August 21, 2019

“The average hospital could save millions of dollars in the next fiscal year.”

When it comes to the successful administration of a healthcare facility, few tasks are more important than ensuring the efficient flow and availability of medical supplies.  Where would a hospital be without a sufficient number of syringes?  How would a surgery center cope without an adequate supply of sterile gloves?  Supply chain management (SCM) is a core function to be sure.  It is central to the facility’s mission and critical in the provision of patient care.  How disconcerting it is, then, to realize that most hospitals are under-performing in this vital area.

They say a chain is only as strong as its weakest link.  When we analyze the medical supply chain of the typical hospital, a number of links are likely to be identified as strained, rusty, or on the verge of coming apart.  In the end, this means a hit to the facility’s bottom line.  Based on those who have studied this issue, there are a number of factors that may contribute to the inefficient management of supplies.  For example:

• Hoarding.  It is well known that many clinicians and hospital staff engage in the time-honored practice of hoarding their favorite supplies.  They will stow them away in a special place to ensure they are present and available whenever they need them.  They’re not stealing, mind you, but this activity does wreak havoc with inventory management and budgeting, and it lessens the availability of these supplies to others when needed in a crunch.
• Antiquated Tracking Systems.  Many facilities still log in supply shipments by hand, typically by keying data into a spreadsheet.  In fact, according to a 2019 survey of 100 industry leaders, nearly half of the hospitals in America still track supplies manually.  This is cumbersome, costly, time-consuming, and will inevitably lead to gaps in data capture.  Manual tracking translates to a haphazard operation and inefficient use of labor.  Automation and data analytics are the key to 21st-century tracking—from shipment receipt to storage to final disposition of the product.
• Poor Vendor Management.  Some facilities run into trouble by not staying on top of their contracted suppliers.  When the vendor is told by the manufacturer that the product will be unavailable for two weeks, or fails to inform the facility of the shortfall in a timely manner, your supply chain manager is left scrambling to call on other vendors to provide adequate alternatives posthaste.  I recently spoke to a director of supplies at a regional hospital who told me that his employees are constantly on the phone running down supplies that were due, but still undelivered.

Cost containment is an ever-increasing component of hospital budget planning these days.  Administrators are being forced to look at new and innovative ways to cut corners and reduce overhead.  According to one healthcare executive, the supply chain represents a third of the average hospital’s operating costs, and is expected to surpass labor as the top budgetary expenditure by 2020.  A 2017 survey indicated that most hospitals could save 18 percent in costs by simply implementing a more effective SCM effort.  This could translate to the saving of millions of dollars for your facility in the next fiscal year.

To begin the process of implementing a smarter, cost-saving SCM, we recommend you begin with the following initial steps:

ACTION ITEMS

1. Determine current SCM labor costs.
2.  Identify current sources and costs of supplies.
3. Examine existing contracts with suppliers that bind the facility to a time period/amount/type of supply.
4. Determine if there are better, cheaper suppliers for each supply category.  For example, if you’ve been buying components for your knee replacement surgeries from vendor A at $8,000 a pop, but vendor B provides them for $2,000, you need to confer with your orthopedic physicians to determine if the clinical quality of option B equals or surpasses option A.  If so, begin your plans to switch vendors.
5. Use an automated, date-driven, notification system to alert you when each supplier contract period has ended.  If you have found better supplies/rates/vendors in the interim, you will now be free to make new arrangements.
6. What automated processes, if any, are currently in place to track supplies?
7. What reports exist to show trends in under-supply, over-supply, late shipments, and other helpful data?
8. Determine cost differential between (a) implementing new automated tracking systems with associated labor cost reductions, and (b) retaining the current manual processes.
9. Consider well the expected rate of increase/decrease in patient population over a given period.  This will allow for greater accuracy in long-term vendor contracting and general supply planning.
10. Determine supply availability and price trends for key products.
11. Determine cost-benefit ratio of ordering high-dollar specialty supplies/equipment.  Will the cost of such items be more than offset by their ability to draw more patients to your site versus your competitors?  For example, if you purchase a TomoTherapy machine, and your facility is now the only one in the region offering this specialized service, will that fact bring more patients and thus more revenue to your hospital such that the new machine more than pays for itself?
12. The consignment model should be reviewed as a possible cost-saving measure for at least some specialty supplies.  Entities providing this service typically offer RFID tagging of refrigerated drugs that are about to expire, with auto-warnings and auto-count for inventory purposes.  Such vendors take on the supply management risks and responsibilities within your facility—at least as to the supplies they offer—freeing your supply staff to concentrate their efforts on other product priorities.
13. Determine how to best combat hoarding. Consider (a) disciplinary provisions within the facility’s compliance plan or bylaws, and/or (b) convening staff meetings where hoarding is strenuously and repeatedly discouraged.  Perhaps the best approach is to make staff and physicians aware of the issue and to bring them in as partners in the formation of possible solutions.
14. Avoid “hyper-overstocking.”  Here’s the problem with ordering far more supplies than needed.  First, you just paid significantly more money than actually required.  Remember that the idea is to dramatically cut costs!  Second, do not assume that all this surplus will eventually get used and that the money was, therefore, well spent.   The fact is that overstocking leads to eventual waste (due to age expiration or technology obsolescence associated with certain drugs or supplies).  The best idea is to use all your reports and data analytics to order with greater precision.  You want to make sure you have more than enough, but not grossly more.
15. Review and improve physician input relative to the ordering process.  Their clinical insight and cooperation are key in making sure that supplies are medically sound and ordered in optimal volume.
16. Review the regulations that govern this process (e.g., drugs, wastage, etc.) and ensure they are being followed.

It is important that facilities recognize that the purchasing and tracking of supplies is a potential goldmine of savings, and they should move quickly to revamp and modernize their SCM process.  Administrators can begin by considering some of the action items listed above in consultation with key members of the administrative, clinical and SCM teams.  These discussions will inevitably lead to additional solutions that may better fit your particular facility’s needs.  The key is to begin the process.  Get your people focused on, and talking about, SCM.  Administrators can no longer afford weak links in this vital chain.