Integrating the supply chain across a health system
As providers look for ways to improve
efficiency and reduce costs, many are looking at
how supplies are purchased, delivered, and
stored.
The average hospital has 40,000 to 50,000
supplies—from bandages to cardiac stents—listed
on its item master, or inventory list. Multiply
that by multiple hospitals in a health system,
and supply management quickly adds up to a
mammoth and costly logistical exercise.
Like many U.S. health systems, Trinity Health
has recognized the potential savings and
efficiencies to be gained with a more
centralized approach to supply chain management.
By reducing supply-related expenses, the health
system will have more dollars available for IT
upgrades, clinical improvements, and other
investments necessary to achieve its vision of
becoming a “care delivery organization” that
delivers the full spectrum of care in a
coordinated, efficient manner.
Efficiencies of Scale
In 2000, when Trinity Health was created with
the merger of Holy Cross Health System and Mercy
Health Services, the opportunities for creating
efficiencies were vast. One of the objectives:
centralize supply chain operations across the
Novi, Mich., system’s 44 acute care hospitals
and dozens of ancillary facilities that are
spread across seven states.
Lou Fierens, hired as senior vice president of
supply chain and capital project management, was
given five years to reduce supply chain costs by
$110 million. Fierens and his staff not only
reached that goal a year early, but also brought
total cost savings to more than $350 million
over the next few years.
How? While investing in a central supply chain
information system was unavoidable, Fierens says
the initiative was really about putting the
right people in the right positions—and
performing the right processes that brought
results.
Strategic Sourcing
One of Fierens’ first initiatives was creating
the concept of strategic sourcing, a procurement
process that involves continuous evaluation of
purchasing strategies to improve efficiencies
and reduce costs. First, he hired category
sourcing managers for each clinical and support
service line, such as cardiovascular,
orthopedics, and medical-surgical. These
managers are responsible for identifying ways in
which supply costs can be managed more
effectively in each service line, using tactics
such as assessing the use of supplies and
negotiating better pricing on contracts.
Fierens then developed the Trinity Health
Strategic Sourcing Process, which incorporates:
• Stakeholder involvement, or involving the end
user in the sourcing process
• Transparency, or ensuring that all suppliers
have equal information about the purchasing
opportunity and all stakeholders have
information necessary to evaluate the
value of proposals
• Competition, or giving suppliers the
opportunity to suggest how Trinity Health can
improve quality and/or lower costs in creative
ways
Separate but Together
Fierens says one of the greatest challenges of
the initiative was changing the culture of
separate organizations in which hospital
employees were accustomed to working
independently. To transform that mindset,
Fierens formed a system-level sourcing
operations steering team, which comprises a COO,
CFO, or other senior leader from each hospital
in the system. He told team members, “You are
going to help us with establishing our
priorities, you’re going to give us input around
how things are working, helping to guide the
work to greatest effect—with the understanding
going in that we’re going to work together.”
In addition, all hospital-based supply chain
managers meet annually to agree upon a set of
common performance objectives that each manager
will be measured against. “We are all beginning
to speak the same language around our operating
priorities because we’ve all agreed on what
these priorities are and how they’re going to be
measured,” he says.
Another important step was centralization of
procurement staff. As the supply chain
information system was installed across the
health system, staff who were previously located
in each hospital were consolidated in one
location to serve the entire health system. “One
of the key tenants in taking advantage of our
economies of scale is to create standardized
work processes and have a focused work group
perform the activity. In this way, we can
elevate a ‘back office function’ to a strategic
source of information and common practice,” says
Fierens.
“Our next phase is consolidation of accounts
payable. Our vision is to streamline the
procure-to-pay process to better manage the
entire ‘req to check’ process giving us the
ability to better manage cash,” he says.
Partnering with Physicians
At Trinity Health, most of the physicians are
independent, which makes gaining their support
in reducing supply costs more difficult, says
Fierens. “Those relationships take a long time
to build. We are in a better place today, but we
could have moved further faster had we engaged
physicians more directly.” Developing
formularies for supplies, for example, would
have helped in controlling hospital spend much
earlier because physicians would have had a
protocol to follow for using certain medications
for specific cases.
“We really need to partner in the care delivery
process with physicians and other clinicians so
we can make the best decisions around our supply
catalog, or our formulary for supplies,” says
Fierens. “Physicians and clinicians are
interested in data, and data can drive behavior.
Creating transparency to the greatest extent
possible around the impact on outcomes—and cost
is an outcome—is important.”
Supplying the Margin
Trinity Health has been able to measure average
annual savings of about $50 million, for an ROI
of 15:1. Plus, the health system has seen
improved operating margins. When Fierens joined
Trinity Health in 2001, the margin was 0.09
percent, he says. In FY07 and FY08, the margin
exceeded 5 percent. Even with the recession, the
margin topped 3 percent last fiscal year.
Revenue improvement and other operational
initiatives contributed to Trinity’s success.
“But there isn’t any way that result would have
been achieved at the level it was without the
supply chain contribution,” he says. “Supply
chain management is the key pillar in managing
nonlabor expense.”
Learn more about Trinity Health’s supply chain
initiative in the upcoming December 2009 issue
of HFMA’s Healthcare Cost Containment. Each
issue of this subscriber-based newsletter gives
you provider-tested tactics for carving millions
off your expenses while supporting high quality.
Learn more at
WWW.HFMA.ORG/HCC