Can Supply Management Technology Be the Antidote to the Healthcare Crisis?

Sept. 1, 2007

Can Supply Management Technology Be the Antidote to the Healthcare Crisis?

It doesn’t take a doctor to diagnose that America is facing a healthcare crisis. Thanks to an aging population and greater longevity, healthcare costs are spiraling out of control. Healthcare spending is expected to top $3 trillion by 2012, accounting for nearly 17 percent of the country’s GDP.

It doesn’t take a doctor to diagnose that America is facing a healthcare crisis. Thanks to an aging population and greater longevity, healthcare costs are spiraling out of control. Healthcare spending is expected to top $3 trillion by 2012, accounting for nearly 17 percent of the country’s GDP.

 These factors have caused lawmakers to scrutinize all aspects of the healthcare sector— from service providers to insurers to pharmaceutical companies. National healthcare performance reviews are heightening transparency of both the cost and quality of healthcare services. Tougher regulations are inevitable, particularly in an election year. These dynamics are shrinking already tight profit margins and increasing pressures for hospitals, clinics and other providers to control costs without impacting the quality of care.

 Efforts to control costs in the healthcare sector have largely been either labor related, such as cutting staff or reducing clinic hours, or care related, such as avoiding certain tests or treatments due to costs. Such tactics have obvious negative impact on the quality of care. These moves are also often temporary, requiring hospitals to recruit, rehire and retrain new staff as patient volume increases demand. Many hospitals now realize that their greatest opportunity to drive sustained cost reductions and to improve care comes from doing a better job of purchasing and supplier management.

 A Moving Target

 Consider Piedmont Healthcare. As the parent organization for Piedmont Fayette Hospital, Piedmont Mountainside Hospital, Piedmont Newnan Hospital, the Piedmont Hospital Foundation, Piedmont Physicians Group and the Piedmont Clinic, Piedmont Healthcare oversees thousands of contracts with scores of vendors, supplying everything from floor wax to cafeteria food to lifesaving biomedical equipment.

 ” With all the suppliers and facilities under management within our organization, staying on top of thousands of diverse contract elements, while ensuring we remain HIPAA-compliant, is a constantly moving target,” says Jay Mitchell, Piedmont’ s EVP and General Counsel.

 Piedmont is not alone. Spending on external goods and services, from imaging machines to bandages, is the healthcare sector’ s second largest expense, representing 35 percent of a hospital’ s total spending, on average. A 5 percent improvement in supply savings can deliver a 1 percent to 3 percent boost in operating profits. These profits can be reinvested in hiring the best doctors, clinicians and nursing staff to drive up the quality of healthcare.

Breaking Bad Habits

 Unfortunately, most healthcare service providers do a poor job of diagnosing and maintaining the health of their supply chains. Most efforts to improve purchasing have focused on managing materials, such as instruments, pharmaceuticals and bandages, once they are in the hospital storeroom. Yet, few healthcare providers have put as much diligence into strategically sourcing and nurturing supplier relationships. What’ s the problem?

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 Lack of standard processes: At most hospitals, sourcing procedures are highly fragmented, with frontline doctors and clinicians often making purchasing decisions in the field and throwing the order to purchasing for execution.

 Inefficient procedures: Most hospitals continue to rely on manual processes systems to identify, negotiate and manage suppliers. Industry benchmarks indicate that, due to such inefficiencies, initial sourcing cycles to negotiate a new contract take more than three months in the healthcare sector.

 Limited and disparate IT systems: Hospitals have lagged behind other industries in adoption of supply management technologies such as sourcing, contract management and supplier management or spend-analysis software. Instead, healthcare providers have opted for either a mix of homegrown solutions or no automation at all.

 Insufficient skills: Veteran purchasing professionals accustomed to processing purchase requests often lack the required skills to assess supply markets and to negotiate best-value agreements with suppliers.

 Such factors limit hospitals’ spending leverage and undermine broader supplier relationship management strategies, resulting in buyer/supplier relationships that are almost entirely transactional (and often confrontational) with hospitals failing to leverage supplier expertise, innovation or services. These factors not only boost healthcare costs but also introduce risks of poor quality or stock-outs that can negatively impact health services and endanger patients’ lives.

Developing a Regimen

 Supply management is the discipline of aligning organizations, processes and systems to source, contract, manage and continuously improve supply for best value performance in support of the strategic objectives of the business. Research by the Aberdeen Group, a provider of fact-based research focused on the global technology-driven value chain, found that for each new dollar of spending brought under management of such standard supply management procedures, an organization achieves between 5 cents to 20 cents in savings.

 But what can be done to improve supply management performance? Aberdeen’ s assessment of the top performers in the healthcare sector reveals the following best practices for supply management success:

 1. Define codified processes for sourcing, contracting and supplier management.

 2. Adopt supply management automation.

 3. Leverage external expertise, services and prenegotiated contracts of Group Purchasing Organizations (GPO).

 In addition, supply management standards are a must-have. Top performers have formal procedures and policies for all aspects of supply management, from initial opportunity analysis to strategic sourcing to ongoing compliance and supplier management. This ensures consistency, reduces risks, and improves overall efficiency and productivity.

Technology’ s Critical Role

 Driving the visibility, control and efficiency required to capitalize on the supply management opportunity is difficult if not impossible without the use of technology. Top performing enterprises leverage commercially available solutions to improve spend visibility, negotiation leverage, speed contracting cycles and compliance, as well as to track and continuously improve supplier performance.

 For example, as part of its efforts to improve supply management performance, Piedmont Healthcare has adopted automation to streamline the entire contract management process, from initial contract negotiation and authoring to expirations and renewals. The solution will provide every department and authorized stakeholder in the contract management process with access to a central and common source of the most up-to-date information on contractual agreements. Users will be able to search contracts, parties and terms, report on contract compliance and performance, and receive automatic alerts in advance of key contract milestones and exceptions.

 ” The value the contract management system delivers is significant, from the time it saves us on administration and paper-chasing, to the opportunities it identifies for concrete cost negotiation,” says Mitchell.

 The use of technology also helps ensure that hospitals fully leverage their spending power and maximize the productivity and effectiveness of their internal purchasing team.

Group Purchasing Organizations (GPO)

 Many hospitals lack the skills, expertise, and infrastructure to effectively manage procurement across all spending categories. Developing these competencies in-house is often too costly, too time-consuming or both. In response, some top-performing healthcare companies are transferring suboptimal procurement processes and poorly controlled spending categories to procurement service providers that offer economies of scale, category expertise and predefined aggregated buying agreements.

 Contracting services providers offer access to best-value deals, in addition to, increased spending leverage and efficiencies, and improved compliance and overall supply-management performance. Some GPOs also offer access to supply management technology as part of their overall service offering.


 Supply management transformation requires standardizing processes, overcoming internal resistance to change and adopting new technologies. However, the benefits of improving spend and supply performance is compelling. Considering the cost, regulatory and transparency pressures facing the healthcare sector today, this is an opportunity that few hospitals can afford.

Tim Minahan is SVP
of marketing at Procuri Inc.
He can be reached at
[email protected].