Troubled times magnify health care supply chain manager's role

January 28, 2009

When times are good, expansion plans, future investments and revenue growth are the focus points in most industries. But during down times, organizations scrutinize spending. The current economic crisis is hitting the health care sector as hard as other industries. The result: shuttered private practices, squeezed hospital operating margins and many non-clinical jobs getting the ax.

So what does this mean for health care industry supply chain managers? In an attempt to usher in supply chain efficiencies and shape a healthier bottom line, clinicians, executives and others are now more ready than ever before to listen to their supply chain managers.

"For a long time they [supply chain managers] were seen as a transactional function down in the basement where you just make sure everything is there on Monday morning," said Eugene Schneller, professor of health care supply chain management at the W. P. Carey School of Business. Schneller moderated a panel of industry leaders at the third annual Leadership Summit on Health Care Supply Chain Management hosted recently by the World Health Care Congress.

Schneller views the industry from a vantage point at the intersection of academia and the industry. Chairman of the World Health Care Congress for three years, Schneller also heads up W. P. Carey's Health Sector Supply Chain Research Consortium. The consortium is a partnership between health sector researchers and managers in some of the nation's leading health care organizations. He has also done research on new medical professions.

According to Schneller, the rising price of new technologies and growing overall supply expenses are among the factors that have driven cost increases in the health sector. In addition, physicians continue to choose expensive products, such as hip and knee implants. While a few hospitals have had great success in controlling these costs, Schneller points out, "others continue to cater to the preferences of individual physicians -- hindering their ability to negotiate with vendors on the basis of committed volumes."

But David Ricker, CEO of Broadlane, a Dallas-based group purchasing organization (GPO), sees these down economic times as a golden opportunity for supply chain managers.

"If you (as a supply chain manager) are not in the C-suite offices pounding the desk with solutions, you're doing the wrong thing," he asserted.

Ricker also said the supply chain's importance has been heightened as a result of recent estimates showing average hospital profit margins down roughly 1.4 percent in the fourth quarter of 2008, a full 7-plus point drop from the 6.2 percent enjoyed in the fourth quarter of 2007.

Physician preference

Today's C-suite is putting an emphasis on the supply chain, but other disciplines within health care organizations are being asked to give input on supply purchases and selection as well.

Dennis Robb, senior vice president of supply chain management for The Health Alliance of Greater Cincinnati, is responsible for $359 million in annual spend for the $1.4 billion-a-year hospital network. Robb is has actively brought physicians to the table to talk about costs associated with preference items.

"We have physicians, nurses, pharmacists demanding products and services often without any insights into potential costs and impacts on the system," Robb said. "When I took over the supply chain [seven years ago] there were seven different vendors for bed pans. I said 'I think we have an opportunity here.'"

Now with 11 clinical advisory committees meeting regularly within the organization, Robb gets input from physicians, nurses and others on supply choices. The input is then used to help make purchasing decisions. As a result, there is little to worry about in terms of clinician discontent or product failure because users have been involved in the supply choices.

Robb also highlights the importance of what he calls "the value proposition" to clinicians, the C-suite and suppliers. "Give me a cheap product with no back-up or support … and you haven't moved us forward," he said. "Nobody wants to go to the hospital with the cheapest crutches."

Outsiders looking in

Health care executives are now looking to supply chain experts in other industries for help, posing another challenge to supply managers who have spent their careers in hospitals. It's a move made by large networks like Utah-based Intermountain Health care, New York Presbyterian Healthcare and others, added Schneller.

"I keep getting a lot of calls from search firms looking for supply chain executives. And they're increasingly asking for people who have been in the industry, but also those people outside the industry, people who can really bring insights," Schneller noted.


This shift is welcomed by long-time health care supply chain pros like Joe Colonna, interim vice president of supply chain for Atlanta-based Piedmont Health. Colonna says bringing in outsiders puts a spotlight on health care supply chain managers who have not brought a comprehensive approach to their institutions.

"It begs the question. Why doesn't the executive branch in your organization see value in people who are already in health care? Part of the problem is we [health care supply chain managers] have taken bits and pieces of concepts and never realized them," Colonna said.

When Colonna came to Piedmont six months ago, he noticed the company used a centralized distribution center for direct purchasing, but still spent $12 million with a distributor. Piedmont did its own contracting, but still spent millions with a group purchasing organization (GPO). These were just two examples, he added, of "never realized" efficiencies.

Schneller, however, emphasized that the movement to bring in supply chain experts from other industries points to maturity in the health care industry. "It's a sign that we're moving from a very transactional to a strategic [supply chain] model," he said.

The Ministry example

Thomas Nash, oversees Ministry Health Care's $550 million annual spend as chief supply chain officer for the Wisconsin-based network of health care delivery organizations. Nash spent 20 years as a supply chain executive with Royal Dutch/Shell and two years working for real estate services giant Cendant prior to joining Ministry a year ago.

Nash, a graduate of the W. P. Carey School, is an active participant in the Health Sector Supply Chain Research Consortium who views the industry's supply chain practices as "immature." With Nash on board, Ministry established $5.1 million in cost improvements in its 2008 fiscal year and is targeting $9.75 million in improvements for fiscal 2009.

Nash said getting clinicians, suppliers, the C-suite and others involved in supply chain decisions has been key to his success, and a primary driver behind him making the switch to the health care industry in the first place. Had executives and others not been on board with making supply chain a priority, he said, he would have likely stayed with his former employer.

"There are only two people in the world that know the product the best: those that make it [suppliers] and those that use it [physicians]. If we don't engage those two groups on some level we don't have to worry about cost. We'll never get there," Nash said.

The tactical-strategic shift

Jim Szilagy, chief supply chain officer with the University of Pittsburgh Medical Center (UPMC), is also a W. P. Carey graduate and research consortium participant. He spent time in the consumer electronics, automotive and metals industries prior to joining UPMC three years ago. Szilagy manages a $1.8 billion annual third-party spend and has overseen many shifts in the company's supply chain. Perhaps most notable was the application of technology to help move the organization from a tactical to strategic supply chain model.

"When I arrived, supply chain didn't really drive technology. PeopleSoft (enterprise management software) was run the way they told us to use it. It was very inefficient," he noted. "Now supply chain drives technology. We build a business case, take it to the (software provider) and say 'This is how we want to use PeopleSoft, these are the modules we want to use.' The functional supply chain actually drives the technology today."

UPMC, a $7 billion a year health care network, benchmarks to industry best practices identified by the Hackett Group, a research firm. UPMC's average cost to process a purchase order is $3.35, far below Hackett's $8.00 average; UPMC's $1.55 to process an invoice is almost 25 percent lower than the roughly $2 average reported by Hackett.

"We are lean and we are efficient," Szliagy said. "We look outside of health care [for examples of supply chain efficiency]. Black and Decker, Harley Davidson -- those are the folks we want to be as good as."

Beyond traditional scope

A movement could be afoot for health care supply chain managers to bring efficiencies to other areas of a health care network's spending as well. Szilagy is in full support of expanding supply chain's role and its potential impacts on the bottom line.

"We need to explore new categories, things like outsourced legal services -- things that have been unexplored by us historically. They represent an opportunity," Szilagy said. "We need to manage consumption. How do we use a product? How much less could we use? Those are the types of things we need to look at. The best cost reduction is not to use an item at all."

As a result of the current shaky economy, Szilagy also said identifying unstable suppliers needs to be a consideration for today's health care industry supply chain managers. The impact of a certain supplier going out of business could be a stronger than some would assume.

"With some suppliers, you can just buy another item, but with others it could be devastating," he added.

Bottom Line:

  • The executive leadership and other areas of health care networks are seeing the supply chain as a key contributor to a healthy bottom line.
  • More and more hospital executives are looking for supply chain managers outside of the industry to run their own supply chains.
  • Health care supply chain operations are shifting from tactical to strategic models, where the goals and needs of the company and department drive the technology.
  • With an efficient supply chain in place, managers may be asked to bring efficiencies to other spending areas of a health care network.