemented a new, standardized corporate-wide materials management/purchasing/AP system late in 1999, due to these Y2K concerns. The new system included one important operational enhancement that was key to the implementation of a centralized purchasing/AP system: electronic requisitioning. This meant that it was no longer necessary for paper requisitions to be delivered or faxed to the hospital purchasing department for order placement. The nursing floors and clinical departments could now requisition off of ordering templates (guides) on their computer screens, and all of the facility’s requisitions would be combined by vendor and appear on the local hospital buyers’ screens. 

Since this process was now electronic, we began asking all kinds of questions about our purchasing/AP processes. For example, why was it necessary for purchasing to be onsite? In most cases, nursing and the departments communicated by phone with the buyers; did it matter where that phone call was routed to? With our multi-campus facilities, the purchasing staff was already off-site for at least one facility. As long as there were some essential materials staff at our facilities for problem resolution, product conversion efforts, and to serve as a local first-call resource for supply questions, why did the buying need to be onsite? And if the buying was done centrally, shouldn’t the accounts payable, which daily interacts with purchasing, be centralized as well? What would the impact be on GPO supply contract implementations, always a challenging issue for hospital purchasing departments to stay on top of? Earlier investigations of faulty contract implementation, non-awareness of contracts in the field, unused contracts, and unsigned Letters of Commitment had yielded potential lost savings of $2.1 million annually for our health system. With central purchasing, our buyers would be working closely with our contract managers, so that communication and awareness of contracts would be enhanced. Additionally, each central purchasing buyer would be placing orders for the entire corporation for a particular vendor or product category, so variations in pricing, supplies, and vendors used would easily become evident.

Some early activities in preparation for centralized purchasing-AP included determining in what shape or form our existing materials departments should be changed into, cleaning up and standardizing the existing item and vendor catalog/databases and merging them, securing access for modifications to the databases to a single SSFHS corporate office employee and developing standardized best practices for purchasing/AP processes, both those that would be centralized and the ones that would remain in the field (examples include communication between central purchasing-AP and hospitals, division of buying responsibilities, hospital receiving processes, invoice pricing discrepancy resolution, requisitioner training, vendor dispute resolution, timeline for CP-AP implementation, etc.).

We also decided to implement a corporate-wide procurement card (P-Card) program for the engineering/maintenance purchases left in the field. And we decided to implement a facility-based, office supply faxed-order guide process that our departments could use to requisition office supplies directly from our sole-source office vendor. This was done to keep thousands of low-dollar items out of our item database and not burden central purchasing with hundreds of low-value transactions. 

A staggered implementation schedule was developed for 2002. In it, one facility each month would be brought up on central purchasing-AP. We began hiring people to staff our new department in the fall of 2001. On January 1, 2002, our first facility went live on central purchasing. From then on through June 1, 2002, one facility per month was switched over to central purchasing/AP. We adhered to our schedule perfectly and all of our facilities were up and running by June 1, 2002.

Benefits achieved
The benefits we have seen are many and are included here in bullet-point form. The impact on the bottom line that we have documented so far is $2 million, but that is only what has been documented. Many prices are fixed daily and contract pricing implemented but without documentation. But the true benefits of centralization go far beyond this, as the list below demonstrates:
- better pricing integrity with regard to GPO and other negotiated contracts 
- improved capture of payment incentives
- better customer service to our end-users, both by central purchasing and the remaining onsite materials staffers
- more contract commitments signed as a health system, versus by individual facilities (and better pricing!)
- a significant increase in the proportion of PO/invoice transactions handled electronically (more automation)
- a corresponding significant increase in the proportion of payments sent via electronic funds transfer (EFT); 25 percent of total expenditures are now handled via EFT and this is growing quickly
- a modest reduction in the number of FTEs needed to carry out these transactions
- improved product standardization across the health system
- increased contract compliance to our GPO and SSFHS purchasing contracts
- consolidation of vendors leading to fewer POs and invoices placed, and shipments received
- elimination of misuse of the system that was causing purchasing history to be lost and the system to crash
- capturing data on purchases that were occuring outside of the system due to manual POs/check requests and non-purchasing system POs 
- improved data capture of capital project purchases for budget tracking
The keys to success:
- Spending sufficient time in preparation to cover all aspects of the purchasing/AP process, current states versus the new centralized process
- Having at least one knowledgeable expert on all aspects of the purchasing/MM/AP software system in use, for both the purchasing side and the AP side
- Creating excellent communication pathways between CP-AP staff, the local materials staffs and directly to the requisitioners 
- Meeting with requisitioners, local materials personnel, and AP personnel to discuss how the new process will work prior to go-live; answer questions; allay concerns
- Providing hospital personnel with a quick reference guide answering the most common questions and concerns about the new process, and how communication will happen
- Reviewing and standardizing receiving procedures at the facilities and making sure all receiving personnel are trained on, and adhere to, the new policies and procedures; this point cannot be stressed enough
- Hiring good, high-functioning, dedicated staff for central purchasing-A/P
- Having good IT department support

Future streamlining
We are looking at enlarging the number of our current EDI vendors to more than 150 from the current 60 using a Web technology provider. We also intend to double our EFT payments to $80 million from $40 million. Enhancing our processes to perform discrepancy resolutions before they arrive on invoices is another improvement we are looking carefully at, as well as implementing document scanning/workflow process technology to streamline our invoice processing, receiving and payment activities to improve productivity further. An additional goal is to automate QA’d pricing downloads from our sole-source med-surg distributor and implement a contract tracking module of our materials management system to better track compliance.

Centralizing the purchasing and A/P activities of a multi-billion-dollar, geographically disperse healthcare corporation is possible and can yield significant benefits both from a financial and an end-user customer satisfaction standpoint. The impact in dollars and cents is significant, and the improvement in processes translates into further cost reduction opportunities down the line (product standardization, electronic automation, system-wide commitments to contracts, etc.).

Additionally, the elimination of practices adversely affecting supplies and equipment expense reporting make centralization of these activities well worth the time and effort. Any health system looking to positively impact its bottom line would do well to look at centralizing its purchasing and accounts payable operations. 

HPN

Matt Mayer, MBA, is executive director of procurement services at Sisters of St. Francis Health Services Inc., Mishawaka, IN. He may be reached at 574-256-5186, Ext.104; Fax: 574-256-3617.

September
2003