SKU Optimization Initiatives Can Create Cost Savings in an Era of Value-Based Care
Tracking supplies and equipment through a stock-keeping unit (SKU) system can help a healthcare organization realize efficiencies and cost savings.
The emergence of increasingly sophisticated healthcare data tracking and analytic capabilities has transformed how hospitals manage supplies. Since the 1980s, the healthcare industry has been shifting from decentralized hospital supply chains, with facilities having standalone materials management departments and large periodically tracked inventories, to centralized supply chains within health systems and integrated delivery systems (IDSs) that aim to maintain lean and perpetually tracked inventory. Innovations in shipping and logistics (e.g., FedEx or UPS) have created the means to improve supply chain efficiency (e.g., just-in-time delivery) and to provide transparent data for tracking inventory. IDSs now allow centralized purchasing and often use internal or external group purchasing organizations (GPOs) to leverage collective buying power and drive down the costs of procurement. The management of inventory and purchasing can now be automated using software. These developments have created conditions for healthcare providers to streamline operations and track material usage at a granular level.
Such advancements align with value-based payment models, which focus on cost savings and improved patient care, where payments are partially tied to performance rather than the volume of individual services delivered. Facing the risk of reduced payment, hospitals and health systems are compelled to identify opportunities to improve efficiencies and eliminate wasteful practices. Although the future of value-based programs is uncertain with ongoing reforms to federal and state healthcare legislation, the financial and population health advantages promoted by the underlying principles of value-based care are widely recognized and appear to have bipartisan support in Congress.
Optimizing SKUs to Improve Supply Chain Management
The stock-keeping unit (SKU) lies at the center of the formula for reducing hospital costs and creating process efficiencies. Up to 40 percent of hospital budget is allocated for supplies—with only labor costs typically constituting a higher percentage—and on average, hospitals may have not only 6,000 to 8,000 SKUs of inventory in-house at any time, but also up to 35,000 SKUs on the product formulary. a As IDSs continue to acquire hospitals, SKU and inventory standardization issues are to be expected. In general, more SKUs create data management and bandwidth challenges, often increasing inaccuracy and pricing complexity. It can be difficult to assess SKU data across all hospital sites and difficult to standardize, given regional and cultural variation across the network. For instance, one product class may have multiple SKUs sourced from multiple vendors at different hospitals within a health system.
To address some of these issues, hospitals and health systems can undertake initiatives to optimize SKUs. Such initiatives typically involve reducing SKUs, but occasionally, organizations add SKUs with the goal of achieving supply chain and clinical practice efficiency. These efforts can involve the consolidation of vendors of specific product categories (or consolidation of products from a given vendor) and can target products that variably are similar in cost to and more effective than other comparable products, equally effective as comparable products but costlier, or redundant.
Excess inventory, unnecessary practice variation, and irrational product consumption are problems that make it more likely products will be wasted or expire, and such problems may point to a need for optimization efforts. SKU optimization should identify the right amount of inventory to maintain by determining the right balance between cost reduction, physician customization, and quality of care. Otherwise, excessive reduction of SKUs may lead to unexpected costs when the products do not meet the needs of the end users or can negatively affect patient care.
SKU optimization represents a critical opportunity to achieve cost savings, as well as both operational and clinical value, and hence can help facilities and health systems further align with value-based healthcare goals. Operationally, successful SKU optimization initiatives create value by allowing health systems to have greater vendor contract negotiating power and supply chain efficiency. Better pricing opportunities may arise from consolidating to a single vendor. Inventory optimization improves the consistency of supplies used across hospital sites within a health system. New efficiencies of SKU inventory at the level of the distribution center, the hospital stockroom, and hospital cart also may improve workflow for locating and picking inventory. b
High-quality SKU data also can facilitate the response to a product recall to allow easier identification of what item was used, when, and on which patient, and it can help to locate a product in critical situations. Optimizing the SKUs available for a given clinical indication can improve the alignment of products with clinical practice, reduce variation in clinical practice, and simplify clinician training. c SKU optimization (as shown in the exhibit below) also should reduce clinical variation across sites within a health system, which may permit healthcare workers to more easily transition between workspaces. And uniformity across a health system creates opportunity to improve both the consistency of patient and healthcare worker experience and the quality of care.
The Total Value of SKU Optimization: Quantitative and Qualitative Benefits
Although some studies support the general economic value of product standardization initiatives at the hospital level, the application of data analytics and SKU optimization is in its early stages. Thus, there is little published evidence on the topic of SKU optimization, specifically, or guidance on appropriate implementation of processes to achieve it. Clear and consistent guidance is needed for hospitals and health systems to recognize when and how to appropriately develop and implement SKU optimization initiatives to maximize the return on resource-intensive efforts.
Applying SKU Optimization Principles in Practice
One example of an innovative infrastructure investment aimed at achieving efficiency in healthcare supply chain management is an integrated services center in Plainfield, Ind., constructed by Indianapolis-based Indiana University (IU) Health. This warehouse uses advanced logistics to improve the distribution of medical and surgical supplies across the IU Health network of 15 hospitals and more than 460 medical facilities across the state, targeting inventory standardization, bulk ordering, automated supply picking, and efficient delivery and return processes. With the new integrated service center, supply chain services are motivated to optimize the inventory that moves through the center to all hospital sites. There also has been a parallel effort to use SKU optimization to create cost savings in the supply chain for commodity and physician preference items (PPIs). SKU optimization has been an ongoing, daily business practice that has critically depended on the availability of clean and accurate data.
Identifying opportunities for optimizing SKUs. To optimize commodity product SKUs, the clinical team or data analysts identify opportunities with the goal of reducing spend, variability, or duplication or optimizing efficiencies. Once opportunities are identified, the clinical user groups guide product trials or bring in samples from multiple vendors within their specialties (e.g., anesthesiology, phlebotomy, and pulmonology).
The staff can identify the variation in product use over time, consider how well the product works, and consider the product costs and the cost of a product conversion (e.g., communication, logistics, and training). Analyses of product utilization and performance patterns are provided by an internal data analytics team composed of data architects and analysts. The data analysis capabilities of the new integrated service center will be used for formal tracking of waste, and SKUs ideally will be tracked at the level of a single product unit to provide the greatest granularity of SKU utilization.
Ensuring data integrity. Inaccurate or missing SKU utilization data can affect the quality of data analytic outcomes and may also affect estimation of par levels and inventory expectations. Often, data cleansing is necessary to reduce flaws in the analysis and the proposed SKU optimization or standardization recommendations. Access to current and historical SKU utilization data, as well as other clinical data (e.g., from operating room and acute care data systems), is essential to enabling the data analytics and decision support teams to integrate information regarding product utilization and performance patterns.
Assessing options. The value analysis team may provide support by reviewing clinical efficacy research. If products under consideration are all clinically acceptable, then the best vendor offer is considered (e.g., one that offers discounts, rebates, “best price at the pump,” or other value-added services). Each user group creates an annual plan and meets monthly during the first quarter, and then meets quarterly for the remainder of the year. These meetings provide ongoing opportunities to activate or deactivate specific SKUs (see the exhibit below for a sample meeting agenda of an IU Health value analysis team).
Sample Meeting Agenda for a Value Analysis Team at IU Health
To consider the addition of new SKUs to the product formulary, a product evaluation process also may be initiated by IU Health staff through an online healthcare value analysis service that is linked to IU Health supply chain services. A proposed process for SKU optimization is summarized in the exhibit below.
A Generic Process for SKU Optimization
Addressing PPIs. Efforts to optimize SKUs for PPIs can be added to the decision-making process, which may heighten its complexity. At IU Health, value analysis teams are organized by service line and review costs, payment, clinical utilization, and practice variation among physicians and nurses. If one vendor is a sole provider of a portfolio of SKUs for a given clinical indication or service line, an ideal partnership with the vendor may permit a process for optimizing the SKUs selected from the portfolio. When SKU optimization decisions are difficult to make at the level of the value analysis team, the clinical counsel (e.g., senior vice president) at the system level can step in to arbitrate.
Getting Started: A Case Example
A great place to start and test the SKU optimization process for any hospital or health system is to target a non-contentious commodity item that present opportunities for reducing cost. IU Health undertook an initiative to optimize exam glove SKUs, for example, led by the value analysis team. The team that executed the project included a clinical resource consultant, a strategic value and contract analyst, vendor representatives, clinicians, and end-users. Starting with 45 exam glove SKUs and four vendors, the team optimized the exam gloves to 16 SKUs and standardized to one nitrile glove from one vendor to satisfy exam glove needs of the IU Health system. The initiative took about six months from the first discussion to taking the SKU optimization initiative live. Because the gloves were already in use and deemed acceptable by clinicians, and because a top-of-the-line product was chosen, product evaluations were not necessary and end-users exerted little pushback. Special item purchases were permitted for staff who declined to conform.
Communication to end users and senior leadership was both a challenge and the key to the initiative’s success. Frequent conference calls kept supply chain and hospital stakeholders cognizant of project status. Posters were used to visually explain the project to end-users and describe how it added value to IU Health. Direct value was achieved by attaining a lower product price through increased business with the exam glove vendor. The exam glove SKU optimization also created value by standardizing the patient and healthcare worker experience across different IU Health sites. From the perspective of supply chain services, tracking the initiative over time will help to maintain pricing and be alert to new exam gloves coming into the system. Recommendations for SKU optimization arising from IU Health’s experiences are summarized in the exhibit below.
Recommendations for Successful SKU Optimization
Measuring and Maintaining the Success of SKU Optimization Initiatives
The immediate product price savings an organization can realize by optimizing SKUs may be the most straightforward to quantify. However, measuring the full benefits, both quantitative and qualitative, of a SKU optimization initiative—as well as any unintended consequences—requires transparent data sharing to integrate up-front costs with subsequent patterns of product storage, distribution, utilization, and changes in clinical practice.
Changes in product storage and distribution may be monitored by tracking how much shelf space a product line occupies at the distribution center and quantifying waste of unused inventory. Through such monitoring, an organization also can track the extent to which inventory reorganization at the distribution center is streamlining access and delivery practices.
The automated inventory data system, including enterprise resource planning (ERP) tools, can be used to help measure changes in SKU utilization at the end-user level. An ERP should include valuable information about contracts, inventory data, daily demand rate, and reorder times. A review of this information can reveal the level of compliance with the SKU optimization initiative, while also helping identify any new SKUs that enter the hospital or health system. When coordinated with data from clinical information systems (e.g., providing patient outcome information such as length of stay, re-admission rates, infection), SKU utilization assessments may indirectly disclose improvements in variation in clinical practice. Ultimately, such information also can be used to track the impact of SKU utilization on value-based payment.
To ensure the long-term success of initiatives, it is necessary to preserve the process of SKU optimization, with the understanding that opportunities for improvement are ongoing. Changes in product availability, staffing, procedure and surgical volumes, and physician preferences all are potential triggers for revisiting SKU optimization. Ongoing staff education also is required to maintain a SKU optimization initiative and avoid reversion to old and inefficient practices, and support from senior leadership is required to maintain positive changes in cultural.
An Organizationwide Effort
SKU optimization is a method hospitals and health systems can use to achieve cost savings that may also lead to improvements in supply chain efficiency, clinical practice, and quality of care. The experience at IU Health demonstrates how supply chain services, data analytics teams, and clinical user groups can collaborate to effectively implement SKU optimization initiatives.
Dennis Mullins, MBA, CMRP, is senior vice president, supply chain services, Indiana University Health System Supply Chain Services, Indianapolis.
Elizabeth J. Persaud is associate project manager, Cornerstone Research Group, Burlington, Ontario.
Nicole C. Ferko is senior director, Cornerstone Research Group, Burlington, Ontario.
Brenda Knight is regional vice president, Becton Dickinson, Inc., Murray Hill, N..J.
Debbie Tripodi is a director, Health Economics, Becton Dickinson, Warwick, R.I.
Paul Delatore is vice president, global health economics and outcomes research, Becton Dickinson, Inc., Murray Hill, N.J.
a. Darling, M., Wise, S., “Not Your Father's Supply Chain: Following Best Practices to Manage Inventory Can Help You Save Big,” Materials Management in Health Care, April 2010.
b. Park, K.W., Dickerson, C., “Can Efficient Supply Management in the Operating Room Save Millions?” Current Opinion in Anaesthesiology,” 2009.
c. Ontario Hospital Association, Optimizing Your Perioperative Supply Chain: A Guide to Improvement Projects, 2011.