Five Ways to Strengthen Your Health System’s Supply Chain

One of the biggest problems that health system leaders face is determining how their supply chain is functioning. Whether it’s strong, weak, or somewhere in the middle, this information is critical to financial viability¹, care delivery, and disaster preparedness.

Oftentimes, supply chain performance is based on vague anecdotal or word-of-mouth evidence relative to peers. The truth is that for a variety of reasons, including organizational inertia, resistance to change, and historic underinvestment, most healthcare supply chain departments are performing sub-optimally.

For leaders looking to evaluate the current performance of and the untapped opportunity for their supply chains, especially as the COVID-19 pandemic has affected 2021 budgets, here are five key questions to ask and associated success factors.

1. Engage physicians in selecting clinical products.

How well does your supply chain team collaborate with stakeholders across the organization, including clinicians? Successful supply chain managers collaborate extensively and cross-functionally with all end users.

Building strong relationships with clinicians, including creating physician panels whereby peers work together to select the suppliers and products the organization will use (e.g. total joints, spinal implants, pacemakers), is essential. Successful leaders look at the supply chain function as a clinically integrated support service and are extremely focused on serving their internal customers.

Case in point: Lehigh Valley Health Network achieved nearly $22 million in savings² in just two years, in part by strengthening physician engagement.

2. Be proactive rather than reactive.

What percent of time does your supply chain team spend on proactive, planning activities vs. reactive, tactical activities? The most problematic symptom of an underperforming supply chain team involves having team members spending the bulk of their time on tactical activities rather than forward planning.

If your supply chain leader and/or teams are always addressing “fire drills” and complain of not having enough time in their day to do their jobs, then your supply chain is reactive rather than proactive. Strong supply chain departments have well documented tools and processes in place to make their work efforts more efficient, including:

• RFP templates with standard terms and conditions in place
• Streamlined procure-to-pay processes mapped out
• A consistent, enterprise-wide sourcing process for all contracting activity

For example, top performing supply chain managers complete an annual profile of spend volumes by category and supplier for the organization. High-functioning supply chain teams also prioritize contracts based on expiration dates and savings potential, publish bid calendars looking 18-24 months out, and create cross-functional teams with enough lead time to deliver priority requests for proposals (RFPs).

3. Consistently track and calibrate performance.

Does your supply chain function have relevant key performance metrics in place? Although cost savings is an important role of the supply chain, simply tracking annual savings targets in isolation is a mistake.

High-performing departments carefully track and calibrate their performance monthly across a few essential operating metrics, or key performance indicators (KPIs). Common metrics include the following and follow AHRMM’s Keys to Supply Chain Excellence³.

• Supply Expense as Percent of Net Patient Revenue
• Supply Expense $ per Adjusted Patient Day
• Perfect Order Measurement, Inventory Turns
• Internal Customer Order Cycle Time
• Supply Chain FTEs Per $1M in Total Non-Labor Supply Spend
• Number of POs Per Month Per Procurement FTE

Top performers also tie incentives, at least in part, to achieving KPI targets. Clinically integrated supply chains can use reports with these KPIs to drive product decisions and compare cost to quality outcomes. Another key to Lehigh Valley Network’s success was focusing on the ways in which standardization and strategic pricing coupled with utilization would improve quality of care.

4. Increase the number of contracts going through the supply chain.

What % of your organizations’ contracting goes through the supply chain department (e.g. spend under management)? The greater the amount of an organization’s spending, the more influence supply chain teams can have on enabling standardization, savings, and optimization.

Spend under management is usually expressed as a % of actively managed spending, as a ratio of all potentially manageable spending. Physician preference items and purchased services should go through supply chain. A rule of thumb is that top-performing health systems have more than 75% of spend going through the supply chain department, average organizations have 50%, and weaker teams have 35% or less.

On average, it is estimated that organizations can achieve 5% cost savings in aggregate for spend that falls under management.

5. Digitize processes to improve productivity and efficiency.

To what extent does your supply chain team leverage technology? Transitioning to automated processes will make it easier for hospitals to track and analyze data efficiently.

Healthcare continues to lag other industries when it comes to supply chain management automation. This holds true from ERP functionality to using data analytics for forecasting and managing product selection decisions.

Best in class organizations process 90% or more of their orders electronically. There exists significant opportunity to “digitize the supply chain” by using technology in a number of areas, including inventory management (through deployment of RFID and point-of-use scanners), demand planning software, cloud-based applications (including procure-to-pay/source-to-pay), and data analytics. For one, automating inventory management can enable faster responses to shortages and more informed use of limited resources.

It’s time to move away from on-premise systems to cloud-based services - a trend that will accelerate over the next decade.

While there is much more to explore, by focusing on these five areas leaders can quickly gauge the power of their organization’s supply chain.

Ultimately, health systems with strong supply chains are clinically integrated, spend 65% of their time on proactive planning, regularly track KPIs, send the majority of non-labor spend through the supply chain process, and consistently rely on technology and data to improve operational efficiencies, care quality, and costs. Guidehouse can help.

Learn more about our supply chain performance services

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¹https://www.modernhealthcare.com/operations/supply-chain-tweaks-could-help-average-hospital-hire-up-165-more-nurses
²https://guidehouse.com/case-studies/healthcare/2020/lehigh-valley-health-network
³https://www.ahrmm.org/keys