The Supply Chain’s Role in Making or Breaking Hospitals' Margins, Competitive Edge

This content is sponsored by MedAssets.

As hospitals seek to protect their margins in an era of decreasing reimbursement and other pressures on their bottom lines, there is one area of spending that is ripe for savings: the supply chain. While roughly half of a hospital's spend is labor, the other half is spent on non-labor expenses, such as supplies and purchased services. Manual and inefficient supply chain management processes can hurt not only a hospital’s financial performance, but also its overall competitiveness in an increasingly challenging industry. Conversely, a well-run, well-led supply chain can be an immense strategic asset to hospitals competing for a place in the market.

"Healthcare has lagged behind other industries in implementing technology and processes within the supply chain that could elevate it to a strategic asset for profitability and wellbeing," says David Klumpe, senior vice president of supply chain services at MedAssets. "Reimbursement changes in the last ten years have brought the strategic nature of the hospital supply chain into focus, because declining reimbursements and value-based purchasing have placed immense pressure on hospital operating margins."

Because hospitals typically have not invested in the technology and processes within their supply chain, it can be difficult for them to effectively reconcile processes of supply chain management. Even with a clear focus of what must be accomplished; there remain obstacles to creating a well-managed, cost-saving supply chain.

Common supply chain pitfalls

Underinvestment in clinician engagement

According to Mr. Klumpe, one of the biggest obstacles at the front end of the supply chain can be getting physicians and other clinicians involved in efforts to reduce costs. "It's vital to engage clinicians in product and vendor decisions," he says. "Practices and products hinge around clinician input. Because clinicians' preferences are driven by patient care, they often have passionate views when it comes to supplies. However, many hospital supply chain departments have underinvested in staff who engage and lead clinicians in these critical discussions. Support and leadership of clinician committees that provide input on which supplies, services and equipment will be purchased — and from whom — is one of the core services MedAssets provides."

Not consolidating vendors

Another common misstep in supply chain management is purchasing similar items from many different vendors. Securing the highest quality products at best price through vendor consolidation is critical for supply chains.

In value analysis with clinicians, hospitals should focus on opportunities to increase savings opportunities through utilization initiatives that also help consolidate vendors, which leads to better, more efficient inventory management. By employing a clinically-integrated sourcing process, MedAssets helps negotiate contracts on behalf of providers while incorporating clinician input on what they want out of supplies at the forefront, says Mr. Klumpe. It's critical to employ a clinically-integrated sourcing process with clinician input on supplies at the forefront of all decisions. 

Poor contract compliance

A third point of contention, according to Bejan Shamsy, vice president of MedAssets procure-to-pay solutions, is that hospitals may not be realizing their full contract savings potential. Contracts represent potential savings, but these savings can only be realized if contracts are effectively implemented and operationalized into the supply-chain process. Often hospitals don't know with certainty if they are getting the correct contracted price at the point of purchase. Most hospitals overpay between two and seven percent, because they don't have the robust processes and required technology to ensure contract discipline at the transactional level, which results in manual processing and tracking of pricing and delivery by their resources. According to Mr. Klumpe, senior leadership often thinks their hospitals have more than 90 percent contract compliance, when it may be closer to about 50-60 percent. "By helping hospitals implement technology and support around day-to-day contract transactions, we're able to help get contract compliance between 85 and 90 percent," he says.

Better contract tracking to improve compliance

Improved compliance comes in part through making it second nature for hospitals and health systems. While clinicians and the supply chain team can identify utilization initiatives designed to control costs and manage inventory, value is only realized by consistent compliance to contracts. Implementing procure-to-pay technology and processes that manage supply-chain transactions throughout the entire process helps ensure purchasing compliance from requisition to correct price at payment. For both the provider and the vendor, utilization of a procure-to-pay technology that leverages a centralized contract catalog as the “source of truth” helps increase efficiency and compliance and ensures real-time price accuracy. Furthermore, a procure-to-pay system will integrate with a hospital’s existing enterprise resource planning system, further driving efficiency and value from the investment they have made in that system.

Building a sustainable model

The ready-made framework for management of various supply chain functions is useful for systemic improvement across any size of hospital. Building a sustainable, strategic supply chain requires understanding an organization's short-term and long-term objectives. Every facility should complete an assessment to understand where it stands. It's imperative that any supply chain partner collaborate and engage the organization's leadership team, work out an implementation plan, identify areas for immediate and long-term improvement and collaborate with the facility to make sure sustainable performance improvements are achieved.

The many moving parts in any hospital supply chain are a challenge for management but yield financially rewarding results when managed strategically.  A successful supply chain thrives on strong leadership support, supply chain talent and technological solutions to enhance efficiencies and optimize cost reduction strategies. A comprehensive approach with core elements keeps the supply chain operation disciplined, which results in contract savings and a streamlined supply chain reducing the total cost of care at all turns.

"The supply chain is made of interconnected processes," says Mr. Klumpe, "and having the infrastructure to measure these processes is fundamental to making the supply chain a strategic asset to any hospital. At MedAssets we help hospitals analyze, measure and benchmark to what 'great' looks like in supply chain management, so those hospitals can improve in the areas of greatest opportunity to impact their bottom lines and reduce the total cost of care." Building a strategic supply chain focused on cost reduction strategies, leadership and clinician collaboration and performance metrics is core to healthcare providers reducing the total cost of care.