3 Questions About Your Supply Chain

  1. What percentage of your total operating budget does Supply Chain represent?

Most healthcare executives understand that Supply Chain makes up the second largest part of any hospital budget next to labor, but understanding the true amount really depends on what you consider part of your Supply Chain.

Progressive healthcare organizations are now recognizing Supply Chain as any non-labor costs to the organization. It is no longer just medical and non-medical supplies. The definition should include all capital, leases, services, plant maintenance, food, pharmacy, printing, marketing and anything other than labor that generates an invoice. If your organization has adopted this understanding of the broader scope of Supply Chain, your understanding of the true percentage of your total operating budget has changed too.


  1. Is Supply Chain cost reduction part of your Strategic Plan?

Healthcare organizations focus a lot of fiscal attention on revenue management and controlling labor costs and tie them into objectives and initiatives in their Strategic Plans. Many include some type of cost reduction objectives, but most do not include tactics or methodology that truly track and attempt to control Supply Chain costs. Fewer still have any processes in place that accurately measure cost savings initiatives against additional new product costs that have been added to the organization.

A true Supply Chain cost reduction strategy must include the following components:

–       Analytical review at the department level of actual supply costs compared to budget is key to this strategy. Understanding and utilizing the report tools available in the Materials Management Information System (MMIS) will provide a level of supply cost detail only summarized in the GL reports. Department heads and administrators alike need to learn these tools and use them.

–       Target realistic cost reduction goals by department and track them month by month. If supply costs are up for a given month, patient volume and gross revenue should be the justification. If not, there needs to be a corrective action plan based on an in-depth analysis to bring supply costs back in line.

–       Develop dedicated Value Analysis Teams. While many know what Value Analysis Teams are, very few organizations make the long term commitment to them. Administration must be committed and directly involved if they expect success and sustainability.

–       While it is important to track cost reduction initiatives and successes, it is equally important to track all new or added costs for administratively approved requests. This is the only way to accurately measure the full picture. New technology and requests are inevitable, but as these unbudgeted costs are approved, you should be challenging the source of the offsetting cost reductions. Otherwise, your explanations for supply budget variances will be anecdotal, non productive, and a detriment to your financial goals.

  1. Is      your Supply Chain model centralized or decentralized?

If you are not sure what the difference is, then you probably have a decentralized supply chain model. The traditional, decentralized model is one where Materials Management is only responsible for the cost and management of supplies in their warehouse. This may or may not include inventory in Central Supply or Central Sterile. Most importantly, it does not account for all of the direct order (non-stock) purchases for the rest of the facility. This is ironic when you consider the amount of labor and effort that goes into managing a perpetual inventory in the typical storeroom system; yet represents only fraction of the total Supply Chain expenditures.

A centralized Supply Chain process is where the Materials Management department controls and is directly involved in:

–        all new item builds in your IT system – both for the item master and also the chargemaster as applicable

–       sources, negotiates and maintains pricing contracts (GPO or otherwise)

–       vendor controls and check-in process

–       manages a centralized service contract portfolio with expiration terms, leads/assists the negotiation process, and supports the financial budget forecasting process for service contracts (including new capital coming out of warranty)

–       Involved in the budgeting, sourcing and negotiations for the overall Capital process

–       Facilitation of the Value Analysis Team.  Specifically, researching and presenting all new item requests, sourcing alternatives, assisting in the reimbursement analysis and by tracking the actual cumulative costs of approved items.  During this process, Materials Management MM will conversely present products with cost reduction potential for clinical acceptance.