Supply Chain Management: Fiscal Discipline

Capturing total supply spend to optimize financial management.
By Allen Caudle, NCI board member

Correcting supply chain inefficiencies is both doable and extremely beneficial. It depends on effectively capturing the organization’s total supply spend. Essentially, this is accomplished with hard work and discipline in the areas of data, purchasing, value analysis and standardization.

Capturing total supply spend starts with excellent data. Excellent data requires that you work with your financial folks to obtain information from every aspect of your organization, including decision support, accounts payable, materials management and information systems.

The goal is to obtain a comprehensive list of all vendors and the total spent at each. One tool used to achieve this is a descending dollar report, which helps you identify what is being spent where. A descending dollar report is a list of vendors organized from largest to smallest according to total dollars spent. For example, let’s say your total budget is $100 million and Company A is your largest vendor, accounting for $17 million of the total budget.

The first question is, “Do you have a good contract in place with Company A?” The second is: How do you know?” Benchmarking against regional and national pricing is the answer. If you’re obtaining materials through a GPO, then the GPO should be able to provide this information. If you’re purchasing independently, you can obtain national and regional pricing data from independent sources.

Typically, the top 20 percent of vendors account for 75 percent of annual supply spend. There should always be a contract in place for your largest vendors. Without a contract, you’re not getting your best deal.

Purchasing controls are an essential component to achieving savings. Lost dollars can almost always be traced to purchases made off-contract or rogue buying. Achieving savings means ensuring that materials purchased through the supply chain are made with purchase orders at prices that can be matched to the contract. When purchases are made off-contract, it’s difficult to know whether you’re getting your best deal. Rogue buying can quickly have a significant impact on your total spend.

Value analysis
Ongoing value analysis keeps you on top of revenue impacting changes. This is accomplished with a value analysis team (VAT) – users/clinicians/revenue folks – from every cost center within the organization. The VAT’s mission is to evaluate every single supply and/or purchased service coming through the supply chain to determine:

  • Do we have a contract for this item?
  • Is this item being purchased on contract?
  • Is this item being standardized as much as possible across the organization?

This is especially important for the more expensive physician preference items, where a change from item A to item B can profoundly impact revenue due to the nature of healthcare reimbursement programs.

Finally, supplies/services need to be standardized. This means using the same vendor for the same product(s) throughout your facility – whether it’s a standalone or part of an integrated delivery network (IDN). Standardization increases buying power and reduces clinical error.

Knowing what you’re spending where is the first step to achieving optimal financial management.

Allen Caudle is Vice President Supply Chain Management – Swedish Health Services.