Business Management

Steve Cochran (Global) - Applying Supply Chain Best Practices from Other Industries to Healthcare

Driven by healthcare reform and economic pressures, healthcare executives are viewing the supply chain as a strategic asset to meet operational, clinical and financial goals. This has not always been the case. For years, the supply chain was seen as little more than an ancillary function.

The supply chain represents 45% of hospitals’ operating expenses, second only to labor, which it is expected to supersede by 2022. With numbers like these, it’s hard for hospitals to ignore the role the supply chain can have on the bottom line.

However, many providers still focus their supply chain efforts on pressuring suppliers to lower prices. The flaw in this approach is not recognizing that putting pressure on one node in the supply chain will have repercussions in others. If providers want to turn the healthcare supply chain into a means to achieve the goals of healthcare reform – better outcomes at lower costs – they need to apply best practices that have proven successful in other industries.

Understand TCO

Total cost of ownership (TCO) is an underutilized concept in healthcare. When making sourcing decisions, other industries look beyond the price paid for products to consider fully landed costs. TCO will take on even greater importance in healthcare with the need to report on quality and cost. This call to better understand TCO is driving hospitals to work more closely with both suppliers and clinicians.

Establish New Relationships

The nature of the relationship between providers and suppliers is changing due to an increased appreciation for the interrelationships between players in the supply chain. One of the first observations made by supply chain professionals entering healthcare is the lack of collaboration between hospitals and their vendors. When suppliers serve as partners, not adver¬saries, hospitals gain new insights into opportunities for savings.

Turn Transparency into Trust, Demand into Value

Researchers at the University of Tennessee found that “world-class supply chains benefit in many ways from collaboration – even in times of severe economic stress.” The challenge is that trust is hard to come by in the healthcare supply chain. When trading partners do not share information, mis¬trust grows, and they are less willing to share information. The result is increased inefficiencies and missed opportunities.

In contrast, large retailers have systems in place that use point-of-sale information to trigger upstream supply chain activities. By sharing information, all parties are collaborating to serve the customer better and faster, while helping address inefficiencies that lead to excessive inventory and higher costs.

Speak the Same Language

One of the challenges with sharing data between healthcare partners is the lack of adoption of industry standard product identifiers and use of auto ID and capture technology. Real progress with supply chains can be traced back to use of a common language. That’s expected to improve with the pending FDA Unique Device Identification (UDI) rule requiring manufacturers to uniquely identify their products.

Invest in Supply Chain Technology

Historically, healthcare providers have invested less in IT than organizations in other industries. A study conducted by Oracle Healthcare Insights noted that “healthcare providers that make greater investments in back-office automation and process improvement enjoy operating cost ratios that are 2 to 4% better than those of their peers.”

Industries that invest in these technologies are better able to virtually integrate various functions and organizations, which increases appreciation for the interdependent nature of the supply chain.

Leadership Lessons

Successful supply chain transformation requires a fundamental shift in how an organization behaves internally and externally. It is an exercise in change management that must be led from the top of the organization, with effective execution across the enterprise.

Strategic Fit: Since it’s still viewed as a tactical function, the supply chain rarely holds a seat in the healthcare executive suite and is limited in its ability to contribute to corporate strategy. Most other industries consider the head of supply chain an executive-level position. Hospital leaders are encouraged to create a senior-level position with broader authority for the supply chain.

Professional Development: Supply chain optimization requires a broader skill set than most hospitals possess. The vast majority of hospital supply chain departments do not have personnel with formal training in areas like industrial engineering or logistics. Healthcare systems should be investing more in professional development in these areas.

Talent at the Top: The challenge for healthcare is attracting top talent. Since healthcare has devalued the supply chain role, it has not offered the level of authority or compensation to compete with other industries for skilled leaders. With a greater appreciation for the role the supply chain can play in optimizing the quality of care and improving efficiencies − the milestones by which healthcare will be measured and reimbursed going forward − the time is now for healthcare executives to make the supply chain an integral part of their organizations.

Successful supply chain transformation requires more than well-executed technology and process improvements. Supply chain leaders must have executive-level and enterprise-wide responsibility, a fundamental understanding of the interdependencies and interrelationships inherent in the supply chain and the ability to change how their organizations behave, both internally and externally.

By Steve Cochran, CTO, GHX


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