Within healthare organizations, there are many opportunities to reduce costs. ERP systems provide a rich source of data that can be used to increase efficiencies and reduce costs. No area can benefit more from mining this data than in the supply chain. Supply expenses represent on average 30% of the costs at a hospital and offer the most opportunity for reduction of through proper cost controls. A recent study found that hospitals could save $23 billion in supply costs without any impact on the quality of care and challenged all hospitals to 17.8% across the board reduction in supply costs. How can your hospital meet that challenge? The answers are in your ERP system – if you know where to look for it and how to take action from the information that you find.
Our goal is to reduce supply chain expenses by 17.8%. As with any goal, the key is to commit to a timeline to achieve that goal and then to establish stepping-stones along the way. A hospital is not going to make that level of reduction overnight, it is a process that could take several years to complete, but it is achievable. Start with identifying a timeline to achieve that goal. Next, establish targets for each quarter, and then each year. These stepping-stones provide a way to validate that progress is being made and to measure success (or failure) of initiatives.
Lastly, make sure that there is a clear definition of how supply chain expenses are to be measured. Too often, data-driven projects fail due to shifting explanations of crucial data points. Alternatively, a plan can falsely be seen as successful if the descriptions are changed. Document the source of the data that will be used to ensure consistency in future data reviews. With the target and the method of measurement defined, we are ready to move forward with reducing supply chain expenses.
Hospitals are full of savings opportunities; they can be found on every shelf in every closet. It would not be possible to provide a comprehensive list of possibilities, but here are a few suggested areas to look to get you started.
Hospitals storerooms and full of items that aren’t needed, purchased due to the request of a specific physician or replaced by other preferred products, or in many cases stocked “just in case.” Too often that product stays on the shelf until expired, at which point it is thrown away. While emergency stock is important, with modern distribution systems, most hospitals can get the majority of their need product within 24 hours from multiple distribution partners. Inventory Turns are a metric to challenge your storeroom inventory and only carry products that are used regularly. Establish a required number of turns to be carried in the storeroom, and phase-out inventory that does not meet that number of turns. Sometimes a product can be returned or used as a substitute to phase them out, and in some cases its best to donate bad inventory and free up space to carry more good inventory. On the flip side, add items to your storeroom that are used often. Doing so will reduce your shipping costs and increase service to the hospital staff. Min/Max Levels should be continuously re-evaluated, reducing stock levels of items turning slowly and increasing stock levels of things going out of stock. Storeroom sizes vary and maximizing the space through evaluating inventory turns both increases the quality of patient care as well as reduces supply chain costs. Inventory control does not only apply to storerooms. Par locations also carry significant stock levels in hospitals, and the operating rooms are often full of high-value inventory that is far too often undocumented and uncontrolled.
Special Orders/Rogue Purchasing
Most hospital purchase through group purchasing organizations (GPOs) which provide reduced pricing for blocks of products through group negotiation with vendors. However, that special pricing only applies if those products are purchased from those vendors. Often, savings projects take credit for “potential” savings based on past buying behaviors, assuming that all users of that product will agree to convert to the new product from the new vendor. Without strong purchasing controls, these savings will not be fully achieved. Rogue purchasing, or buying outside of approved vendors for that product or product line is a common challenge at many hospitals. Supply vendors, in particular, those who service operating rooms, have become experts at finding ways to bring a product into the hospital outside of the approved purchasing process. Not surprisingly, these products are often high-cost and high-margin for the suppliers. Purchasing Compliance metrics allow for the hospital staff to identify common rogue purchasing staff and to challenge why it is occurring. If there is a legitimate need for the product, pricing can be negotiated to reduce future costs. If there is not a legitimate need, they can be converted to the proper product.
Hospital mergers and acquisitions continued in 2018 and the number of “mega-mergers” increased with many of the largest providers combining. As hospitals have merged, the trend towards shared services for supply chain continues, with most of the top providers in the United States operating shared service centers for supply chain operations. Shared services allow these organizations to benefit from economies of scale, as well as to put controls in place to ensure compliance with purchasing and contracting guidelines. Shared services also reduce the need to have supply chain staff in each hospital, resulting in labor savings. However, the existence of a shared service operation does not guarantee savings. Some organizations have seen increased costs due to an inability to reduce local staff or for centralized staff to reign in rogue spend. Properly implemented, shared services can indeed provide significant operational efficiencies and reduce costs. If your organization has an existing shared service operation, the right processes and controls can significantly increase the opportunity for success. Any organization with more than one hospital that is not using shared services is missing out on a significant savings opportunity.
The Joint Commission has strict guidelines for handling of expired products and when doing inspections will check to make sure that there is nothing expired on the shelves. However, far too often hospitals wait until there is a pending inspection before checking for expiration dates which present a patient safety risk as a product that is expired can be accidentally used and leads to increased waste. Supply chain should be checking not only for expired products, but also what will soon expire – allowing it to be used, returned, or donated before the expiration date. Product Waste is a key metric for a supply chain department to measure, and anytime a product is thrown away should be seen as a failure on the part of the staff to monitor product inventory accurately. Waste is also caused by over-ordering which leads to extra items sitting on the shelf. Monitor for hoarding, the practice of staff requesting more product then they need in fear that they won’t be able to get it when they need it. Proper waste management techniques can protect your money from being “thrown in the trash.”
Regardless of which methods are selected to reduce supply chain costs at your hospital, the key to success is to make it a hospital-wide initiative and to ensure that all staff has bought into the goals, methods, and reasons for the cost reduction. Staff can view the supply chain departments as the “bad cops,” trying to make their job harder. It is much easier to succeed when everyone considers the supply chain cost reductions as a way to make more funding available for other initiatives such as buying new equipment or salary increases. Support from the C-suite staff to explain the long-term goal and benefits can help, and supply chain leadership should excel at communicating with staff and educating them about each initiative and how it will help to achieve that objective.
Our country faces a crisis of escalating healthcare costs. While no single cost reduction project will resolve that crisis, we must each do our part to reduce the cost of providing healthcare, and when enough of these projects succeed, they will have a dramatic impact on the cost of care. The ideas expressed here are just a few ideas about how your hospital can accept the challenge to reduce supply costs. The answers to which are most beneficial lie in the data in your ERP system. Unlock the power of that data and begin the process of reducing your hospital supply chain costs today.