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         Clinical intelligence for supply chain leadership



September 2011

Having My Say

This Month's Advertisers


Reflecting retail’s example, model

Category management should define healthcare supply chain, too

by Joseph M. Dudas, vice chair of category management, Mayo Clinic

Ever walk into a Walmart store, survey the vast array of shelved merchandise and think about the retail contents?

Why is a certain product on the shelf, let alone that shelf?

Why is it on a shelf at eye level?

Why is it "on sale?"

Why is it in the back of the store versus the front?

Those decisions are made because of you, the consumer. Every time you go to the cash register with those items in your cart you are casting a very important vote to someone in Bentonville, AR, with the title "Category Manager."

There is a saying in retail that "customers vote with cash," and it is absolutely true and why retailers like Walmart have been so successful. They are consumed with making you happy to the point you will hand over some of that hard-earned money in exchange for their services. That is right, not for the products you purchase, but for their supply chain to bring them to you.

A little history tells us that this is not the way it always was. Prior to mega retailers like Best Buy, Target, Walgreens, Walmart and others, manufacturers pushed products into the marketplace in hopes of capturing sales. Retailers at the time lacked sophistication and generally followed the advice of the largest and most powerful suppliers at the time. A huge sales force and massive advertising campaigns were standard.

Retailers eventually caught on, began to consolidate, create a brand of their own and develop supply chains as well as a relationship with those who entered into their stores. They leveraged their newly formed assets and began advocating for their shoppers. The first step was to start charging suppliers for access (via shelf space and advertising). Does any of this sound familiar to you?

Over time decision making transitioned completely from the seller to buyer, and this is now known in the retail industry as "Category Management." Healthcare must transition similarly. In the end "The Needs of the Patient Come First." Reform is here to stay, and quite frankly, there is no more money to spend on healthcare.

That elusive silver bullet

In just the past five-to-six years we have seen tremendous healthcare supply chain advancements as well as recognition of its importance. However, what I see too often is a lack of commitment and coordination. Organizations often bandwagon from solution to solution looking for a single "silver bullet." Executives are then often frustrated because the new overhyped solution does not resolve the overall needs, so that solution is abandoned.

What follows is an actual conversation that I overheard one day outside of my office. Contracting Manager: I hate these new spend reports!

Contracting Analyst: Why?

Contracting Manager: They never work. Look, I put in my items’ numbers, run the report and after several minutes of waiting, I get…NO DATA.

Contracting Analyst: That is strange. The reports seem to work fine for other items. Let me call our IT group.

IT Developer: Your report is working fine. There are no purchasing records for those item numbers.

Contracting Manager: This is our preferred vendor, and these items are on our contract. We are in my office now, and I just don’t know how this is possible. I will call purchasing. Thanks.

Contracting Manager: IT is trying telling me that we that we have not purchased any of the products on our new contract. We made commitments and they gave us a sweet deal in exchange. What is up?

Purchasing Manager: Relax. We buy those items all the time and we are surely compliant with your contract. We launched a new P-card program and decided to use it to purchase those items. The program is working great for us.

Contracting Manager: What the heck is a P-card?

There are categories where P-cards work great. However, this conversation is just a very simple yet good example of why we are not great and are in need of a closed loop system.

Getting on target

The reality is that a single bullet (or solution) is not what drives the most efficient and effective Supply Chains. Many of the popular retailers have developed and embraced a complete arsenal of solutions and a very well-coordinated deployment plan. The plan, Category Management, leverages the power of the teamwork and collaboration and applies each solution to a specific category (or groups of categories).

A textbook definition (or Wikipedia in this case) reads something like the following:

Category management is a retailing concept in which the range of products sold by a retailer is broken down into discrete groups of similar or related products; these groups are known as product categories (examples of grocery categories might be: snacks, washing detergent, toothpastes). It is a systematic, disciplined approach to managing a product category as a strategic business unit.

Each category is run as a "mini business" (business unit) in its own right, with its own set of turnover and/or profitability targets and strategies. Introduction of Category Management in a business tends to alter the relationship between retailer and supplier: Instead of the traditional adversarial relationship, the relationship moves to one of collaboration, with exchange of information, sharing of data and joint business building.

Category Management is a combination of many things, but first and foremost it is a strategic approach to meeting or exceeding consumer demand. It is a closed-loop purchasing process that begins with business intelligence leading to the best sourcing and contracting results, optimal procure-to-pay processes, contract utilization and compliance leading to a high quality patient outcome and financial performance (i.e., realized on the financial statements). When all of this works optimally, it produces the next wave of intelligence to be used in the cycle all over again to produce continuous business benefit.

Mayo does it

Mayo Clinic has been on such a journey during the past 10 years, like many, to transform its Supply Chain from a very tactical process to one that is well-defined and significantly improved in each function. We have consolidated our operations, invested in staff and systems, as well as improved our relationships with our end users including our physicians.

Here are a few examples:

Partnerships: Mayo Clinic has a unique relationship with our group purchasing organization, and we have both committed to mutual objectives and resourcing. We have also committed to work for the mutual benefits of 35 other healthcare providers in our UMCSC, LLC [purchasing coalition.] We have deployed integrated teams within Mayo Clinic as well as clinical quality value analysis.

Skills: Transactional roles, no longer necessary due to automation, have been replaced (through retooling) with consultants who are well versed in DMAIC [Six Sigma], project management, technology and facilitation.

Systems and Master Data: We have implemented an enterprise resource planning (ERP) system to automate and integrate our administrative back office. On the front lines we have deployed materials resource planning (MRP), point-of-use, e-commerce and optical character recognition (OCR). Mayo Clinic has also been on the forefront of GS1 Healthcare US data standards adoption.

Business Intelligence: Through our GPO partnership we have invested in and deployed spend analytics and benchmarking. Additionally, we have invested heavily in enterprise data warehousing.

The return has been well worth the effort, and as a result we have documented more than $600 million in savings. Yet, while this is good, we recognize it is not great.

Gazing ahead

Great performance is what we are going to have to achieve in order to meet the future needs of our patients. For this reason, we have committed to transition a large portion of our supply chain activity to "Category Management.

Our first steps are to consolidate our sourcing and contracting, value analysis, contract administration and systems units into a single highly empowered team. We have also launched a three-year program to completely integrate supply chain and clinical data, recommitted to the basics, as well as invested in a fully automated contract management system.

But most importantly we have committed to work together, across those well-performing supply chain processes, to develop solutions that work best for each category of products. Our objective is to not only accelerate savings and efficiency for Mayo Clinic but also to provide incremental value to all of our partners (including the suppliers). These changes will not be easy, but as we look back on history and into the future we are sure the changes are very much necessary.

We believe that others have been progressing similarly and will naturally transition into this next phase of advancement. In short, healthcare can adopt Category Management.

What follows is our hope for healthcare’s future supply chain.

Hospitals eventually caught on, began to consolidate, create a brand of their own and develop supply chains as well as a relationship with those who entered into their facilities. They leveraged their newly formed assets and began advocating for their patients. They skipped the first step, which was to start charging suppliers for access. Instead, decision making transitioned completely with a strategy that was well known in the retail industry called "Category Management."

Healthcare supply chain management transitioned just in time. They realized that in the end "The Needs of the Patient Come First." Now there is more money to spend on healthcare research, education and innovation.

As vice chair, contract management, Mayo Clinic, Joe Dudas is responsible for all Strategic Sourcing, Contract Administration and Informatics. He served as chair of the Healthcare Supply Chain Standards Coalition and is currently a member of the GS1 Healthcare US leadership team.