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About this series:
This article is part of our year-long Fiscal Fitness series focusing on proven strategies hospitals and health networks have undertaken to contain expenses in the face of an increasingly constrained financial environment. The series will look at cost-cutting efforts across the entire organization or in specific areas, such as the supply chain or energy use. It will look at how hospitals use Lean, Six Sigma or their own homegrown methodologies to create efficiencies and control spending. The series includes articles in Hospitals & Health Networks and multimedia content in our online newsletter, H&HN Daily. The January issue of the magazine will feature a foldout section focusing on energy. The series is sponsored by VHA.

Research by Lee Ann Jarousse

Call it a silver lining, of sorts. The economic downturn has given the supply chain renewed prominence, boosting it in many hospitals from the basement to the executive suite. Organizations that have placed strategic focus on the discipline are reaping significant savings, but that's not all. A high-functioning supply chain can improve employee satisfaction — particularly nurse satisfaction — and positively impact patient safety and outcomes.

"The supply chain affects so much of the hospital organization that it needs to be embraced as a C-suite, strategic issue," says Jamie Kowalski, who worked on supply chain initiatives in a variety of health care settings before founding his own consulting firm. Adds Deborah Sprindzunas, executive director of the Association for Healthcare Resource & Materials Management, "Organizations need to raise the bar for the supply chain and get the CEO to pay more attention. It's an uphill battle. Many CEOs do not look at the supply chain from a strategic perspective."

Taking a holistic view can change that, notes Kowalski. On paper, the supply chain typically accounts for 30-40 percent of a hospital's expenses but "you can't just look at the cost of goods. If you factor in the actual cost of procurement, storage and all of the other factors associated with supplies, including engineering, pharmacy, food service and nurses' time spent on supply chain activities, the supply chain accounts for 50 percent of an organization's budget."

H&HN Web Exclusive
Lee Ann Jarousse, senior editor of custom publications for H&HN, talks with Scottsdale Healthcare's Mike Hildlebrandt, associate vice president of the supply chain, about how his hospital saved millions through value analysis, contract negotiations and involving physicians in utilization and standardization decisions. Running Time: 4:17

And Sprindzunas points out that around 2020, medical supplies will surpass labor as the biggest expense for hospitals and health systems.

The best place to start is with the low-hanging fruit: Standardizing commodities, maximizing use of contracts with group purchasing organizations and inventory management can turn up significant savings. In many cases, organizations will find they are not using the relationships with their vendors to the fullest extent.

However, the biggest opportunity lies in resource utilization and reducing variation in care. "You cannot sacrifice quality for cost," says Ed Smith, executive director of supply chain management, University of Mississippi Medical Center, Jackson. "For that reason, we don't base our decisions solely on cost. In some cases, the higher-cost item is associated with better outcomes. If we can reduce length of stay, eliminate infections and speed recovery time, we are impacting the bottom line in a big way."

Making the connection is not easy. "I don't think supply chain executives have the data at their fingertips to really look at utilization patterns," says Mike Alkire, chief operating officer at Premier Inc. health care alliance. "When you have that data, you can begin to talk to physicians to say, 'Let's look outcomes.' If we're not seeing any clinical delineation, let's figure out ways we can share best practices by driving costs down."

Garnering physician support is key. It's critical to involve them throughout the vetting process both to enhance their understanding and to receive valuable input on the care delivery process. "The big challenge is preserving choice for physicians," says Willliam Stitt, vice president, materials management, Robert Wood Johnson University Hospital, New Brunswick, N.J., and president of AHRMM.

Physicians are welcoming the opportunity to become more involved in the product selection process. "In my time in health care, I've never seen physicians so interested in finding ways to standardize the specifications for products," Alkire says.

Key Steps to Strategic Supply Chain Management

Changes in reimbursement are driving cuts in supply chain spending. "Whoever can deliver care at the highest quality and lowest cost will be the winner," says Richard Grundling, vice president of the Healthcare Financial Management Association. These key steps can elevate the supply chain strategically within the organization.

1. Build relationships: Supply chain executives must garner support from all areas of the hospital to truly impact supply chain spending. "Supply chain executives must realize they don't have all the answers," says Sean Angert, managing director, Huron Consulting Group, Chicago. It's important to build relationships throughout the hospital, including nonclinical areas, Angert notes.

2. Align with physicians: Organizations need to engage physicians proactively in supply chain management. Placing physicians in leadership positions on value-analysis committees can help achieve significant buy-in from the medical staff. Physicians also can be involved in contract negotiations, formulary development and technology assessment.

3. Practice evidence-based medicine: Eliminating variations in care through the adoption of evidence-based medicine not only improves outcomes, but also reduces expenses. Reducing readmissions and preventing infections, among other things, optimizes reimbursement and places less pressure on the supply chain.

4. Focus on clinical integration: The supply chain should be integrated with the care delivery process. A high-performing supply chain delivers the right product, at the right time, in the right quantity, at the right cost, resulting in improved outcomes and greater efficiency.

5. Automate the supply chain: The need for automation in the supply chain is clear. Lack of automation can lead to overstock and overspending on supplies. Materials management information systems provide real-time information on pricing, product availability, contract compliance and usage. Automation also enhances supply chain accuracy and expedites the billing process.

6. Adopt standards: The adoption of supply chain standards such as GS1 can enhance efficiency, patient safety and regulatory compliance.

7. Enhance value analysis: The value analysis process helps hospitals determine whether they are getting the right product at the right prices. Value analysis teams provide nurses, physicians and others a say in product utilization and performance.

8. Think Lean: Process improvement methodologies, such as Lean and Six Sigma, can identify inefficiencies within the supply chain and streamline processes.

Key Supply Chain Challenges

Underutilization of data standards

The underutilization of supply chain data standards results in significant inefficiencies across the entire supply chain continuum.

Lack of representation at the C-suite level

The supply chain needs to be elevated to the C-suite level to recognize its strategic importance within the organization.

Supply chain silos

Many organizations still operate disparate supply chains serving individual departments and service lines, inhibiting an organization's ability to coordinate purchases and limiting its ability to understand total supply chain costs.

Clinician resistance to change

Physicians and other clinicians like choices and autonomy and are often loyal to particular products and brands.

Source: H&HN research, 2011

Key Supply Chain Financial Metrics

Below are key financial metrics to measure supply chain performance.

• Supply expense as percentage of net revenue
• Supply expense/supply intensity score per adjusted discharge
• Supply expense as percentage of gross revenue
• Supply expense as percentage of net revenue
• Supply expense as percentage of operating expense
• Supply expense, excluding drugs, per case mix index adjusted discharge
• Inpatient drug expense/prescription intensity-weighted discharge
• Supply expense per CMI-adjusted patient day
• Supply expense per adjusted patient day
• ROI (total cost savings facilitated by supply chain as seen in profit and loss divided by total cost to run supply chain)
• Operating margin impact (percentage of operating margin that is attributed to supply chain cost savings)

Sources: Repositioning Supply Chain in Health Care Systems, Health Sector Supply Chain Research Consortium, Arizona State University, 2010, and University HealthSystem Consortium, 2011.


University of Iowa Hospitals and Clinics, Iowa City

Relationship building. That's a key strategy of the University of Iowa Hospitals and Clinics' supply chain team. "We have to be service-oriented and make sure we are good supply chain stewards," says Frank Eischens, R.N., director of procurement and value implementation services. These efforts build trust among clinicians and physicians and help garner support for supply chain initiatives. "We need to provide great products, great prices and great services," Eischens says. "That's critical." Through partnership with its GPO and a focus on price negotiations and product standardization, among other things, the organization achieved $14 million in savings over an 18-month period. "The two main costs in health care are supplies and people," Eischens notes. "If we can't cut supply cost, we have to reduce [the number of] people. That's a driving factor for all of us."

University of Mississippi Medical Center, Jackson

The University of Mississippi Medical Center began formalizing its supply chain about four years ago. Before that time, materials management was a Monday-to-Friday operation and purchasing was siloed within departments and service lines. The organization had low compliance with its GPO contract and no primary distributor. Inventory was held off campus on the upper floors of a converted retail mall and difficult to access. The supply chain has undergone a complete overhaul, starting with consolidating to a single purchasing department, establishing a new GPO contract and using a single distributor. The warehouse was closed and the organization maintains between four and five days' worth of inventory on-site. And the organization has installed a new materials management information system. Combined with efforts of a value analysis team, the medical center has realized more than $10 million in savings as a result of these efforts. "We've built the supply chain, but those savings can quickly erode," says Ed Smith, chief supply chain management officer. "We have to stick with our policies and procedures so new products don't creep in." The organization now is focusing on utilization. "That's the next big frontier," Smith says.

Scottsdale (Ariz.) Healthcare

Three years ago right in the midst of the economic downturn, Scottsdale Healthcare opened a new facility. "We had a rough fiscal year three years ago and we actually lost a little bit of money," notes Mike Hildebrandt, associate vice president of supply chain. The hospital joined a new GPO and began looking for ways to achieve savings without sacrificing cost and quality. Scottsdale assembled seven value analysis teams to focus on standardization. To date, the organization has achieved more than $13 million in savings. The multiple teams have allowed Scottsdale to work simultaneously on multiple projects within various service areas. "In order to hit those savings targets quickly, we needed to move quickly," Hildebrandt says. The CMO has championed the organization's efforts. "We've promised our physicians we will not make changes without consulting them," Hildebrandt says.

How We Did It:

This gatefold was produced by researching published studies and articles and conducting interviews with hospital and industry executives.

Research: Lee Ann Jarousse,

Design: Chuck Lazar,