Sustainable supply chain management, and how it can save millions

NYC Health + Hospitals in Queens. Photo via Google Maps

New York City Health and Hospitals is staring down a $673 million operating loss from the past fiscal year and a budget gap that is equally daunting. So when it comes to cutting costs and finding the savings that will help bridge the gap, the system has turned its attention to their supply chain management, where they plan to save $137 million through a host of initiatives. 

Rick Conlin, a founding partner of the Advisory Board's supply chain practice, said he's not surprised. He said there's a great deal of transaction value in the supply chain if you think about what a hospital buys -- supplies themselves, professional services, purchase services, contracting. 

"It's done within so many different transactions. You're talking about 30 to 50 percent of an operating budget arguably depending on how you define it. There are so many value levers. It can be so directly influenced with just smart attention and focus … if you know how to handle the execution of pulling those levers."

The supply chain transformation at NYC H+H actually started about four years ago when Vice-President of Supply Chain Services Paul Albertson and Assistant Vice President Jun Amora joined the system and immediately set about the task of closing eight decentralized purchasing offices that had been operating independently. Their job was to create a single supply chain office and take advantage of the 22 facilities and $7 billion in spending they had as a corporation, but with everyone driving toward the idea of standardization of good supplies, equipment and a focus on outcomes.

Once the consolidation was complete, they started looking for opportunities to renegotiate contracts. They also began what would prove to be a years-long process of instituting standardization throughout their supply chain operations, especially product standardization so that all hospitals were using the same supplies for the same activities, Albertson said.

Negotiating singular standard price throughout the system for products also helped them achieve major savings, and so did making sure they weren't paying too much or more than other hospitals in their region.

"It was a lot of blocking and tackling but our theme is always standardize. Consolidate where you can and simplify the process," Amora said.

They also eliminated contracting at the local sites. Thanks to the centralized office, vendors had to approach Albertson and Amora for real negotiations, they said.

To accomplish that caliber of system-wide standardization, it was crucial that supply chain leadership partner with their clinical counterparts to drive decision making based on need, cost, quality and outcomes. Then they could negotiate, set pricing and usage standards and eventually realize savings. They partnered early with their chief nursing officer for the system but engaged with clinicians at every level, asking the clinical team to say what they needed as it relates to supplies.

"It's been a very welcome idea that someone is actually talking to them about supply, telling them how much things costs, helping to break some of those misconceptions that one vendor is clearly different than the other. In many cases, the difference in quality is not significant," Albertson said.

Conlin agreed clinical engagement is arguably the most important part of supply chain improvement. When leadership simply issues orders with no input, it frequently backfires, leaving scorched earth where success and savings could have bloomed.

Instead, he said, build physician champions in supply chain management. "Get them involved in vocally validating the data early on in the process. Have physicians in the room that are amenable to taking the first steps to talk about collaboration points or offering their own ideas on standardization."

Amora said it's not just standardizing what you order, but changing the strategy on how you order. He called this project "moving from a just-in-case to just-in-time model" of managing and right-sizing the inventory.

Overstocking leads to expiration, capital dollars being tied up in on-hand inventory, having to find space and manage inventory and supplies gathering dust. Understocking causes frantic scrambles, expensive expedited shipping, and most importantly, potential patient safety issues.

In order to help achieve this new strategy, NYC H+H has implemented a new enterprise resource planning system that will deliver a standard supply of products throughout their facilities, use barcodes to manage delivery and help them predict future usage and replenishment. Though the system comes with a hefty price tag, they expect to save $65 million over the next five years by maximizing efficiencies from retiring the four separate legacy systems that were in place previously.

They also recently partnered with Northwell Health on a lab project to buy all new analyzers, selecting the same machine for the entire system. The partnership allowed them to further leverage negotiating power, saving $25 million over the next seven years.

"These are core business principles applied across different industries that we're applying to healthcare," Amora said.

"Historically, we have built up over the last three years a track record for savings, with $64 million this past fiscal year in actual cash savings. Next year that figure target more than doubles," Albertson said. 

When it comes to standardization though, Conlin cautions that "short-sighted category management and standardization" can leave you with immediate wins, but long-term gaps.

Often a supply chain team identifies a savings category, squeezes savings out of that one area and takes a quick win before forgetting about it.

"You need to be able to draw from that well over and over again -- think year over year," Conlin said.

Another major leakage point in supply chain management where systems fail to cultivate savings is not thinking enough about their strategy and the influence it has on their group purchase organization relationships. GPOs offer purchasing and supply chain oversight on behalf of the hospital, and some hospitals pay tens of millions of dollars for those contracts.

You need to get the best deal on that contract, but because of fundamental overlap into operations, you also need to make sure that contract is tailored right for your organization.

"By not taking into account how tailor fit that GPO relationship should be, not only are you overpaying for the GPO relationship itself, you might actually be paying a GPO to tackle something you could otherwise do better yourself," Conlin said.

Finally, he said, be diligent with how your system manages the acquisition and commercial relationship of information technology, especially clinical IT. While in the long term these systems will help cut costs, they are expensive to implement and it is really hard to predict the budget of implementation.

The bottom line is to set your sights on year-over-year execution, and how to accomplish savings long-term.

"Every dollar saved in the supply chain is so much better than another difficult conversation about where to cut that dollar out," Amora said.

Twitter: @BethJSanborn