Materials Management

The continually skyrocketing cost of healthcare in the United States impacts every facet of a healthcare organizations operations. In particular, materials managers and others involved in managing supply chains feel the pressure to eke out savings wherever possible. Supplies represent a significant piece of most facilities budgets; in a 2005 Healthcare Financial Management Association (HFMA) survey of hospital financial and materials management leaders, respondents from small hospitals noted that medical/surgical supplies accounted for 13 percent of the total operating budget. Those from large hospitals indicated this percentage to be even larger 17 percent.1

Fortunately, cost-reduction opportunities frequently do exist in this area. HFMA survey respondents said supply-chain initiatives were responsible for reducing their supply-chain budgets by an average of 1.25 percent per year over the past two years. Respondents were also optimistic about the future; the median response in terms of potential future opportunity was a reduction of 2.50 percent per year over the next two years.

How are materials management personnel realizing these savings? When asked to describe recent projects that have led to the greatest improvements, respondents to the HFMA survey most frequently cited the following:

  • Group purchasing organization (GPO) utilization and pricing 
  • Centralization of supply-chain functions 
  • Investments and utilization of information technology 
  • Revising structure, adding staffing, developing teams 
  • Increasing value-based selection 
  • Revising and standardizing item master 
  • Developing physician/clinical buy-in 
  • Developing reporting and metrics 

Carl Tietjen, senior director of corporate contracts/ procurement services at the University of Maryland Medical System, suggests that the role of the supply chain should be a strategic element of a hospitals growth. Many hospitals understand the need to do that, but very few have accomplished it, he says, adding that senior management executives must truly understand what supply chain is, and what its potential is. I often hear people referring to the supply chain as simply materials management or purchasing.

Those are components or functions within the supply chain, but there are several other major functions, and theyre all connected. Its called the supply chain, and the operative word, to me, is chain; theyre all connected each link in the chain must add value. If it doesnt, we need to examine the reason why, and if its necessary.

Tietjen explains that he and the COO of his system are putting together a document to educate senior level executives about the supply chain. The document will provide definitions and major functions, including accounts payable and the charge capture process. Again, educating people about what the supply chain is and going from an individual in the organization filling out a requisition all the way through to product consumption and utilization to payment and charge capture; that all touches the supply chain. That can mean additional revenues, or the potential for lost revenues. After resources, our next highest expense in the organization is generally supplies and services, so why wouldnt we manage that as closely as we would resources?

I think materials managers in healthcare have to learn to think, function, and operate the way senior level executives do; we have to learn their language. Jean Sargent, CMRP, director of central service for UCLA Healthcare, and president-elect of the Association for Healthcare Resource & Materials Management (AHRMM), explains that moving toward a more effective supply chain involves a number of important steps. Were looking at ways to minimize the number of vendors were dealing with by having more items available through our prime vendor, she says.

Were also trying to work more closely with the high-dollar areas such as the operating room (OR), interventional radiology (IR), and the cath lab. Thats where most of the dollars are spent, and the technology changes quite frequently, especially in IR and the cath lab. To be able to keep up with the changes while holding costs is a challenge, but its something we really need to do in order to maintain our effectiveness and efficiencies.

Sargent also cites the necessity of integration with other departments. Its extremely important to have those good working relationships with the heavy hitters, she says. Nursing is another vital area. In working with nursing, its a matter of maintaining what they need to have for the patients, and looking at new products that come out and going through product evaluations. Working on that relationship with nursing and providing good customer service is also important. With the higher-dollar areas, its a little different, because those types of products are more value analysis-driven because of their costs. You must have controls that are established with the physicians and an understanding of what the policies and procedures are to get new products into the system without circumventing the system.

Technology

In order to promote supply-chain efficiency, healthcare organizations are increasingly looking toward the examples set by other industries, particularly large retailers. Many organizations that approach supply-chain management strategically have been able to realize significant fi nancial gains. The use and support of effective technology is often a key component in this effort.

Technology is still a relatively new concept for healthcare supply chain, however, according to Tietjen. We seem to use it in bits and pieces and we havent quite got to the point where we try to connect it all as a network, he says. Conceptually its a great idea data is extremely important, but again, were not connecting it all. Sometimes I think we get so much data that we dont know what to do with it, and it becomes overwhelming.

Here were trying to be selective about the kind of technology we need and why we need it, as well as how that technology can work for us, as opposed to us trying to create a fi t for the technology, Tietjen continues. There are things like our item table; what does that data represent and how does that data match up to our suppliers information? Many times its not consistent, and that creates a host of issues for us. How can these kinds of issues be corrected?

One way is to move toward electronic ordering, where the item fi le, pricing, products, and codes are all done electronically and connected with our suppliers, he says. It helps us free our time, avoiding the back-end issues like discrepant invoices. We still have that because many of our vendors arent hooked up on EDI (electronic data interchange) yet. As I do that, Im able to reassign some of my resources to do more research, contract compliance, utilization, and standardization activities.

On the technology side, were using more bar coding for inventory control, and the next step is going to be getting into RFID (radio frequency identification) as that becomes more available and less expensive, says Sargent.

The other thing that were looking at with CHeS the Coalition for Healthcare eStandards is adopting and activating industry-wide data standards.

ICTand the Infection Control Education Institute appreciate the importance of educators in the healthcare industry and offer an annual award to honor educators who exemplify the ideal characteristics of a teaching professional.

Anyone who teaches infection control principles at the facility level may be nominated for the Infection Control Educator of the Year Award. Candidates include university professors, perioperative educators, infection control consultants and industry educators.

The winner will be announced in the December 2006 issue of ICT and will receive: A cash award A recognition plaque The opportunity to be published in ICT

Three CHeS initiatives involving data standards are the GLN (global locator number), the product data utility (PDU), and the United Nations Standard Products and Services Code (UNSPSC ®). According to CHeS, the GLN:

  • Gets the right product to the right place at the right time 
  • Has proven capable of reducing providers customer numbers by 96 percent 
  • Can reduce ordering errors by 7 percent, generating a potential savings to the healthcare industry of between $1.72 and $2.9 billion per year2

CHeS contends that the use of inconsistent customer identifiers in healthcare is a problem that can be solved with the adoption of an industry standard. Currently, thousands of different numbers are used to track the shipment of supplies across the country. This system creates unnecessary waste and costs patients, employers, and insurers millions of dollars each year, according to CHeS.

The GLN provides a globally unique identification of a functional entity. CHeS explains that Implementation of the GLN drives efficiencies in the supply chain, reducing invoice errors, and has the potential to save healthcare organizations billions of dollars annually. With this system, each location of a healthcare facility is assigned a unique 13-digit data structure; this is the GLN.

The GLN can identify a functional entity, such as a nursing station; a physical entity, such as a warehouse or a hospital wing; or a legal entity or trading partner such as a specifi c supplier. The use of these numbers eliminates the need for a hospital to use a suppliers assigned proprietary customer number on orders, invoices, and other transactions.3

The GLN Registry for Healthcare is a directory of healthcare and healthcare-related facilities in the United States, with corresponding GLNs. Through the Registry, an updated list of industry manufacturers, distributors, retailers, hospitals, clinics, and retail and mail-order pharmacies can be accessed to ensure the accuracy of their supply-chain activities. This information allows healthcare providers and suppliers to improve collaborative commerce activities in key electronic commerce processes such as invoicing and logistics.

Another CHeS effort involves PDU. CHeS notes that the healthcare supply chain wastes 24 percent to 30 percent of supply administration time on data cleaning and corrections, costing the industry billions of dollars. In a PDU, manufacturers contribute product information to the utility where it is verified and published for subscribers to access. A healthcare PDU would give the industry a central resource for standardized product data from manufacturers and distributors.

This would enable participants to synchronize and maintain accurate item fi les in near-real time from the manufacturers through the supply chain to the end user.4

According to CHeS, a PDU results in reduced product cost through improved contract compliance, allowing for:

  • identification of non-contract/contract opportunities 
  • Increased transaction accuracy for ordering through bill payment 
  • Improved accuracy in product sourcing 
  • Increase in patient safety due to accuracy of product information 
  • Rapid access to information on new, discontinued, replacement, and recalled products 
  • Accurate information to generate usable barcodes5

In terms of product classification, CHeS advocates UNSPSC, which is an analysis tool for organizing, finding items, and ordering products. UNSPSC is a free, open standard that can be used by many industries. It allows companies to consistently classify the products and services they buy and sell.6

The UNSPSC is designed to group similar products together into categories, which facilitates analysis and organization, as well as searching for and ordering products. UNSPSC does not identify individual items nor describe them; instead, it provides a way to categorize a product without giving any details regarding specifi cations or features. Because the UNSPSC is easy to use and reduces resource requirements associated with developing, maintaining, or supporting any proprietary taxonomy system, hospitals and suppliers are increasingly moving to adopt the system. Additionally, there are no license fees or restrictions on sharing UNSPSC codes between trading partners.

Use of the UNSPSC is increasing, according to CHeS. Collectively, the GPO members of CHeS manage more than $80 billion worth of purchases annually for the countrys healtcare providers. This represents 80 percent of all transactions for this market. In a recent press release, CHeS provided the following descriptions of how GPOs and supply-chain solutions companies are using the UNSPSC and making it available to their member organizations:

  • Amerinet continues to endorse the utilization of the UNSPSC and responds directly to member requests to ensure compliance within its e-commerce solutions. For example, currently all Amerinet medical/surgical line items contain a UNSPSC code that members access directly from the contract catalog. Through Diagnostix, Amerinet's data-driven solution, providers can use UNSPSC codes to run spend analysis by category or to identify UNSPSC codes that match item master line items. Additionally, provider members use the UNSPSC codes to populate the classification field in the MMIS (materials management information system) 
  • Global Healthcare Exchange, LLC (GHX) adopted the UNSPSC as the standard for classifying products in its AllSource product content repository three years ago. Since then, many of its participating hospitals have contracted with GHX to classify products according to the UNSPSC taxonomy. As more products are assigned UNSPSC codes, hospitals and other healthcare providers can use the supplier-verified data in AllSource not only to improve the accuracy of their transactions, but also to gain a better understanding of what they are spending, on what, with whom, by whom and for what purpose, according to GHX. With this information, hospitals may be able to strategically focus their cost improvement efforts. Many providers also use the codes to cross-reference product costs to expense codes in order to track costs by procedure, doctor, and/or facilities 
  • MedAssets has fully adopted and implemented the UNSPSC. By leveraging the standardized classification system throughout its supply chain and revenue cycle technology solutions, customers trace the impact of a supply item from order through to patient billing. Customers can search by UNSPSC in an eCatalog, perform in-depth purchasing analysis, and map their charge master by UNSPSC. Additionally, MedAssets provides full UNSPSC classification as part of its Master Item File services
  • Novation provides VHA and UHC members with online contract management and analytical tools designed to improve purchasing decisions and procurement processes. An important component of this offering is the ability for materials departments to locate products for contract conversion. One way this can be accomplished is by using the Novation Contract Catalog to search by UNSPSC commodity categories. Currently, more than 450,000 medical/surgical products are categorized by UNSPSC. This information can be downloaded from the Novation Contract Catalog and uploaded into the MMIS, allowing members to track and analyze their purchases by the classification code. Moving forward, UNSPSC is at the foundation of future offerings being developed for VHA and UHC members. Applications and services are in development that will assist members in analyzing their global supply spend by category, assisting in identifying savings opportunities and cost reduction 
  • As an early adopter of UNSPSC, Premier Inc. has implemented UNSPSC codes for 1.2 million manufacturer-based products. Premier has also linked UNSPSC codes to 1 million related distributor cross-referenced products. Users of Premier's online catalog can search for products using the UNSPSC taxonomy. Products are categorized to the commodity level, which is the deepest level of detail in the taxonomy. In addition, Premier was instrumental in building out the pharmacy categories of the UNSPSC and is currently collaborating with GHX to complete the product categorization of the UNSPSC7

Sargent notes that AHRMM has begun working with CHeS to promote product code standardization efforts. Its something thats been talked about for many years, and each one of the GPOs is involved in this, but the feeling is that the facilities are going to be the drivers, she says. The facilities need to get together and make the request to the manufacturers, and possibly through the GPOs to the manufacturers.

Value Analysis

An effective value analysis process can be an asset to any supply-chain improvement effort. Weve got a very strong value analysis committee process, Sargent offers. We have a value analysis coordinator, and the co-chairs of the committee are two physicians. We have 30 members on the committee, about half of whom are physicians. We have a form that needs to be completed by the physician requesting a new item; if its going to be more than $5,000 annually, then it goes to value analysis. If its less than $5,000, then it goes to the products committee, or depending on what the item is, quantities, etc., it may get approval without going into a committee.

Sargent explains that physicians on the committee are the reviewers, so if one physician requests a new product, another physician on the committee is assigned the task of reviewing all of the paperwork that goes along with the product and determining whether or not its something that should be considered. At the actual committee meeting, the physician who wants the new widget comes to the meeting and makes a short presentation about what it is he or she is asking for, what it does, and so forth. After the presentations, the committee goes through one by one and talks about each item or grouping of items, and the physician reviewer gives his or her response as to what they read vs. what they heard. After discussion, we vote to approve or deny the request. Sometimes well approve them for a certain quantity and then after theyve used that amount, ask them to come back to the committee and report on their findings.

The structure and approach of the value analysis committee may vary depending on an individual facilitys needs and structure, of course. In my organization we have it broken down into sub-committees, Tietjen comments. Theres a perioperative services sub-committee and a medical/surgical sub-committee, because in perioperative services, many of the products they use are exclusive to them. We also have an ancillary, and that covers radiology, and a cardiac services sub-committee, and they work with contracts and purchasing, doing bids and analysis and so on, and then the recommendations go up to an oversight committee, which consists of senior management personnel who then decide whether or not to support it.

Utilization Management

Analysis of product use, including how, when, and how often usage occurs, can be another helpful supply-chain tool. Sargent explains that her facility is looking into what happens to supplies associated with a patient when he or she is transferred from an intensive care unit (ICU) to a different unit in the hospital. Do they send those supplies with the patient, or when the patient gets to the next unit does he or she get new supplies? That would fall along the lines of utilization if they dont take it, do they throw it away? Do they donate it? Or do they put it back on the supply cart?

The other piece to that, which is maybe not in the forefront of peoples minds, is waste management, Sargent continues. If you dont send the supplies with the patient when he or she transfers and then throw them away, youre adding to not only cost, but also the waste stream. Sargent applies this point to plastics such as basins and bed pans as well. These things may not cost as much, but what does it cost us to throw all of that away? And, do the patients get new ones every time they transfer to another unit?

A greater emphasis on utilization and consumption is one of several trends that Tietjen sees coming in the near future. I also think there are going to be a lot more standardization opportunities, which is going to require supply-chain people to sharpen their skills to the point where you can meet comfortably with a CEO, COO, or a CMO about supply-chain opportunities and get them to understand those opportunities. At the same time, however, we need to learn from the CMOs what their needs are, because my sense is that were all starting to do the same thing, perhaps taking different approaches. We need a supply-chain executive who has that mission working with them.

Tietjen also sees closer relationships forming between hospitals, their primary distributors, and their GPOs. The success of my organization related to supplies and services shouldnt be just my responsibility; it should also be my distributors and my GPOs. Many times what my distributor may offer may be the same thing that my GPO is offering, so they become competitors. If theyre competitors, are they truly looking out for me as the customer? That is work Im doing with my GPO and distributor now forming the partnerships, and both entities have told me that this is a long time coming. They know how to work together in terms of establishing a contract with one another, but how to bring that to the customer is a whole other matter. Thats all part of the vision for me. 

References:

1. HFMAs 2005 Supply Chain Benchmarking Survey: Managing Resources to Achieve Improved Economic Outcomes and High-Quality Care. http://www.hfma.org/library/accounting/costcontrol/2005_Supply_Chain_Benchmk.htm  

2. CHeS Initiatives: GLN. http://www.chestandards.org/gln/glnmain.htm  

3. Ibid.

4. CHeS Initiatives: PDU. http://www.chestandards.org/pdu/pdumain.htm  

5. Ibid.

6. CHeS Initiatives: UNSPSC. http://www.chestandards.org/unspsc/unspscmain.htm 

7. CHeS press release: Use of UNSPSC Product Classification Code in Health Care Increased in 2005. http://www.chestandards.org/news/PR/UNSPSCrelease042406.doc 


SUPPLY CHAIN
Top Practices

The Healthcare Financial Management Association (HFMA) noted the following top practices in its 2005 Supply Chain Benchmarking Survey:

  • Inform and train to build buy-in from the back office to the boardroom 
  • Select metrics and benchmarks that the clinical staff, physicians, administration, and others value 
  • Integrate physicians in evaluating programs through a review of variations in clinical and financial outcomes by program and by physician 
  • Establish a continual focus on a clean and comprehensive item master Evaluate technologies to improve and integrate information for decision making 
  • Continually examine processes and structures for review of preference items 
  • Evaluate opportunities to improve asset tracking 
  • Continue focusing on core supply-chain management functions and structure, such as purchasing control, inventory control, transportation, and GPO utilization 
  • Celebrate successes to build awareness and collaboration 
  • Interact and share best practices with peers

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