Should Supply Chain be taking care of business?

When to venture beyond the business of healthcare to the business of healthcare business

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Historically, the stereotypical Supply Chain department (particularly in those pre-halcyon days of being known as “Purchasing” or “Materials Management”) occupied a basement alcove where it directed the movement of pallets, boxes, cases and eaches from dock to clinical and general areas.

In short, they were “bottom dwellers” focused on the “bottom line,” striving to get the right products at the right prices in the right locations at the right times satisfying the right demands. Cost was king and needed to be conquered.

For progressive supply chain departments today that stereotype no longer suffices nor fits. These departmental executives and leaders refuse to limit themselves to the esoteric necessities of the job. They’ve moved beyond those artificial borders to serve as business advisers and consultants to physicians and surgeons, facilitating economic and professional relationships to suppliers to strengthen relationships to patients and reinforce dealings with payers.

Eschewing traditional cost-containment boundaries, these executives and leaders have pushed into largely uncharted territory for Supply Chain — ventures designed to provide relevant services that generate revenue for an organization.

No, we’re not talking about a “Supply Chain Soda & Sundries Shoppe,” but ventures fueled by supply chain expertise in the areas of product and service design and logistics and customer fulfillment — whether that customer represents clinicians and department heads within their own facility, other facilities across town or farther out in the region.

Critics and skeptics alike may mull and muse whether Supply Chain should be in the business of revenue-generation anyway, particularly if its own cost-containment strategies and tactics fall short of C-suite expectations. Supporters and visionaries, on the other hand, contend that revenue generation by Supply Chain represents a logical extension of a department that should be respected and valued for its contributions … and making money in addition to saving money justifies that position.

Still, the idea of Supply Chain embarking on some type of revenue-generating enterprise may not be right for every department. So how does a Supply Chain executive and leader know if his or her operation is ripe and ready for the challenge and when to take a leap of faith?

Taking the plunge: Cleveland Clinic

Cleveland Clinic may be renowned for providing world-class healthcare and medicine around the globe, but it also serves as a business incubator. One of its more prominent examples involves its 2009 launch of Explorys, a cloud-based clinical data company that it spun off to IBM’s Watson Health unit six years later. On a side note, Cleveland Clinic earned a variety of accolades from Healthcare Purchasing News, including the CS/SPD Department of the Year award in 2002, the Supply Chain Department of the Year award in 2005, a S.U.R.E. award for Supply Chain-Focused CEOs in 2008 for now-retired President and CEO Delos “Toby” Cosgrove, M.D., and a spot on the Supply Chain Operations Worth Watching list in 2015.

Four years ago, Cleveland Clinic’s Supply Chain recognized the time was right to venture beyond the traditional side of the balance sheet, according to Simrit Sandhu, Executive Director, Supply Chain Operations.

Simrit Sandhu

“Drawing upon a patient-focused mantra organizationally helped to empower our Supply Chain team to think differently when it came to sourcing products for the organization,” Sandhu said. “Our culture encourages us to innovate daily while steadfastly remaining efficient in our operations. What began as a cost savings measure quickly turned into a scalable physician-engaged model fueled by evidence and data, guiding a path toward supply reduction variation. This model and process soon became a foundational blueprint of innovation to partner and scale nationally.”

Searching for a partner to expand this new venture nationally, Sandhu’s team initially turned to evaluating group purchasing organizations. What they learned was that one of the GPOs on their search list, Vizient, seemed to be in an expansive growth mode, too.

“They were looking at a range of possibilities, including one where they would leverage their knowledge and expertise in combination with service line expertise at a health system,” Sandhu said. After an extensive mutual evaluation, Cleveland Clinic and Vizient launched a joint venture in 2013 called Excelerate LLC. Vizient contributed supply chain analytics and group purchasing infrastructure fused with Cleveland Clinic’s quality-centric, physician-engaged sourcing model that fostered clinical alignment in supply chain decision-making for a growing number of healthcare organization clients, according to Sandhu.

Mayo Clinic

Nearly a decade ago, “economic pressures and more aggressive budget targets” motivated Mayo Clinic’s Supply Chain division to commercialize its business services, Stephanie Matejka, Senior Director, New Business Development, indicated.

“[The] financial pressures facing healthcare organizations and subsequent challenges, such as the Affordable Care Act, required us to think differently and fundamentally transform the way the supply chain operated,” Matejka said. Mayo Clinic earned a spot on HPN’s “Supply Chain Operations Worth Watching” list in 2011, the first year of the feature.

Consequently, Supply Chain launched several initiatives to “drive value and generate revenue to offset the operating costs of running the supply chain, resulting in a lower allocation of costs to Mayo operating entities,” she continued. “Developing a revenue center became a strategic goal.”

Supply Chain focused on four main areas in which it could leverage its knowledge, process expertise and tools to generate revenue: Audit and recovery, card programs, outsourced services via a regional supply network, and freight management.

Audit and recovery allowed Mayo to “build our own risk and analytics offerings to reduce finders’ fees and perform our own investigation and recovery efforts,” she noted. The card programs help reduce manual checks and increase controls over process efficiencies, rebates, supplier satisfaction and cash flow, she continued. Meanwhile, the outsourced services area focuses on centralized sourcing, contracting and other business initiatives via the Upper Midwest Consolidated Services Center LLC. Freight management relies on Mayo’s market position, expertise and best practices.

“Each program leverages a core competence of our Supply Chain organization and was proven within our own operation before expanding the service offering externally,” she said. “Each program also was in response to a gap or the ability to easily enter the market.”

UPMC

Incubating business ventures may be effective ways to generate revenue and fuel internal efficiencies, expertise and excitement, but UPMC also cited the need to share the wealth with others as a driver.

“Every day at UPMC we’re solving very complex clinical and business issues,” said Robert A. DeMichiei, Executive Vice President and Chief Financial Officer. “As we have invested the time, resources, and energy of the organization in solving these challenges, particularly around supply chain, we’ve concluded that other health systems, both large and small, could be helped by our solutions. That’s the first big test: If you believe you’ve taken a high-stakes business problem and solved it successfully, then it’s obvious to conclude that others could benefit from it, too.”

UPMC’s efforts began with two startups emerging from Supply Chain — Prodigo Solutions in 2008 and then Pensiamo in 2016.

Prodigo concentrated on procurement and compliance. “It’s a narrow space, but procurement compliance at health systems can be very undisciplined,” DeMichiei said. “We developed a solution that made it easy for end users to do the right thing by putting a very user-friendly interface on an enterprise resource planning (ERP) system to make the whole thing run smoothly.” UPMC sold a majority stake in Prodigo to an investor in 2014.

With Prodigo’s success, UPMC expanded Supply Chain services to more than 25 hospitals, he continued. “We developed solutions for integrating acquisitions and their supply chains, strategic sourcing, procure to pay (P2P), value analysis optimization and other complex areas. We realized we had a complete suite of solutions for supply chain. These experiences of being a large academic medical center and one that was growing very quickly gave us practice in solving very complex problems that we knew many other health systems also face.”

Pensiamo formed from this realization, focused on what it calls “cognitive supply chain management” and headed by UPMC Chief Supply Chain Officer Jim Szilagy.

Jim Szilagy

“We understand the challenges of the healthcare market as it transitions to value-based care,” Szilagy said. “We built a world-class supply chain management organization, and we knew we could help other institutions that didn’t have the financial or human resources to make this leap. By offering a variety of services through different delivery options, we could help clients where they needed us most.”

But Szilagy urged caution and trepidation before Supply Chain leaders decide to embark on a business venture — particularly if his or her own house is not in order. UPMC was listed as one of HPN’s “Supply Chain Operations Worth Watching” in 2011 and then earned HPN’s Supply Chain Department of the Year award in 2012.

“The Supply Chain leader must be certain that his organization possesses a differentiated and sustainable capability or skill that would be valued by others and not easily replicated by potential competitors,” he said. “External validation through market testing is a prerequisite to building a business case to secure funding. The ability to scale a venture cannot dilute the ability to serve the resident organization.”

LeeSar and Cooperative Services of Florida

Lee Health and Sarasota Memorial Hospital teamed up in the late 1990s to form its well-publicized and highly regarded joint-ventures LeeSar and Cooperative Services of Florida that over time and under charismatic and effective leadership became one of the earliest reigning models of Supply Chain as a business venture. In fact, LeeSar earned a spot on HPN’s “Supply Chain Operations Worth Watching” list in 2011. Further, LeeSar earned HPN’s CS/SPD Department of the Year award back in May, more than two decades after Sarasota Memorial first earned the distinction.

Sterile processing services represents one of its latest venture offerings as LeeSar and CSoF launched an in-house single-use device processing program for its members in 2014, according to Bill Tousey, RN, Vice President, Cooperative Services of Florida.

Bill Tousey

“Between the environmentally positive effect of landfill waste reduction and the cost savings, it was both the right thing to do and produces savings,” Tousey told HPN. “We partnered with an independent reprocessor for our ‘non-critical’ items where their technology and staff would be in-house at LeeSar. Collections and redistribution are managed by a team from LeeSar. Our goal was to increase collections to 80 percent for items in this category, and we are currently running at 72 percent.”

LeeSar opened an on-site reprocessing center in 2016 that enabled them to collect, reprocess following FDA-approved protocol and redistribute devices to LeeSar and CSoF members, generating “millions of dollars in savings” for them as the program expands in the number and volume of products eligible for service, according to Tousey. The sterile processing venture follows the joint venture’s consolidated sourcing, contracting, distribution and logistics operations for member facilities.

ROi

Mercy executives sketched the idea for Resource Optimization & Innovation (ROi) unit more than a decade ago on the back of a napkin. They wanted to launch an internal, end-to-end strategic, integrated supply chain organization to service all of its provider organizations. HPN saluted ROi on its “Supply Chain Operations Worth Watching” list in 2011.

ROi launched its Medical Device Implant Services line after considering the idea for several years, according to Greg Meier, Vice President, Finance, ROi.

Greg Meier

“In order for this to be successful, we were going to need to be able to overcome likely physician resistance to changing their relationship with distributors and reps,” Meier said. “We were lucky to identify a surgeon within Mercy who was interested in tackling the status quo and who also had the ability to drive the initiative. Once we had that, we were able to use the market research we had been compiling to complete the business case, get approval and then implement. We were successful in driving savings for the hospital while also generating supply chain revenue.”

Deciding to launch a Supply Chain-based business venture can be challenging and difficult based on the internal and external details to be considered, Meier noted.

“Many health systems are poised to think mainly towards investment related to physical healthcare facilities or equipment,” he said. “As a result, the investment the supply chain is requesting may be going up against a need for a new linear accelerator. Significant groundwork has to be laid before the proposal ever comes forward to build credibility. Once this is present then the discussion has a realistic chance of being objectively considered. From an external standpoint, the Supply Chain executive needs to understand the overall opportunity and risks. The return needs to be sufficient enough, even with this risk, that it will provide a return when looking at quality, outcomes and finances in a combined fashion.”

FMOL Health System

Before Franciscan Missionaries of Our Lady Health System could launch its central service center under the Logistics One name, Supply Chain logically had to demonstrate its own mettle, according to William Mosser, Vice President Materials Management, FMOL Health System and LogisticsOne. FMOLHS earned a spot on HPN’s “Supply Chain Operations Worth Watching” list in 2015.

“As a high-performing team, one that is great at what we do, the likelihood of repeating success with new endeavors is better than that of an average performing team,” Mosser said. “So verifying we are great at what we do with performance metrics earns credibility with executive leadership. At FMOLHS we gained credibility through reducing our annual supply costs and the operating costs of the entire supply chain over four successive years. We did this through improved contracting programs that reduced our supply expenses by more than $50 million.”

Internally, Mosser’s team was able to reduce supply chain operational costs during each of the four years by at least 5 percent and concentrated on total cost reporting.

“We did this by understanding the functional costs of the supply chain and implementing cost effective solutions,” he said. “For instance, we spilt out the cost of distribution services through third parties from the supply cost and incorporated those service fees into the supply chain operations budget. Any other costs related to supply chain operations — freight, waste, service fees, etc. — were also built into the supply chain budgets. This gave us a clearer picture of the total cost of the supply chain function. And it provided the hospitals with actual supply cost rather than an inflated number based on a cost plus calculation. Our services are then charged based on what activity we support for each customer organization.”

Basically, Mosser’s team demonstrated to the C-suite it could deliver quality, service and employee engagement around its core operational functions, specializing in “best unit of measure” deliveries directly to patient care areas at lower costs than third-party organizations could deliver.

With a track record and credibility established, Mosser’s team opened the LogisticsOne facility in 2015, which worked to reduce overall supply expense by $8 million to $10 million annually. From there, senior executives have asked the team to investigate a variety of “non-traditional” purchased services.

“This opens the door to [our] investigating and driving insource/outsource decisions based on current organizational capacity and the demand for high-quality services,” Mosser said. “Our future efforts will focus on facility services, non-acute care support, document management services, pharmacy support and eventual commercialization to our partners in the health care community.”

Supply Chain-based business ventures hinge on several factors, Mosser insisted.

“First, we need to recognize our team’s capability to succeed,” he noted. “Second, we need to be aware when opportunities present themselves and if we are agile enough to react and support them. Third, we need to be willing to view circumstances from a total cost of operations standpoint, with fact-based decisions rather than what looks like a good idea.”

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