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Does Your Supply Chain Need to Go on a Diet?

By Ken Morris, JD

Supply chain costs can easily reach 50% of a hospitals annual budget, particularly when the costs of managing the supplies is added to the cost of the supplies themselves. This provides the hospital stewardship team of CEO, COO, CFO and supply chain officer the opportunity to reap significant savings by adopting a strategic supply chain methodology such as Lean Acquisition™.

Lean Acquisition™ rests on three pillars: Optimizing Care, Reducing Costs and Eliminating Waste. A highly functioning and efficient supply chain improves employee satisfaction such as nurses working at the top of their license rather than doing inventory management tasks. A lean supply chain reduces supplies expense, particularly physician preference items. Finally, the estimated 20-25% waste in the healthcare system can be eliminated by adopting lean strategies.

Lean strategies begin with low hanging fruit:

  • Standardizing commodities
  • Maximize purchasing power by aggregating with other hospitals, systems and integrated delivery networks
  • Improve contract compliance
  • Leverage technology for procurement, inventory management and supplies utilization

Key Steps to Lean Acquisition and Supply Chain Management

  • Align with physicians
  • Retain optimal clinical choice for physicians
  • Build relationships across the hospital system
  • Adopt lean technology such as cloud based solutions to automate the supply chain
  • Enforce clinical and operational standards
  • Practice outcome based and evidence based medicine
  • Understand and leverage utilization patterns to optimize care, reduce costs and eliminate waste
  • Adopt value analysis metrics and tools
  • Think and operate LEAN

Consider the following supply chain metrics:*

  • Supply expense as percentage of net revenue
  • Supply expense/supply intensity score per adjusted discharge
  • Supply expense as percentage of gross revenue
  • Supply expense as percentage of net revenue
  • Supply expense as percentage of operating expense
  • Supply expense, excluding drugs, per case mix index adjusted discharge
  • Inpatient drug expense/prescription intensity-weighted discharge
  • Supply expense per CMI-adjusted patient day
  • Supply expense per adjusted patient day
  • ROI (total cost savings facilitated by supply chain as seen in profit and loss divided by total cost to run supply chain)
  • Operating margin impact (percentage of operating margin that is attributed to supply chain cost savings)

*Sources: Repositioning Supply Chain in Health Care Systems, Health Sector Supply Chain Research Consortium, Arizona State University, 2010, and University HealthSystem Consortium, 2011.

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Published on by Sheepish Design.