Benchmarking can be an effective management tool as many industries have learned. But benchmarking cannot be any more effective than the accuracy of the performance data will allow. Each data point must be well defined and the instructions to capture it must be clear and concise. Anything short of this will lead to muddled data and benchmarks that are not benchmarks at all.

Materials management in a hospital setting is all about performance and performance data. As a result the financial results of the materials function should be among the easiest to evaluate. Yet hospital CFOs seem to struggle mightily to identify a reliable and useful set of financial performance criteria on which to base their evaluation of the performance of the materials function. But those "benchmarks" that are currently in place barely provide useful information about the department’s management of supply costs and offer nothing of use in evaluating the cost of managing the supply management function.

For years hospitals have relied on two similar measures of supply cost management and both fail to provide information that the director of materials management can use to create change and improve performance.

First, supply cost per adjusted patient day and supply cost per adjusted patient discharge are both significantly dependent on utilization and in most cases utilization is controlled not by the materials director but by clinical protocols. Although it would be correct to argue that individual product costs will impact these numbers, those product costs are more likely to be more a function of the hospital’s compliance to its GPO contracts and whether the hospital’s own clinical protocols support the products available on the GPO contract.

At the end of the day there is little the director of materials can do to affect this unless supply contracts ignore clinical protocols and non-contract products are strictly prohibited, supplies are rationed to clinicians or they are withheld altogether. None of this has stopped hospital CEOs and CFOs from rushing into their director of materials management’s office with the latest supply cost benchmarking report in hand, demanding change. But this logic makes it easier to sell automated supply cabinets than it does to find meaningful indicators on which to measure the relative effectiveness of the materials management department.

Second, there are no established baselines or standards of excellence for today’s supply cost benchmarks. A hospital can be led to believe that it is better than another hospital in its benchmarking group but none of the hospitals know if the hospital that looks the best is really the best of the best or if they are simply the best of the worst. Case mix indexing was added in order to create a set of assumptions against which the data could be normalized but that is not the cure all that it was hoped to be (See Hyde, Garrick, "How Does Patient Acuity Affect a Hospital’s Expenses", The Society for Health Systems, 2002).

But even if supply cost per adjusted patient day/discharge was an accurate method of benchmarking supply costs, it completely ignores the hospital’s cost of performing materials management activities. And those costs contribute to the hospital’s labor costs which make up the more than half of the hospital’s total expenditures and they simply cannot be ignored.

Analyzing the mission
What aspects of materials management performance should be measured?

Before one can decide what to measure one must first understand the important issues for materials management and specifically for the hospital director of materials management. In other words, what is the mission of the materials function? That mission falls into four main areas as follows: 

1. Can the department reduce unit supply cost? While the director may not be able to control utilization he must try to impact the unit cost of each product used by his hospital. (This is made immensely more difficult if the CEO sends conflicting messages to the director. On one hand he wants to support his GPO and get the annual excess fee disbursement check. On the other hand he won’t waste a minute telling the director to find a lower price even if it means going outside of the GPO.)
2. Can the department reduce the chances that accounts payable will pay invoices with prices that are incorrect?
3. Can the department provide high service levels in supply replenishment and make equipment reasonably accessible so that nurses spend their time caring for patients and not serving as temps for the materials distribution function?
4. Can the materials department deliver all of the above at a reasonable cost to the organization and can that cost be clearly measured and effectively managed?

In order to fully address these areas of importance there are some misconceptions that must be eliminated.

Cost and utilization are not the same issue. Utilization is a matter of which product to use and how often to use that product or how much of it to use. These decisions are clearly clinical in nature and it is unfair to expect materials management to make them. Unit product cost, on the other hand, is a legitimate focus of the materials department, but that responsibility is often outsourced by the hospital to its GPO. Too often, CEOs seem to want to focus not on cost, but on utilization, mistakenly assuming that materials can control utilization, perhaps because while the CEOs are able to make the GPO selection decision they are less prepared to confront their physicians on product selection and utilization issues. Ironically, in too many hospitals the residents of the C-suite seem to lack the proper respect for the materials function and the people who run it, yet somehow they expect that the director of materials will have better luck controlling the product selection choices of physicians than they do. How will the physicians learn to respect the work of the materials department if the senior executives don’t model that respect for them?

What can materials really control? It is easy for a hospital CEO or CFO to read a supply cost benchmarking report and assume that the director of materials management is not getting the job done. But hospital executives do a grave disservice to their directors of materials management and to themselves when they fail to establish performance measurement parameters that measure those areas that the director of materials can actually control and change. Some hospitals have added to their own confusion in this area by moving clinicians into materials management leadership positions in hopes of addressing their troubling utilization issues but again failing to understand the essential logistics and business management role of the director of materials management. Clearly, a materials department can benefit from the counsel of an experienced and knowledgeable clinician but putting that person in charge may rob the organization of a healthy tension between the clinical side and financial side that should be best advocated by materials management.

Product cost and product cost assurance – Materials management should be responsible for line item cost for all products in two ways. First, it should be in charge of bidding, negotiation and contract management. If the hospital is a member of a GPO the materials department should provide ongoing oversight over the activities of the GPO to be sure that the hospital’s interests are protected. Second, the department should also be responsible for assuring that suppliers charge the correct price to the hospital. While accounts payable may discover the pricing error it should be the materials department’s responsibility to permanently resolve all such supplier pricing errors and establish any tolerance level for errant pricing, if one should exist at all.

Oversight of product selection decisions – Clearly clinicians are the product experts but without the influence of materials management there is a greater risk that their decisions will result in higher per-unit product costs. Materials management directors should respect the medical knowledge of their clinical counterparts but resist abandoning their own fiduciary responsibility in deference to the product knowledge of the clinical staff. While it may be temporarily uncomfortable, the financial vs. clinical tension between materials management and the clinical staff can be enormously constructive in fashioning product decisions that meet or exceed baseline clinical requirements while protecting the hospital’s financial health.

Procurement and capital purchasing activities – Materials management should manage all procurement and capital purchasing activities. Materials should be responsible for getting price quotes, placing orders, expediting those orders and resolving order issues. Regardless of how much buying authority is given back to individual departments, materials management should retain oversight responsibility. Hospitals expose themselves to significant financial risk and monetary losses when they allow clinical department managers to freelance their own purchasing without the procurement advice and counsel of the materials management department.

Internal and external logistics – Materials management should manage all internal and external logistics for the hospital. This includes supply inventory management and replenishment, asset management including the supplemental rental strategy and disposition of obsolete equipment and all equipment and software used in the process of managing these areas. One of the most important responsibilities of the materials management department is ensuring that clinicians have easy and timely access to the medical supplies and equipment they use to care for patients. Any time that a nurse becomes an ad hoc employee of the distribution department due to an out-of-stock situation it is an indication that there is room for improvement in how the materials department performs it function. HPN