Driving Transformation in the Healthcare Supply Chain: Change ...
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Driving Transformation in the Healthcare Supply Chain: Change Can Be Good for Your Bottom Line
A GHX White Paper for Healthcare Executives
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Driving Transformation in the Healthcare Supply Chain: Change Can Be Good for Your Bottom LineA GHX White Paper for Healthcare Executives
Some in the industry are embracing major
changes and transformation to address the
challenges facing their organizations. And they
are using their supply chains to help drive that
transformation. By making their supply chains
a strategic asset that can help them meet
operational, clinical and financial imperatives,
these organizations have recorded tremendous
successes in controlling costs and increasing
business efficiencies—both paramount to the
future of healthcare.
This white paper will examine:
•Howgainingvisibilityinto,andcontrolover,
your organization’s supply chain can help you
weather the current changes in healthcare and
emerge stronger
•Whyhealthcareorganizationsundertake
supply chain transformations
•Whatisnecessaryforsuccessfulsupplychain
transformation
•Theresultsthatcanbeachievedthrough
transformative change in the supply chain
Executive SummaryThe healthcare industry stands at a crossroads.
Faced with unprecedented challenges on a
variety of fronts, it can continue to do business
as usual and risk being unable to achieve its mis-
sion. Or it can change the way it does business
and tackle the challenges head on—forging a
path to the future.
There’s a new sense of urgency in healthcare
today. On the provider side, the mandates
of healthcare reform intersect with declining
reimbursements. At the same time, providers
are being asked to deliver the same high-quality
level of service to their patients. On the supplier
side, with selling, general and administrative
expenses nearly twice those of any other indus-
try, manufacturers of medical-surgical supplies
and the distributors who work with them are
watching as margins continue to decline.
Seven Steps to Success
1. Executive support2. Alignment to
organizational objectives
3. A holistic approach across departments
4. The right technology5. Robust processes and
training6. Proper resource
alignment7. Change management/
communication
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Catalysts for ChangeNever before has the business case for trans-
formation in the healthcare supply chain been
sopersuasive.Whilethefutureisunclear,
most agree that at least some things are
certain.Healthcarecostsmustcomedown.
Hospitalsandothercareproviderswillbe
reimbursed on value, not volume.
And hospitals will need to survive
on Medicare reimbursement levels.
Despite the ongoing political
and legal debate over healthcare
reform, most healthcare organiza-
tions realize the time for change is
now. Consider these facts:
•In2010,themostrecentyearfor
which figures are available, the U.S.
spent$2.6trilliononhealthcare,or
$8,402perperson,accordingtothe
Centers for Medicare & Medicaid
Services.
•Healthcarespendingnowaccountsfor17.6
percent of the nation’s Gross Domestic
Product, and CMS projects it will grow
at an annual average rate of 5.8 percent
through2020—aratethatisconsidered
unsustainable.
•Supplychaincostsarethesecondlargest
and fastest growing operational expense for
most hospitals (labor is the largest expense).
(Gartner AMR Supply Chain Research)
•Somestudiesshow30percentofhospitals
today are unprofitable.
•Ittakes$1,000worthofnewrevenueto
have the same impact on the bottom line
asjusta$1reductioninoperatingexpense.
(Thomson Reuters)
•Bettersupplychainmanagementcansave
anywherefrom5-15percent,translatinginto
aprofitincreaseof2-7percent.(Gartner
AMR Supply Chain Research)
No Quick FixesSo far, healthcare as an industry has been
slow to embrace change in its supply chain.
Despite progress in recent years, the health-
care supply chain continues to be plagued by
inefficient manual processes, inaccurate data,
lack of visibility and poor business intelligence
and reporting, and healthcare is far behind
other industries in adopting global data stan-
dards. Further complicating matters is the fact
that the healthcare supply chain has not been
entirely successful in shedding its image as
a tactical back room function, separate from
other functions and with no strategic role.
One of the things that make transformative
change in the healthcare supply chain difficult
is the supply chain’s complexity. There are
several reasons for that complexity. On both
the provider and supplier sides, the number
of players is large, unlike other industries, in
whichtherearejustafewbigplayers.Inthe
U.S.alone,therearenearly5,300acute-care
hospitals, each of which has hundreds—and
sometimes even thousands—of vendors.
The healthcare supply chain also must deal
with a tremendous amount of data, such as
contract information, that changes often.
DisparateITsystemsthatdon’tshareinfor-
mation and the difficulty of incorporating
standards into procurement processes both
add to the complexity.
Despite the obstacles, many healthcare
organizations today, confronted by compel-
ling reasons to change, are beginning to break
down the barriers and build the supply chain of
the future. That supply chain will be lean, quick
to respond to opportunities and challenges
alike, and viewed as a strategic imperative
for the financial health of the entire organiza-
tion. And perhaps most importantly, it will be
sustainable.
Robert Beyer, Vice President
of Materials Management,
HSHS
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But it won’t be a quick fix. Typically, supply
chaintransformationtakestime,with10years
or more not unusual for large organizations.
However,someleadinghealthcareorganizations
already have begun and are showing remarkable
progress after just a few years of working to
transform their supply chains.
Turning Challenges into OpportunitiesNewYorkCityHealthandHospitalsCorporation,
ClevelandClinic,HospitalSistersHealthSystem
andChamplainHealthSupplyServicesare
among healthcare organizations that are well on
the way to success in their supply chain transfor-
mation efforts. Faced with different challenges,
but with the common goal of cutting costs and
becoming more efficient, all four organizations
used similar methods to turn their challenges
into opportunities. They found there were seven
crucial steps for success, as follows:
•Executivesupport
•Alignmenttoorganizationalobjectives
•Aholisticapproachacrossdepartments
•Therighttechnology
•Robustprocessesandtraining
•Properresourcealignment
•Changemanagement/communication
The remainder of this paper will examine each
of the factors considered essential to suc-
cessful supply chain transformation by four
healthcare organizations that already have
made the journey to cut waste, add value and
sustain improvements in their supply chains.
By following these steps, they have turned
the weaknesses in their supply chains into
strengths, creating viable solutions for the long-
term success of their organizations.
It All Begins at the TopTrue supply chain transformation requires a clear
mission set forth by upper management. As part
of an ongoing effort to understand and improve
the processes of business, Visa Commercial
Solutions commissioned Deloitte & Touche
Consulting to conduct a comprehensive study
of procurement and payment best practices for
large and mid-size companies nationwide. The
first key finding of that study: leading companies
thatoptimizetheirprocure-to-pay(P2P)function
have proactive, ongoing senior management
sponsorshipfortheirP2Pinitiatives.Thestudy
went on to say that senior management interest
intheP2Pprocesshasincreasedsignificantly
due to economic conditions and an increased
focus on cost containment.
AtHospitalSistersHealthSystem(HSHS)in
Springfield,Ill.,oneofthehurdlesthathadto
be overcome as the system began to transform
its supply chain was the “if it ain’t broke, don’t
fixit”mindset.Withalegacymaterialsmanage-
mentinformationsystem(MMIS),obtaining
buy-in from the administration to spend some
money on the supply chain was critical.
Robert Beyer, vice president
of Materials Management at
HSHS,saidtheapproachheand
his team took was to focus on
how the transformation would
driveexpensereduction.“We
demonstrated the return on
investment, and that was what
soldourCEOandupperman-
agement,” Beyer said.
At Cleveland Clinic, widely
regarded as one of the premier
healthcare organizations in the
world, the direction actually
came from the top down. To prepare the organi-
zation for new, innovative technology that would
be introduced as part of the comparative effec-
tivenessmovement,theCEOdirectedthatthe
clinictake$100millionoutofsupplychaincosts
overa24-monthperiod.“Otherindustriesdoit,
Bill Donato,
Executive Director,
Supply Chain
Management,
Cleveland Clinic
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why not healthcare?” said Bill Donato, executive
director,SupplyChainManagement.“With$1.6
billion of spend influenced by the supply chain,
we had to become a strategic imperative of the
organization.”
TheleadershipofNewYorkCityHealthand
HospitalsCorporation(HHC)alsorecognizedand
championedtheneedforchange.Infact,HHC’s
top management felt the need was so acute
that the organization named a chief restructuring
officer to guide the effort.
Start with a Goal and a VisionAnother thing all four healthcare organizations
had in common was they began with a vision
that was aligned with organizational objectives.
HHCwasgrapplingwithabillion-dollardeficit
thatthreateneditsabilitytoserve1.3million
NewYorkerseveryyear—morethan450,000of
whom are uninsured. The impera-
tive for change was clear and supply
chain reconstruction was seen as
one method of driving significant
cost reductions.
AtHSHS,Beyersaidhisorganiza-
tion was transitioning from more
of a holding company that provided
guidancetoits13hospitalstoa
company that began to look at
operations and drive efficiencies
throughout the organization. This
transition, along with healthcare
reform and other economic pres-
sures, led to a greater focus on
the supply chain as a way to reduce costs and
improve the system’s ability to deliver excellent
patient care.
Cleveland Clinic, well-known for innovation
in other parts of its organization, wanted to
prepare for the new technology, but realized
that technology itself was only an enabler and
that it needed to build sustainability to help it
move forward in continuing to take costs out of
thesupplychain.Itknewprocesschangealso
would be required.
ChamplainHealthSupplyServices(CHSS),
whose very reason for existence was to inte-
grate sourcing, procurement and logistics for
member hospitals and eventually other health-
care providers in the Ottawa, Ontario, area of
Canada, said the first thing it did was create a
business plan as a blueprint for change. The goal
was to build an integrated supply chain system
that would improve the hospitals’ performance
andgenerate$32.5millionincumulativesupply
chaincostsavingsovera10-yearperiodforuse
in direct patient care.
JosephQuinones,HHC’svicepresidentof
Contracting and Supply Chain, had a vision of
a streamlined, automated supply chain that
wouldgiveHHCthevisibilityandtransparencyit
needed to drive down cost and deliver excellent
patient care. Throughout a restructuring initia-
tive, the vision lived on and was extended based
on the belief that delivering an enterprise-wide
“Amazon.com” experience would be a critical
lynchpininHHC’sstrategytotransformthe
organization.
Breaking out of the SilosTraditionally, the various departments within
healthcare organizations have functioned in
separate silos, as they do in many other indus-
tries. Finance, procurement, accounts payable,
physicians,clinicians,IT—allhavetendedto
develop tight-knit groups and become isolated
in their work. Breaking down the silos by putting
people with different backgrounds and perspec-
tives together and enabling them to understand
each other’s issues is a critical component of
supplychaintransformation,GHXhasfoundin
working with organizations that have done it.
Overcoming this barrier to change requires
collaboration, Simrit Sandhu, Senior Director,
Simrit Sandhu, Senior
Director, Supply Chain,
Cleveland Clinic
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Supply Chain at Cleveland Clinic, believes.
“Whatwereallyneededtodowasengagemul-
tiple stakeholders across the organization,” she
said. “Supply chain is not a department, it is not
a function, it is a process, and every stakeholder
across the organization is engaged, involved and
impacted.”
During its transformation initiative, Cleveland
Clinic wanted to make certain it was address-
ing issues that affected multiple departments,
not just a siloed supply chain. So it involved
everyone—from senior leadership to physician
leadership and every key department—with the
supply chain department acting as a business
consultant.
JohnMartinofCHSS,asharedservicesorga-
nization similar to regional service centers in
the U.S., said his organization created a gover-
nance structure to ensure that all parties lived
up to commitments and that the collaborative
effort was, and continued to be, sustainable. An
operations group made up of representatives
from all participating hospitals also was formed
to review potential supply chain opportunities.
Technology as an EnablerHSHS,HHC,CHSSandClevelandClinicallwere
pursuing a solution to the same problem—how
to cut costs, streamline operations and work
more efficiently. And while each organization
took a somewhat different approach to solving
that problem, one thing they all had in common
was the recognition that technology, while not
what drives supply chain transformation, can be
a powerful enabler of change.
Healthcareproviderstraditionallyhaveinvested
less in information technology than have organi-
zations in other industries, and the money they
doinvestprimarilygoesforclinicalITsystems.
Although a federal government requirement that
providers make substantial investments in elec-
tronic records provides an impetus for providers
to continue doing that, a recent study by Oracle
HealthcareInsightmakesastrongargumentfor
reversing the trend. The study concludes that
“healthcare providers that make greater invest-
ments in back-office automation and process
improvement enjoy operating cost ratios that are
2–4percentbetterthanthoseof
their peers.”
Through its work with a global
networkofmorethan5,500
hospitals and the suppliers
from which they purchase the
majorityoftheirsupplies,GHX
has found that the following
technologies are necessary
for successful supply chain
transformation:
•Purchasingautomation
•Contractandprice
management
•Contentmanagement
•Requisitioningworkflowandpricecontrol/
contract compliance
• Invoiceandpaymentautomation
•Businessintelligenceandreportingacrossall
levels of the organization
Whiletechnologycanbeapowerfulenabler,it’s
also generally recognized that technology is only
as good as the data that feeds it. Data plays a
key role in providing the foundation on which
healthcare supply chain management technol-
ogyisbuilt.Withoutgreatcontent(rightitem,
right description, right price), the focus of a
technology solution shifts from process automa-
tion to workflow enablement as more players
must participate to ensure that the right data
(right item, right description, right price) goes to
the supplier when a product is ordered.
JohnMartinofCHSSisabelieverwhen
it comes to good, clean, meaningful data
being critical to the success of a supply chain
John Martin, CHSS
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transformation.“Withouthavingahighdegree
of confidence in your data, it’s difficult to
establish a baseline,” Martin said. “And if you
can’t establish a baseline, it’s difficult to create a
business case and measure success. You don’t
know what you don’t know until you
try to measure it.”
JosephQuinonesofHHCagrees
thatitallstartswithdata.HHChad
no formulary or even a sourcing
catalog before the transformation
began, and Quinones said it was like
“going to Amazon.com and find-
ingtherewasnothingtobuy.”HHC
realized that building an item master
using good, clean data was crucial
to controlling its spend and ensuring
it was getting the correct contract
price for products.
Doing Business a Different WayToo often, organizations make isolated tech-
nology decisions rather than focusing on a
plan to implement an entire solution. Leading
organizations, however, look at things more
pragmatically, focusing on the implications
of supply chain transformation for the entire
organization. Most importantly, they recognize
that the benefits of technology can only be fully
achieved by incorporating process changes into
the transformation.
“Whenwebegan,wethoughttechnologywas
the problem,” said Cleveland Clinic’s Simrit
Sandhu. “Shockingly, and to our dismay, we
foundthatprocesswastheproblem.Whatwe
really needed to do was engage multiple stake-
holders across the organization” and convince
them to do business a different way.
The need to develop standardized processes
andtrainingaroundtheP2Pfunctionalsowas
identifiedasacriticalelementbyCHSS.John
Martin said roles and duties of the different
people involved in the process should be clearly
defined and training should emphasize how
invoices and requests should be processed, the
reasons why deviation from the process is unac-
ceptable and the consequences involved with
deviating from the process.
Align to WinSuccessful supply chain transformation requires
strict alignment of resources throughout an
organization to ensure proper execution. Bob
BeyerofHSHScreditedaseamlessrelationship
betweensupplychainandITasoneofthekey
reasons his healthcare system succeeded in
making transformative change.
“Wealsofounditwascriticaltohavesomeone
with no emotional ties to get the project going
and keep it on track,” said Beyer. “So we set up
fourteamsofproductexpertsandengagedGHX
Business Solutions to bridge all four modules
andmakesuretheyaligned.”Headdedthatby
aligningresourcesinthatmanner,HSHSmade
sure it was not a single department’s project
but a supply chain transformation project that
involved everyone.
GHXBusinessSolutionsalsoservedasa
businessconsultantforHHC’s,CHSS’and
Cleveland Clinic’s supply chain initiatives. Part of
its role was to help ensure proper alignment of
resources.
AtHHC,thecomplexityoftheorganization
mirrors the broad diversity of the city. Aligning
the leadership team and winning the hearts and
minds of the thousands of associates who help
runHHC’ssupplychainwasamonumentalchal-
lenge, according to Quinones.
ToalignthesevennetworkswithinHHC,
Quinones reached out directly to the local lead-
ership and their key lieutenants to help them
understand the vision and what they could do
Joseph Quinones, Vice
President of Contracting
and Supply Chain, New
York City HHC
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to make the overall program a success. These
“roadshows” proved invaluable to helping
spread the vision and build grassroots support
for the initiative. Associates saw first-hand the
importance of the mission and what specifically
they needed to do to make a tangible difference.
The final and perhaps most important partner-
shipHHCcreatedwaswiththeITorganization.
During the planning phases, three new leaders
entered the group and worked side by side with
Quinones and the rest of the organization to
deliver and support the new supply chain set of
capabilities and help ensure that it integrated
seamlessly with their existing technology.
Change Management Is ImperativeA key component for the success of any supply
chain transformation initiative is gaining buy-in
from everyone involved and helping them under-
stand what it will mean to them and how they
can help. A detailed plan that addresses con-
cerns about how the new system will alleviate
current issues and how it will affect job tasks
while providing a clear long-term strategy that
can be understood and embraced by everyone
is imperative.
GHXhasobservedthatthemostsuccessful
organizations invest in communicating the value,
testing the solution, creating the right initial
experience for users and sustaining the change.
And that requires a robust change management
and communication effort. The four healthcare
organizations highlighted in this paper all real-
ized the importance of change management
to the success of their efforts and conducted
robust change management programs.
Cleveland Clinic’s Simrit Sandhu said communi-
cations, training and change management really
were what drove her organization’s success.
“Ifyou’regoingtochangethesupplychainin
healthcare, you’re going to have to start at the
grassroots level and involve everyone,” she said,
while acknowledging that it requires a “mam-
moth effort.”
HHCalsorecognizedtheneedforcross-func-
tional buy-in to drive change. Joseph Quinones
saidsomeofHHC’ssupplychainstaffhadbeen
“doing things the old way” for a long time,
and that it required a real culture change that
included training staff on new technology and
processes and showing them why the change
was necessary.
Reaping the Benefits of Transformative ChangeHSHS,HHC,CHSSandClevelandClinichave
shown that the supply chain can be an engine
for cutting costs and putting a healthcare orga-
nization on better financial footing. The results
of their organizations’ efforts and how they
achieved them provide a roadmap for other
healthcare organizations considering their own
supplychainreengineeringinitiatives.Here
are the highlights:
• NewYorkCityHealthandHospitals
Corporation has cut costs and improved
operationalperformance,achievinga$14
million annual savings goal in the first year
ofitstransformation.Itbuiltavirtualitem
masterthatconsistsofmorethan800,000
enriched items by facility, of which 98
percent are on contract.
• ChamplainHealthSupplyServices had
setagoalof$32millioninsupplychain
costsavingsovera10-yearperiod,butnow
expects to realize that goal in just six years.
In2010alone,CHSSdocumented$1.5
million in savings and is on track to save
$2.8millionbyMarch2012.
• HospitalSistersHealthSystem had a
goalofreducingexpensesby$12millionin
fiscalyear2010,anditachievedmorethan
“Working with GHX as our consulting, technology and business partner, we now conduct business in a fundamentally different way. This project has helped HHC take a very significant step forward in helping to ensure that we can serve the residents of New York City both today and in the future.”
— Joseph Quinones, Vice President of Contracting and Supply Chain, New York City HHC
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$14millioninsavings.Supplyexpenseasa
percentage of revenue decreased during the
same period by a full percentage point from
17.8percentto16.9percent.
• ClevelandClinic, in the first year alone,
cut $45 million in costs by reengineering
its business processes to make them more
efficient and by implementing supply chain
management solutions.
Conclusion Change is happening everywhere in health-
care today, and organizations that don’t
embrace the change and reengineer their
business processes accordingly run the
risk of failing to achieve their mission—pro-
viding high-quality patient care. But true
transformativechangeisnoteasy.Itrequires
time and a commitment to sustaining the
change, even when leadership of an organiza-
tion changes.
The healthcare supply chain is evolving to help
deal with the challenges facing the industry.
Now more than ever, supply chain leaders
have an opportunity to play a strategic role in
their organizations by providing greater spend
visibility and identifying effective ways to cut
costs. Through process automation, tech-
nology improvements and greater resource
alignment, healthcare organizations collec-
tively can build the supply chain of the future,
one that will be leaner, more efficient and able
to withstand the challenges ahead.
To download a copy of this white paper, go to http://www.ghx.com
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