5 Supply Chain Management Questions and Answers

December 28, 2015 - A chain is no stronger than its weakest link. But strengthening the most fragile links when many moving parts collectively bump into each other along the way is no easy task when it comes to supply chain management.

Here are 5 supply chain management questions the healthcare industry learned more about this year.

Does budgeting variation need to be more clearly identified?

As payment models transition towards the value-based care realm, hospitals are paying closer attention to where their money goes.

Supplies cover around 15 percent of a typical hospital operating budget, claims research from Arizona State University.

“In most provider organizations[,] supply chain management and revenue cycle operations function in silos, occasionally responding to anecdotal evidence to make improvements in the processes linking the two areas,” researchers assert.

“Hospitals and health care systems that become proficient in managing the revenue environment achieve strategic advantage by reaching their financial goals and assuring a stream of revenues to support their clinical efforts.”

But another estimate from Materials Management in Health Care calculates supplies can cover up to 40 percent.

Is “invisible cost” a detriment to revenue cycle management?

“[Hospital executives] fall short in making sure they have the right processes and standardization of procedures in place. Those are generally in that invisible cost bucket that you don’t have a tangible product price for, such as a box of gloves,” stated James Spann, Practice Leader of Supply Chain & Logistics at Simpler Healthcare, to RevCycleIntelligence.com.

“You can’t say, ‘I’ve got 50 different types of gloves in the system. I’m going to standardize those.’ The invisible cost causes heartache and financial problems for hospitals.”

“If products lack a good order requisition and sourcing system upfront for users to work with, different departments in the hospital order supplies based on what doctors want. And you get variation – 50 different types of gloves – with everyone ordering their own, based on user preference.”

Why is supply chain about much more than merely cost reduction?

“A few of the factors that breed unnecessary costs in healthcare supply chains: Nonstandard ordering and delivery methods, varying drug formulary across pharmacies, clinicians hoarding supplies, drug diversion, and a lack of intelligence and visibility surrounding what inventory is redundant, what can be repaired, and what needs to be upgraded,” explained Spann in a follow-up chat with RevCycleIntelligence.com.

“CFOs and COOs need to understand it’s not just about reducing cost, reducing product price, standardizing, consolidating. You need a methodology and approach to improve the supply chain and overall team performance.”

“The goal for executives should be to build a Lean Supply Chain – which will help you advance up the profit curve. Having the right amount of the right supplies, at the right time and place at the lowest possible cost – can actually increase patient care quality as well as clinician satisfaction.”

Is sharing really caring when it comes to addressing end-to-end costs?

Collaboration and standardization may be the key to supply chain management success, according to McKinsey research.

McKinsey highlights three specific strategies to achieve this dual goal. One is to establish relationships with customers to collaboratively assess supply chain waste at as many different points as possible. This includes from the manufacturer to the patient and everywhere in between.

Some examples of possible focal points include inventory management, data management, and customer demand management.

Secondly, greater levels of data sharing and more collaborative partnerships are necessary to effectively achieve this objective, said McKinsey.

A third way to address end-to-end supply chain costs is to “enable and promote shared savings goals that generate savings from both physical and data standards.”

Does greater transparency strengthen alignment efforts?

What proves especially valuable when it comes to greater cost savings is real-time consumption and inventory data recording, said Steve Kiewiet, Vice President of Supply Chain Operations at BJC HealthCare, to RevCycleIntelligence.com. 

The acquisition of baseline data across the healthcare industry is far from mainstream, he asserted.

“We end up spending billions of dollars of inventory within these various silos because we live in a world where you can never run out of anything,” he stated. 

“We document a piece of it when we do a physical inventory here and there, but it’s not something we’ve measured. It’s not a discipline that’s been built into the healthcare world yet.”

A simple report to a manager can list specific items pulled from inventory for a procedure and which ones may have disappeared without explanation, he asserted.

This report can provide basic yet valuable information: “These things were documented and used. One was opened and thrown away. One wasn’t documented anywhere, and it’s not back in storage. Where is it?”

“We can’t underestimate how much money we may be losing that we’re not even aware of because we haven’t taken complete control of our supply chain. It’s not just about negotiating a better unit cost. It’s much bigger than that. It’s around aligning our entire supply chain industry from manufacturing to patient use in removing variation and waste. Until we do that together, we’ll fight forever over the pennies in the pricing fight that goes on.”