How to create financial efficiency in the Healthcare supply chain
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It is well known that the US health care system is in crisis mode. US hospitals and health systems are facing declining revenues due in large part to health care reform measures, with provider organisations being pushed to achieve certain patient care quality metrics or risk cuts in Medicare reimbursements.
Some in the industry are embracing major changes to control costs and increase business efficiencies; both paramount to the future of health care, and they are using their supply chains to help drive that transformation. By making their supply chains a strategic asset, forward-thinking companies are finding new ways to meet operational, clinical and financial imperatives.
Challenges to Transformative Change
Health care as an industry has been slow to embrace change in the supply chain. While many leading firms view their supply chains as strategic assets and have taken steps to automate processes, improve data quality and increase access to information on which to base business decisions, others are still plagued by inefficient manual processes, inaccurate data, lack of visibility and poor business intelligence and reporting.
Key challenges to transformative change in the health care supply chain include:
- Number of industry players: Unlike other industries in which there are just a few big players, in the US alone there are nearly 5,300 acute-care hospitals, each of which has hundreds and sometimes thousands of vendors.
- Vast amounts of ever-changing data: The health care supply chain must deal with a tremendous amount of data, such as contract information, that changes frequently. Every year, on average, changes are made to one-third of the 30 million plus medical-surgical products on the market in the US, and each GPO is estimated to make as many as 30,000 changes to contract data each month.
- Disparate IT systems and lack of data standards: Disparate IT systems that do not share information, and the difficulty of incorporating global data standards for unique organisation, location and product identification into procurement processes, add to the complexity.
Turning Challenges into Opportunities
Despite the obstacles, many health care organisations, confronted by compelling reasons to change, are beginning to break down the barriers and build the supply chain of the future.
That supply chain will be lean, quick to respond to opportunities and challenges, and viewed as a strategic imperative for the financial health of the entire business. But perhaps more importantly, it will be sustainable.
As the largest business community in health care, GHX connects hospital supply chain, finance and clinical professionals with their suppliers and partners, providing services and solutions that enable them to improve operational efficiency and drive down costs. The company does this by automating supply chain processes, increasing visibility into information and providing business intelligence tools that enable providers and suppliers to make more informed decisions.
GHX has identified seven steps to health care supply chain transformation. By following these steps, hospitals and health systems can turn the weaknesses in their supply chains into strengths, creating viable solutions for long-term success.
1. It All Begins at the Top
Because supply chain touches a broad range of functions within a health care organization – operations, clinical departments, finance, value analysis, and so forth – true transformation requires a clear mission set forth by upper management. Significant improvements in business processes, technologies and data require the C-suite to serve as champions for this change and build support within the organization.
2. Start with a Goal and a Vision
Health care groups that have successfully cut costs and improved efficiency through their supply chains all began with a vision that was aligned with organisational objectives. In today’s health care environment of cost-pressures and sweeping reforms, most hospitals and health networks have established cost cutting goals while trying maintaining the quality of patient care.
Health care executives are increasingly turning to their supply chain departments to play a pivotal role in these efforts. Supply chain leaders need to be bold and demonstrate to the C-suite how they can have a positive impact on bottom line.
3. Break out of the Silos
Traditionally, the various departments within health care organisations have functioned in separate silos, as they do in many other industries. Finance, procurement, accounts payable, physicians, clinicians, and IT develop tight-knit groups and become isolated in their work. Breaking down the silos by putting people with different backgrounds and perspectives together and enabling them to understand each other’s issues is a critical component of supply chain transformation.
4. Technology as an Enabler
Health care providers traditionally have invested less in information technology. The money they do invest primarily goes for clinical IT systems. Despite a federal government requirement that encourages this trend, a recent study by Oracle Healthcare Insight makes an argument for greater investment in back-office automation and process improvement, stating that organizations can realise operating cost ratios that are 2–4 percent better than those of their peers.
Through its work with hospitals and the suppliers, GHX has found that the following technologies are necessary for successful supply chain transformation:
- Purchasing automation
- Contract and price management
- Content management
- Requisitioning workflow and price control/ contract compliance
- Invoice and payment automation
- Business intelligence and reporting across all levels of the organization
While technology can be a powerful enabler, it’s also recognised that technology is only as good as the data that feeds it. Data plays a key role in providing the foundation on which health care supply chain management technology is built. Without great content (right item, right description, right price), the focus of a technology solution shifts from process automation to workflow enablement as more players must participate to ensure that the right data goes to the supplier when a product is ordered.
5. Doing Business a Different Way
Too often, executives make isolated technology decisions rather than focusing on a plan to implement an entire solution. Leading organisations look at things more pragmatically though, by focusing on the implications of supply chain transformation for the entire business. More importantly, they recognise that the benefits of technology can only be fully achieved by incorporating process changes into the transformation.
6. Align to Win
Full value chain alignment includes IT, clinicians, administration and other key stakeholders to ensure new supply chain initiatives integrate seamlessly with existing technologies and processes.
7. Change Management is Imperative
A key component for the success of any supply chain transformation initiative is gaining buy-in from everyone involved. The most successful companies invest in communicating the value, testing the solution, creating the right initial experience for users, and sustaining the change. This requires a robust change management and communication effort. A detailed plan that addresses concerns about how the new system will alleviate current issues and how it will affect job tasks while providing a clear long-term strategy that can be understood and embraced by everyone is imperative.
The health care supply chain is evolving to address the challenges facing the industry. Now more than ever, supply chain leaders have an opportunity to play a strategic role in organisations by providing greater spend visibility and identifying effective ways to cut costs.
Through process automation, technology improvements and greater resource alignment, health care organisations can build the supply chain of the future, one that will be leaner, more efficient and able to withstand the challenges ahead.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”