How a Small Hospital Developed Lean Supply Chain Management

September 06, 2016 - When hospitals start to dig into how their organizations can reduce healthcare costs without lowering care quality, many run the risk of overlooking several cost-cutting opportunities in their healthcare supply chain management process. But developing a more strategic supply chain management approach can help providers optimize more than simply their stock room procedures.

Healthcare supply chain management is the second largest expense for most providers after reimbursement management, according to a 2015 survey from Cardinal Health and SERMO Intelligence. While a mere one-third of providers described their hospital’s supply chain process as very effective, about two-thirds reported that improving the process would lead to lower overall healthcare costs, boosts in revenue, and better care quality.

A 110-bed community hospital in North Carolina recently recognized the need to improve supply chain management to reduce costs. By implementing lean management strategies and using the support from Simpler Consulting, Caldwell Memorial Hospital saved $2.62 million in just five months by consolidating and eliminating excess supplies.

The lean management approach to supply chain also helped the hospital — now doing business under the name of Caldwell UNC Healthcare — to identify $421,000 in savings related to distribution costs as well as $366,000 associated with the amount of resources clinicians used managing supplies. Using Simpler’s Physician Preference tool, the hospital also identified $4.1 million in potential savings.

Establishing a more strategic rather than transaction-based approach to healthcare supply chain management was key to generating healthcare savings, Caldwell UNC Healthcare CEO Laura Easton told RevCycleIntelligence.com. Using the help of a consulting firm in 2014, Easton learned how moving beyond the traditional supply chain strategy would help improve the hospital’s overall performance and benefit patients.

“That was the basis on my introduction as the CEO into saying ‘Hey, the supply chain is a really important value stream,’” said Easton. “It is a stream of work in our organization that creates value for us and for our patients. I have an obligation as the CEO to delve into how are we performing as a small community hospital and what do we need to do to transform and to change.”

Although not well versed in the supply chain when Caldwell Memorial Hospital started their supply chain optimization project, Easton said that the hospital's first step was identifying the major challenges across the supply chain areas.

“From an operational point of view, we really had to look at six areas — how we source products, how we contract to purchase products, how we manage the products that we buy, how we manage the suppliers who deliver those products, how we manage our inventory, and how we manage the productivity of our employees operationally,” Easton explained. “So that is where we started to look and we did a self-assessment as to what our biggest challenges were.”

Once Easton identified supply chain areas needing the most work, she engaged the healthcare consulting firm Simpler to help install lean management principles into its supply chain management process. For healthcare, lean supply chain principles help hospitals to continuously streamline their clinical workflows and eliminate waste, such as stocking the right amount of supplies at the right time and ensuring that the appropriate employee is responsible for ordering supplies.

“The reason that we really wanted to use the lean principles was that we were using them in other parts of our organization,” said Easton. “But we also believed philosophically that the people who do the work know the most about what needs to be done to improve the workflow.”

Caldwell UNC Healthcare started to implement lean supply chain management with areas that presented the most opportunity to reduce healthcare costs, such as inventory management.

“Where we decided to focus first is what I would call the lowing hanging fruit because there are many opportunities,” Easton explained. “When you open your eyes to waste anywhere in your organization, which lean processes do, you just see the plethora of opportunities and, in supply chain, we saw a huge number of opportunities.”

“We decided to start with somewhat of low hanging fruit and work in the inventory management side,” she continued. “We used the people who do the work and conducted, what you call in the lean world, success exercises around inventory across all our major clinical departments in the hospital. We identified significant amounts of inventory that were not being productively used in our organization. We got an immediate benefit from that, but, also in that process, we used the front line staff to learn about inventory management themselves.”

Redesigning their inventory management process also helped the hospital pinpoint inefficiencies with employee productivity.

“We found when we were doing our work that we had very skilled people, high-paid people doing very labor-intensive work that was not at the top of their licensure,” Easton observed. “We had nurses doing things that folks in materials management could do more effectively and at a lower cost. So, on the productivity side we really helped ourselves.”

The next phase of optimizing Caldwell UNC Healthcare’s supply chain was installing a visual inventory management dashboard that promoted healthcare transparency and presented data to clinicians to encourage more cost-effective behaviors.

“The BlueBin system was implemented in all major clinical areas across our organization and it is a very effective way for users to quickly find and manage your inventory and allows you to manage how much inventory you have on the floor in a very data-driven, transparent daily manner,” said Easton.

While lean management implementation helped the hospital reduce its supply chain costs by several percentage points and increase employee productivity, Easton added that engaging front-line staff (e.g., physicians, nurses, medical technicians) was crucial to changing the overall approach to supply chain. By presenting the employees who actually use, order, and stock the inventor with accessible information, Caldwell UNC Healthcare was able to engage the whole organization in its effort to reduce costs.

“They really bought into it and got some deep personal learning experience that inventory that is not used is like dollar bills sitting on our shelf and it’s a waste,” Easton maintained. “That process really helped them see the waste, understand it, and buy into our process.”

Looking forward, Easton plans on further educating hospital providers on using the “most effective product for the circumstance at the best value.” She also intends to tackle other areas of the supply chain management to drive down healthcare costs.

“The greatest challenges now include working with product costs, probably most significantly, in the pharmaceutical area with the recent instability and the rapidly rising costs of pharmaceuticals,” she said. “Another major area is managing the supply chain process with physician preferences, advancing technologies, and the demand for the latest and the greatest, but at the same time declining reimbursements. That little juncture is a major area or challenge we are going to be attacking in the future.”

Dig Deeper:

• Why Healthcare Needs Value-Based Supply Chain Management

• Exploring the Role of Supply Chain Management in Healthcare