The pressures on hospital supply chains are changing. In the past, a hospital that managed its purchasing costs well could operate efficiently. Today, the cost of materials management can exceed 35% of a hospital’s operating budget, with nearly 20-25% attributable to supply costs alone.

What are the top issues facing hospital executives and supply chain directors today? Specific perspectives may vary, but most agree that there are tremendous opportunities to improve supply chain performance. However, strong barriers must be overcome for change to succeed. Requirements include:

Integration
The hospital supply chain has insufficient linkages to clinical systems, revenue cycle, IT, and clinical operations. The supply chain often is viewed as a "back dock" support service that provides the products and services required by clinical departments. To be fully effective, it must be an integrated link in the chain of clinical and non-clinical operations.

Control
Supply chain should be the primary conduit for all third party relationships.  Yet many hospitals have non-materials trained people ordering supplies and signing contracts without utilizing supply chain procedures. In order to optimize pricing, GPO relationships, inventory management, vendor relationships and contracts, and financial and inventory reporting, all purchasing should funnel through the organization’s supply chain operations.

Strategic focus
Supply chain management should focus on the total impact of care, not merely product acquisition costs. It should look strategically at value, to positively affect both the patient outcome and the costs of care, not just price.

Supportive structure
Effective supply chain management structures are extremely rare across the industry. Most healthcare organizations still have materials management and purchasing departments. While some have changed the name to ‘Supply Chain’, they are still acting like a traditional materials management operation. Few materials management departments are positioned well to take advantage of leading supply chain practices.

A new skillset
Traditional healthcare materials management focused on processing requisitions and placing orders. The procurement aspect of the operation disseminated information and researched price quotes. The materials management aspect focused on ensuring that there were enough supplies to satisfy customers. In order to move to a more strategic focus, supply chain managers will need:

•Analytic skills to evaluate spend history and analyze cost-benefit;

•Project management experience to leverage cross functional expertise from departments across the organization (e.g., Physicians, Nursing, Finance, Administration);

•Facilitation skills to ensure that different points of view are considered when developing strategies;

•Professional skills to communicate effectively across the organization.

Empowerment
Frequently, supply chain is in the basement.  Not only is this a physical reality, but also metaphorically true.  Many supply chain leaders do not have the title or corresponding authority to enact the policies required for dramatic supply chain improvements. The hospital’s supply chain leader must be positioned to enforce central purchasing, improve inventory management, and redesign logistics and procedures across the organization.

Physician support
There is often a disconnect between those who are making the buying decision and those who do the buying. Physician collaboration and financial responsibility are two critical success factors of any supply chain initiative. Physician support can be improved by using proper data and metrics, enlisting physician champions, increasing awareness of supply issues and the strategic importance they play, and involving physicians in value analysis teams. Supply chain leaders must educate, inform, and join with physicians to acquire quality products while reducing the cost of care.

Measurement
Many hospitals make changes that result in lower costs, but measure results in weeks, rather than years. To be successful and sustainable over the long term, supply chain initiatives must focus on process redesign and attitude change, while deploying enabling technology. You get what you measure and reward consistently.

Consistency
Typically, pricing for physician preference items differs across departments, facilities, and geography.  This is simply not logical.  There are a few very minor "cost to serve" reasons that could affect pricing.  For example, different facilities could handle a different mix of diagnoses, affecting the volumes purchased and by consequence the pricing. However, there is no efficient market reason to justify most of the differences in prices. GPOs have had only minor successes in this arena. Supply chain leaders must engage with their peers as a unified industry in order to have a strong, common voice when engaging manufacturers of health devices and supplies.

A holistic view
Healthcare organizations face compartmentalization and fragmentation on multiple fronts. Externally, hospitals are faced with suppliers structured with siloed business units. Internally, hospitals are divided into departments that do not effectively work together. The total cost of patient care could be reduced through a holistic collaboration of materials management, pharmacy, lab, and other support services together with physicians, clinical care givers, and end-users.

Enabling technology
MMIS systems are largely inadequate for a strong supply chain process.  Quality information and an integrated architecture are lacking. New processes and tools such as eSourcing, eAuctions, RF Technologies, Automated Data Retrieval (ADR), Comprehensive Data Standards (UPN, HIN, UNSPSC, etc.) are almost non-existent.

Content management
Information systems are only as good as the quality of their data. Most materials management information systems contain obsolete, duplicate, and inaccurate data. As tools for procurement become more automated and efficient, it becomes more important that the data is up to date and correct. Cleansing and managing thousands of lines of data — which are often created by multiple users at different points in time — is a huge task. A hospital can greatly improve its cost savings by integrating, verifying, standardizing, and monitoring the data going into and out of their materials information systems.

Edward Stark is a Vice President in Capgemini’s Health Practice and also serves on the executive leadership team for the global supply chain organization. Mr. Stark has extensive experience in global supply chain consulting, including procurement, manufacturing, logistics, planning and information technology. Mr. Stark can be reached at Edward.stark@capgemini.com.
	Timothy Mangione is a Manager in Capgemini’s Health Supply Chain Practice. Mr. Mangione has more than seventeen years of experience in healthcare materials management, group purchasing, sales, and consulting. Mr. Mangione can be reached at Tim.mangione@capgemini.com.

Group purchasing organizations
According to recent AHRMM studies, the average hospital belongs to 1.2 GPOs, today, down from 2.5 memberships in 1994. GPOs are a very valuable tool, assisting with contracts for supplies, information access, and peer collaboration. But at times, GPOs can limit a healthcare organization’s ability to self contract and can artificially set prices higher through strong contractual relationships with manufacturers and most favored nation clauses. A hospital must utilize its GPO as but one tool at their disposal, looking at all available options for contracting, sourcing, and supplier management, including self contracting and regional purchasing alliances.

Inventory management
Most healthcare supply chain operations cannot efficiently manage their flow of materials, sustain correct levels of inventory, or maintain fundamental inventory information and reporting. A 3% percent reduction in supply inventories can equate to a 1% reduction in total hospital expenses. Areas impacting inventory management include unofficial inventories found throughout the facility, which can account for as much as 50% of total inventories; central sterile and supply management; accurate, real-time information systems with interfaces to appropriate financial and clinical systems; and collaborative, efficient support from nursing and other internal customers.

Conclusion
Hospitals can achieve substantial benefits by not only changing purchasing practices, but also improving how they manage their labor force, supplies, equipment, and facilities. With nearly 80% of total hospital expenses accounted for in patient care costs, this impact can be truly significant. A strategic view of the hospital’s supply chain is critical for success. Supply chain management must be high-level, focused, concise, non-fragmented, driven towards realizable and sustainable goals, and overall collaborative.