The Hallmarks of an Under-performing Supply Chain
It is estimated that the average American Hospital runs at an efficiency rate of less than 65%. This refers to the full cycle of major operational processes and the time necessary to complete those cycles. While there are numerous reasons for these existing inefficiencies, the primary reasons hypothesized are:
• Lack of adequately trained personnel
• Fundamental devaluation of basic supply management practices and processes due to the need to concentrate on patient care
• Lack of organization as it relates to the design of supply processes
• Lack of awareness of inefficient operations
• Broken or antiquated supply management processes
• Budget shortfalls not permitting hospitals to perform proper analysis of needs and inability to implement corrections to identified issues in the supply chain
Perhaps the most notable area of inefficiency lies in supply management. Considering that supplies account for 25% of the overall costs in most profit and non-for-profit hospitals, it is easy to understand how impediments within the supply chain process of a hospital could lead to significant financial consequences. It has been estimated by the American Association of Hospitals that a gain of 10-25% on gross margins could be realized through basic investment in redevelopment or redesign of the supply chain. Much of the savings derived is from a leaning of labor costs (particularly in overtime and part-time labor cost), supply expense management and increased operational efficiencies.
Another major concern experienced by hospitals lies in a fundamental breakdown within the hierarchy of personnel. While Clinical staff is generally responsible for department supply management, they generally place a lower priority on the activities supporting effective supply management than other, more important, activities.
While organizations are clearly able to recognize and communicate the benefits of effective supply management, they have not yet bridged the gap to action. Fully 60% of organizations currently rely upon manual tools to collect and analyze supply spend data, resulting in limited visibility to expense and an inability to effectively implement cost savings opportunities.
An effective Cost Containment program, of which Supply Chain Management is a key component, will employ the following:
• Data Integrity & Integration
• Actionable Reporting & Executive Dashboards
• Process Improvement & Rapid Response Teams
• Physician & Clinician Advocacy
High Performance begins with Proper Fundamentals
Stephen Covey stated that we should “begin with the end in mind” and we should each remember that high-performance organizations did not transform overnight. Each evolved over time, yet addressed basic issues before tackling larger organizational problems. A good manager is compelled to take a situational inventory before making any major decisions when assuming control of a new Team, Department or Client. This truth extends to Supply Chain Optimization efforts. A high-integrity physical inventory of all medical supplies in core departments, mapped against hospital Materials MIS and department MIS, e.g. ORIS, will provide the Executive Management Team with a valuable tool in understanding what efforts to undertake in fixing the primary problems with sourcing, replenishment and availability.
Physical Inventory: this is best sourced to an external firm that can provide more than a summary report of inventoried items against an average cost. Consider using a reputable firm that can offer services such as Data Management, Opportunity Assessment, Inventory Rationalization, and Process Improvement efforts such as Right Sizing. A firm unwilling or unable to implement their recommendations suggests corrupt business practices.
Inventory Rationalization & Reorganization: Following a comprehensive physical inventory that your Team has validated, the next step is to obtain Clinical Validation of the results. Provided your Team has attributed 12-24 month usage history against the items inventoried, the appropriate next step is work with Clinicians to understand whether the recommendations for right-sizing are appropriate. This will also build trust between the Teams and promote collaboration in Assessment, Implementation and Continuous Improvement of future initiatives.
Data Integrity & Transparency: Another benefit to a high-integrity Physical Inventory is that it provides the Materials Management Team with a clean file of what is NOT maintained in the Materials MIS. Typically, only 72% of all items within a Perioperative Department are cataloged properly within a Materials MIS. Does that seem low? I assure you, for under-performing hospitals, it is accurate. Properly managed, updating the item catalogs, attributing usage to consolidated items and undertaking process improvement initiatives will deliver integrity to the Supply Chain process and deliver a ROI in excess of 800% for cost of the Physical Inventory.
Process Improvement & Performance Management: If the focus of these efforts is to address excess inventory, but not improve the processes governing Supply Chain Management, spare your organization the expense and your Management Team the embarrassment of having to explain why benefits were not sustainable. Process Improvement and Performance Management are key components of sustaining change.
The Value of Transparency in Hospital Cost Containment Efforts
It is estimated that a typical 300 bed hospital with an annual $40M supply spend has a 3.6% opportunity for improvement by effectively leveraging information gleaned from previously disintegrated data. This translates to a $1.4M hospital opportunity through appropriate focus implementing high-value opportunities . Furthermore, it is estimated that Consulting organizations utilizing existing vendor capabilities for implementation of Distribution, Supply Consolidation and/or Supply Automation realize 4-15% savings on annual Supply Cost by leveraging information obtained from Hospital data .
High-integrity data supports efforts well beyond Cost Containment. Without this, other opportunities identified will have marginal value and improvements will likely be unsustainable. Consider as well that highly-touted Supply Automation cabinetry and software is a considerable expense, footprint and disruption for the organization. Delivering integrity to data, inventory and inventory management processes on the front end of a Supply Automation installation could reduce the footprint and cost by more than 1/3. As the cost of these installations are often in excess of $500,000, the savings are significant and improved inventory management practices have a direct correlation to high compliance and adoption rates for Supply Automation programs.
Statistics and Ancillary Benefits
The primary concern articulated by most Hospital organizations is that vendors and manufacturers are not a credible source of expertise in this market due to conflicts of interest. Finding a firm that is independent of (though capable of collaborating with) these firms is imperative.
A well-used example of opportunity afforded through effective supply management supported by an effective Supply Chain Management strategy is commonly referred to as spend under management. Though one of many possible metrics, research has shown that Hospitals have been able to achieve a 5-20% cost savings for each dollar of expense brought under management.
Supply Data Statistics
• $40 billion or 3.5% of sales are lost each year due to supply chain information inefficiencies.
• 30% of item data in catalogs used by retailers and manufacturers for replenishment of stock is in error.
• Each of those errors costs $60-$80 to address.
• Companies invest an average of 25 minutes per SKU (stock keeping unit) per year manually cleansing out-of-sync item information.
• 60% of all invoices generated have errors. And, each invoice error costs $40-$400 to reconcile.
• 43% of all invoices result in deductions.
• On average, a new product rollout requires four weeks due in large part to inefficient and error-prone approaches for the exchange and updating of new item information in various MIS.
1: Hospital Material Management Quarterly, Aspen Systems Corporation, June 2005
2: “Fixing the Healthcare Supply Chain”, Jonathan Byrnes, Harvard School of Business, April 2004
3: HCAB Financial Leadership Council Interviews (2006)
4: Nick Sears, CMO, MedAssets (AHRMM 2007)
5: “Data Synchronization in Healthcare: A Solvable Problem”, Rosenfeld & Stelzer, 2006
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