Bringing retail strategy to healthcare
Category management not just for
by Joseph Dudas and Terri Nelson
a popular topic in the early 1980s, service line management currently
remains a topic of interest within the healthcare provider community.
In the past, service lines were primarily
seen as a marketing strategy to combat the emerging trend in inter-hospital
competition. However, service-line strategy (also known as centers of
excellence) is not being viewed as just a marketing function this time
around. This time senior managers seem to realize that the concept not only
holds great financial promise, but also offers potential for gaining a
competitive edge through integrating their practices as well as forming
strategic partnerships (such as accountable care organizations and
Service lines are sure to challenge as well
as overlap supply chain needs, and this is where the beauty of category
management comes in. Through category management, processes such as clinical
quality value analysis (CQVA) can be utilized to support the unique needs of
multiple service lines while coordinating a discrete solution set across its
supply chain functions. At the Mayo Clinic, for example, 30 to 40 Specialty
Councils have been formed where physician leaders come together to
standardize and optimize practice standards. These same councils are looking
for the Mayo Clinic Supply Chain to interact with and support each council
with both flexibility and agility.
To meet this challenge the Mayo Clinic
Supply Chain Management Division has created integrated teams that review
transactional data looking for opportunities to address price, utilization
and new technology opportunities as well as leverage best practices, such as
CQVA. Category management’s philosophy also reinforces that Supply Chain
Management develop partnerships with suppliers as well as other healthcare
providers. This allows for new levels of collaboration and the power of
"Without our strategy of category
management we would not be able to scale to the required customization that
is needed to support the complex needs of our existing practice,
affiliations or UMCSC (a 36-member purchasing network)," said Jim Francis,
our Supply Chain Management Division leader. "Looking at the business of
supply chain management as 6 to 7 business segments allows us to apply best
practices while dividing and conquering the unique needs. One size does not
fit all, and we would not want to throw away a good business solution just
because it does not work for a given category."
Managed chaos, more
In retail, category management was created
as an integrated approach to marketing. Like the physician, the professional
marketer had always challenged the supply chain. It was not until these
functions were integrated that retailers were able to scale to the likes of
Best Buy, Target, Walgreen and Walmart. Marketing focuses on their four Ps:
Products, Placement, Price and Promotion. Likewise, when I joined the Mayo
Clinic Supply Chain Management Division close to seven years ago, I was told
that supply chain all boils down to delivering four Rights: Right product,
Right place, Right time and Right price.
At the Mayo Clinic, several years ago we
began noticing significant gaps between what supply chain stakeholders
wanted and what our supply chain could deliver. Even though we tried to
customize, we often got at least one of the four Rights wrong. This is when
we started talking about the concepts of category management and the need
for a more strategic approach.
When we benchmarked ourselves against
successful retailers, we quickly noticed that they had mastered, through the
grouping of their products into categories, a strategy for mass
customization while still holding firm to appropriate standardization.
A simple example can demonstrate the power
of category management. If you have five categories and five business
functions each with two options, then that is a combination of 50 unique
strategies that are possible (5 times 5 times 2). Each function offering
just two options can create a very wide range of solutions that the customer
sees in aggregate as 50 unique options. Executed in silos you have chaos.
However, when executed in a coordinated manner, the entire enterprise can
work together to execute very sophisticated strategies with a high level of
standardization and synchronization.
Think of it as "managed chaos." We felt
that through category management we could offer customers of our $2 billion
supply chain a higher level of service if we thought and acted strategically
as an integrated team but held to standardization in a very different way.
Where to start?
We decided to begin with Clinical Quality
Value Analysis (CQVA), which turned out being a great place to start your
migration to category management as it required categorization of our
product lines and forced us to think like a Category Manager. It is a
scientific approach to purchasing and will require some customization as it
is applied to significantly different categories.
CQVA is a systemic decision–making approach
to product management that is facilitated by supply chain management and
incorporates clinicians into the process. It is very much related and in
support of the basic concepts of category management.
There are six basic steps:
1. Categorization –
How should we group products into categories?
2. Business Intelligence –
What information (both clinical and financial) will drive decision making?
3. Initiative Identification –
Which product categories should we review first?
4. Recommendation/Approval –
What format and process will be used to force an objective and scientific
5. Implementation –
How should we communicate, convert and drive standardization?
6. Compliance –
Can we measure success and expected results?
With the assistance of our medical/surgical
product distributor and group purchasing organization (GPO) we developed a
product classification system with major classes that are further divided
into minor product categories (which is what Mayo now considers a book of
business for contracting purposes).
• Major Class – Anesthesia
• Minor Product Categories - Anesthesia
circuits, Anesthesia Trays, ET tubes, etc.
Seventy-two major classes with 317 minor
product categories were identified and labeled within the item master file.
We further divided the minor product categories between clinical commodity
and physician preference products. We defined clinical commodities as
products that are interchangeable with equivalent products that warrant
clinical validation due to intended use (examples include needles and
syringes, ostomy supplies and general wound care products). This is where we
would focus first.
Development of a review and approval
structure was established with the formation of the Mayo Clinic Commodity
Committee (MCCC) to serve as an enterprise-wide value analysis committee to
identify, approve and execute product standardizations and cost reduction
opportunities for commodity medical/surgical supplies and processes.
Membership includes clinical leadership, supply chain management (clinical
value analysis contracting, informatics) and GPO representatives.
To maximize clinical staff input, five
product review teams (PRT) were launched (Medical, Surgical,
Respiratory/Anesthesia, Wound/Ostomy/Orthopedic and General). Each was
charged with reviewing, recommending and implementing product
standardization and conversions. At the start of each PRT’s product category
review, information is obtained that includes financial data (cost and
volume) and clinical data (effectiveness, safety and service).
It is critical to have tools to monitor
both from a process as well as a strategy perspective. Following are a few
critical success factors that we utilize:
• Process metrics –
tracking the time from the start of a review to the recommendation and from
approval to conversion of products.
• Strategy metrics –
decreasing the number of vendors and stock-keeping units (SKUs), decrease
cost and increase in price savings.
When it comes to implementation, you cannot
manage what you cannot measure and therefore you must measure and track
compliance. Mayo Clinic facilities have 90 days after the approval of a
product category to convert product. Each approved product receives a
"formulary flag" that is attached to product information on the item master.
This identifies that the product has been approved by the MCCC. Compliance
reports determine the percentage of compliance for the entire organization
and each individual facility which the PRTs monitor closely.
Results achieved so far
Consistent with the concept of category
management, CQVA is the framework for organizing and synchronizing product
focused teams across the supply chain. By focusing on specific categories
the team is not overwhelmed and can adjust the process to fit the needs of
each unique category.
The benefits include:
• Taking product category decisions from
subjective to objective
• Providing a formal, customized,
collaborative approach to reduce and manage expenses
• Involving interdisciplinary teams that
are able to optimization across business functions
• Ensuring optimal benefits and clinical
• Processing that is supported by
documentation which maintains and /or improves quality and customer
The results directly associated with our
Clinical Commodity CQVA program have been significant with direct savings of
over $7 million, as well as a SKU reduction of close to 40 percent. With
only 10 percent of our item master categorized as a Clinical Commodity we
feel we are only scratching the surface as we learn how to apply the similar
techniques to other categories.
Joseph M. Dudas serves as vice chair of
category management at the Mayo Clinic where he is responsible for all
strategic sourcing, contract administration and informatics.
Terri Nelson serves as manager of Mayo’s
clinical quality value analysis (CQVA) program.