Ask other healthcare purchasing and materials management pros to assess their biggest challenges and they’ll tell you what they’re facing: high costs, high pressure to drive costs down, and a high frustration level in their efforts to do so. Sound familiar?

Purchasing is not an easy place to be in the healthcare world today, but it’s particularly difficult in the hospital setting. Supply costs are the second largest expense for hospitals — only labor expenses are higher. Managing materials, supplies and their associated costs consumes 15 to 30 percent1 of net patient revenues, and hospital supply expenses represent 25 to 30 percent¹ of the organization’s total spend.

And that spend is getting bigger. Healthcare spending now accounts for nearly 15 percent² of the U.S. economy — the largest share on record — and this percentage is expected to continue to increase.

As the front line in patient care, hospitals are under intense scrutiny. It’s no wonder hospital purchasing departments and group purchasing organizations are under such pressure to perform.

To their credit, hospital and group purchasing organizations have made great progress over the last two decades to become as efficient as possible and rein in expenses. Since the 1980s, they have pinched budgets and squeezed supply unit costs through dogged negotiation. But at this point, it seems that the hospital efficiency-driven, price-focused model has delivered just about all it can.

The problem? It’s the model itself.
When you’ve driven your costs as low as they can go, it’s time to look elsewhere for savings and efficiencies. Hospitals need radical, big-picture solutions in materials management — solutions that encompass the entire hospital supply chain, and inbound logistics in particular.

Unfortunately, hospitals are ranked toward the bottom in terms of logistics expertise. This is slowly changing, as hospital groups acquire logistics expertise from consumer product, manufacturing and other sectors outside the healthcare industry. But it’s still rare for hospitals to have the expertise and technology they need to reap the rewards of good supply chain management. And look at what they’re missing in terms of bottom-line impact:

• Approximately 35 to 40 percent³ of hospital supply-related costs are devoted to handling, moving and processing material and supplies as compared to other industries where it is less than 10 percent.

• Purchasers spend approximately 40 percent⁴ of their time, and accounts payable departments spend more than 60 percent of their time, on manual processing of transactions.

• A single paper-based purchase order may cost anywhere from $75 to $140⁵ to process. Transactions processed online can cost as little as $6 to $10.5

• Current use of EDI within hospitals only covers 30 to 40 percent⁶ of transactions available for automated processing.

• Hospitals overpay suppliers for contracted medical and surgical products from 2 to 7 percent⁶ of the available contract price.

• A 5 to 15 percent⁷ savings in supply chain costs would equate to a 1 to 3 percent improvement in a hospital’s operating margin.

The supply chain represents an untapped source of bottom line savings for many hospitals. Indeed, the more saved in the supply chain, the more available to spend elsewhere. But in order to exploit the potential of this rich resource, hospital purchasing teams need help. They need to know the true cost of what they’re buying. They need tools to help them manage what and how they buy. And they need to manage and control their inventory more efficiently.

What do — or don’t — you know?
The way it works now, typical hospital groups don’t have a clear picture of their supply chain. Although some aspects seem relatively well defined, there are still major gray areas.

It seems obvious — it would be beneficial to know the true cost of a product. But this isn’t the way it currently works. Distributors typically don’t break out transportation costs on delivered goods. So what have you actually negotiated? If you purchased in a more direct, transparent mode — or even had the tools to know where you stand — could you do better on product price and distribution?

Inventory — Hospitals can’t afford inventory failure. The right products must be in the right place at the right time. For this reason, many hospitals have too much inventory on the shelves "just in case." Do you know how much is too much? What’s the cost of keeping the shelves too full? And why is it that some areas have too much of certain items and some have too little?

Getting answers

Most hospitals work with distributors to manage supplier relationships and deliver goods. Working with distributors in this way has given hospital organizations a feeling of security — and relief. Security because the hospital knows it has a reliable source of products, and relief because in many cases the hospital doesn’t have to manage its own inventory and restocking.

But what are the potential cost savings and control improvements to be gained when hospitals manage these processes more directly or farther upstream in the supply chain?

Innovations in sourcing and purchasing today include several interesting trends.

A case in point: One group purchasing organization invested in an advanced processing system and assigned staff to perform a detailed data analysis on a quarterly basis. The additional revenue gained by uncovering contract and payment inconsistencies more than covered the cost of the investment.

Stocking controls — Tracking how products move through your facility is crucial to maintaining accurate usage data and inventory controls. There are several state-of-the-art scanning solutions — and even radio frequency identification (RFID) solutions — that are making inroads in the hospital setting. Regardless of the specific solution, the point is to get tighter controls, which quickly translate into more efficient spending.

What can you do?
In an industry that’s changing as quickly and dramatically as healthcare purchasing, it is crucial to get a handle on where your organization stands and identify the opportunities that exist for supply chain improvements. Whether you are the final decision-maker or one in a line of purchasing personnel in your organization, you can affect change.

Find out true costs. Most of your supplies are purchased at a "delivered" price, so transportation and distribution costs are included in the price you pay. Can you quantify what you are being charged for the actual product versus the transportation and distribution services? If you manage your own inbound logistics — a common practice in retail and other sectors — can you reduce those costs? Start by working either directly with your distributors or with your group purchasing organization to figure out exactly what you’re paying. You’ll be in a much better negotiating position and may be inspired to consider alternatives.

Look for new ideas. Learn from purchasing and supply chain management experts from other industries. See what they’re doing with their inventory, distribution and supplier relationships. Talk to your group purchasing organization leaders and distribution partners. They’re looking for new ways of working, too. Healthcare is catching up, but it still has a long way to go in terms of technology adoption and supply chain innovation.

Sell up the management ladder. Your hospital’s executive management team may still be focused on a price-driven purchasing model. Share statistics with your coworkers and managers. Report your findings and your ideas about how supply chain efficiencies can reap rewards for the entire organization. You’re increasing your value as a subject matter expert while increasing organizational awareness.

REFRENCES

1. Kemani, Priya "Hospital Supply Chain Savings" Ascet Volume 6, 2004

2. Boston University School of Public Health study, Feb. 2005

3. Grossman, Robert L., Health Forum Journal 2000

4. "The Value of eCommerce in the Healthcare Supply Chain: Industry Study Report," Anderson, June, 2001

5. "Hospital Web Operations Gear Up," InternetWeek.com, October 18, 1999

6. "The Value of eCommerce in the Healthcare Supply Chain: Industry Study Report," Anderson, June, 2001

7. "Online Healthcare Marketplace," Millenium Research Group, June, 2001