Supply Chain Management: The Year of Transformation

By Greg Firestone

If you have been contemplating when to “truly begin” the process of transforming your supply chain, clearly, the time is now. During 2005, the GPO business models changed radically and many providers began to better manage the exorbitant cost of high technology products. While these changes are encouraging, it may be merely scratching the surface.

Successfully managing the supply chain is no longer as simple as inventory management and demand fulfillment. It’s really the combination and integration of strategy, financial, revenue, operations and clinical performance management. Unfortunately, this requires specialized knowledge and know-how, which is commonly lacking among healthcare providers. Currently, few hospitals and IDNs employ a senior level executive with the necessary qualifications to effectively manage their supply chains. Attaining/retaining financial viability in the current environment depends on chief resource officer attributes, with experience implementing total quality management (TQM) systems.

The costs of supply chain inefficiencies are staggering. According to accepted industry estimates, as much as 35 percent of total supply chain costs result from inefficiencies. This has been known for some time, yet many providers have chosen to pursue the business-as-usual approach.

There are a number of healthcare providers – from every type of provider network – that are in critical financial trouble. Many have already filed for bankruptcy. In contrast, some providers have recognized significant cost savings by merely “cutting the fat.” Consider the following examples provided by healthcare systems that have already instituted strategic supply chain initiatives:

Swedish Health Care Services of Seattle undertook a strategic supply chain initiative in 1998 when it was a two-hospital system. Since that time, Swedish added its third hospital (2000) and was still able to cut its total supplies expense as percentage of net revenues 4.5 percent, from 21 to 16.5 percent. With net revenues for 2005 at $1 billion, that’s a savings of $45 million. Allen Caudle, Swedish’s VP of Supply Chain Management, estimates Swedish’s annual expense reduction to be approximately $30 million.
In 2002, the management of The Health Alliance of Greater Cincinnati decided to make supply chain management a core competency. A two-state, seven-hospital system, The Health Alliance was spending $269 million of its $1.3 billion in annual patient revenues on supply chain items. Dorman Fawley, COO, says The Health Alliance showed an audited expense reduction of $34.3 million over the four-year period ending Dec. 31, 2005.

Over a series of articles, NCI will share details around the five steps required to achieve this magnitude of success. In priority order, they are:

  • Developing strategic planning
  • Capturing and focusing on total supply spend (strategic sourcing)
  • Creating a clinically integrated supply chain
  • Optimizing a supply chain management
  • Improving financial management.

The path to rigorous supply chain management and financial health in healthcare is not unknown, only infrequently traveled. Making the proper adjustments will not only mean success, it will surely be one of transformation for the industry.

Greg Firestone is CEO of NCI.