Tina Vatanka Murphy

Squeezing costs out of supply chain management

October 02, 2015
As we seek a more value-based health care system, one that delivers better quality care at a more affordable cost, hospitals and health care systems are working with their suppliers to take costs out of the system, rather than just shifting costs from one to another. The more historic approach, with providers and suppliers primarily engaged in contentious discussions over the acquisition price of a product, is no longer the most effective strategy. Instead, the more “valuable” conversations between the two parties are those that take a holistic view, examining the total delivered cost of a product, including direct and indirect supply chain costs, as well as the role products play in improving quality care and reimbursements.
Health care providers and suppliers that have collaborated to address the inefficiencies and costs associated with procuring and delivering finished goods, known as cost-to-serve, have not only made tremendous gains in process efficiency, but also achieved significant hard dollar savings. By coming together, trading partners have identified outdated and inefficient business practices and implemented more effective processes that eliminate costs and improve quality for all involved.

Why is the cost-to-serve in health care so high?
Because the supply chain crosses organizational boundaries, the actions of one party impact all of the parties with which it transacts business. This can result in unintentional but very real costs. We convened a 64-organization roundtable to discuss why the cost-to-serve in health care is so high compared with other industries. In those discussions, the participants identified ways in which trading partners increase costs for one another and highlighted how they are collaborating to address those issues. Below are the top cost drivers identified.
• Mistrust and lack of communication (between the right people):
Historically, there has been a high level of distrust between providers and suppliers in the health care industry, much of it stemming from the traditional focus on product price versus value delivered. With supplier sales representatives serving as the primary liaisons with provider organizations, it’s been difficult to change the nature of that discussion to seek out ways to reduce costs across the supply chain.

• Freight charges and excess inventory:
Roundtable participants acknowledged that providers frequently place duplicate orders for the same items, resulting in higher freight expenses. Furthermore, products are sometimes shipped in more expensive ways (overnighted, via air) when a less expensive method (two to three day) may be acceptable. Someone pays for these high freight charges — either the supplier foots the bill or passes along the costs to the providers.
Sometimes, the freight charges are more expensive than the products themselves. Participants also cited the practice of hoarding inventory, noting how many clinicians order and store excess inventory in fear they will run out. In these cases, trading partners lose money when excess products expire and must be discarded.
• The complexities of health care contracting:
Roundtable participants voiced the complexity of health care contracting as a major pain point and cost driver. Both providers and suppliers agree that discrepant data, disconnected systems, frequent price changes and the overall complexity of the health care contracting process creates unnecessary work and increases costs on both sides of the supply chain.
• The shadow supply chain:
Various participants pointed to clinician involvement in the supply chain as a driver of inefficiency, cost and waste. Clinicians spend time on supply chain tasks that take them away from patient care, while often over ordering products because they have little visibility into overall organizational inventory levels. For example, a nurse might reorder products for a facility not knowing that another facility within the health care system has a surplus of the same items available for use.
• Physician preferences:
Cost-to-Serve around physician preference items, specifically implantable devices, was identified as a significant cost driver. Traditionally, supplier and provider organizations have been at odds in this area, competing for physician loyalty and compliance as opposed to collaborating with physicians to determine the best product at the optimum cost for patient care. Complicating matters are the highly manual, disjointed and duplicative processes surrounding the use of implantable devices in the OR, which ultimately drives an additional $5 billion per year in health care industry costs due to lost, wasted or expired products.
About the author: Tina Vatanka Murphy is the senior vice president, Global Product & Corporate Development at GHX.