VALUE ANALYSIS SYNERGY

But the Healthcare Supply Chain is Different!

Michael Bohon, Managing Director—Healthcare Solutions Bureau

How many times have you heard someone say the above statement as to why ideas, concepts and practices from other industries will not work in healthcare? Personally, I cannot count the times that I have.

I have worked in the supply chain world in three industries; steel, electronic and healthcare for 40+ years. The majority of that time was in healthcare. For the past 20 years I have also been involved with the development and presentation of supply chain educational material. These have been delivered in lecture, seminar, workshop and online formats, and about half of them have been through the auspices of the Institute for Supply Management (www.ism.ws). This work has provided me the opportunity to observe, ask about and learn about the differences between the supply chains in different industries. The ISM programs are made up of participants that are from other than healthcare over 98% of the time, and those from healthcare are from the supplier side with only a couple of exceptions.

Value Analysis Synergy

Michael Bohon

My purpose here is to compare some of the aspects of a supply chain operation between those in healthcare and those in a variety of other industries. My thoughts and comments are from my 30+ years of knowledge from my work in healthcare and from observations and discussions I have experienced during my interaction with supply chain professionals outside of healthcare.

I have selected a number of topics or areas of the supply chain activity. I will explain how they are dealt with outside of healthcare and how they compare to healthcare.

Recognition of Supply Chain’s (SC) Criticality

Naturally, this varies by industry and size of the organization. However, generally in non-healthcare industries the supply chain is recognized as a key part of the firm’s structure. They are represented in the leadership level usually in the C-suite. They are included in the decision-making process in most every aspect, especially those with a financial impact on the success of the company. It is not surprising to find that the mid and lower levels of the SC feel that their involvement should be increased, and their authority be strengthened.

The healthcare SC has made good progress in this area in the past 10–15 years. More and more examples are found of VP–Supply Chain and even CSO (Chief Supply Officers) throughout the country. However, there is much more progress to be made as there remains far too many cases of the Director level being the highest. This can only be corrected by SC professionals taking a proactive stance and proving to their leadership the benefits that can be derived from their knowledge and experience.

One significant remaining problem is healthcare’s lack of understanding of the importance of educational programs for those in the key support departments. People have heard my mantra that supply chain education is an investment, not an expense. Unfortunately, the leadership and those who control the purse strings fail to appreciate that fact.

Value Analysis Synergy

Michael Bohon

Value Analysis

The concept of value analysis (VA) has been in healthcare for over 30 years. I worked at a hospital in 1986 that was one of the first to have an RN reporting to Materials Management. The progress was slow at first, but when the benefits of this approach began to become more obvious and meaningful, the interest began to grow. Now, when I talk to a hospital that is having difficulties controlling supply and inventory costs and contract compliance, I usually find that their VA system is either weak or in some cases non-existent.

When I ask my class participants from other indusValue Engineering/Value tries if they utilize VA, they looked puzzled and Analysis is defined as a shake their heads. When I change the question systematic method to wording to value engineering (VE), the majority improve the "value" of goods responds, “Of course!” VE is defined as a systematic method to improve the "value" of or products and services by goods or products and services by using an using an examination of examination of function. Value, as defined, is the function. Value, as defined, is ratio of function to cost. Value can therefore the ratio of function to be manipulated by either improving the function or reducing the cost. cost. Value can therefore be

manipulated by either

Sound familiar? VE was originated during World improving the function or War II by General Electric (G.E). Because of the reducing the cost. war, there were shortages of skilled labor, raw materials, and component parts. G.E. looked for acceptable substitutes. They noticed that these substitutions often reduced costs, improved the product, or both. What started out as an accident of necessity was turned into a systematic process. They called their technique "value analysis". The name morphed into value engineering when it became mandated in federal agencies and programs.

VA in healthcare had a similar start when DRGs became a major force in reimbursement and hospitals had to improve the value ratio of the products they used in their operation to lower their costs and improve their outcomes. Its importance has been realized through the efforts of proponents such as Bob Yokl and others.

Value Analysis Synergy

Michael Bohon

Contracts and Contract Management

There is another area where healthcare has made major improvements in the last 20 years and that is in the realm of contracts and contract management.

When I used to tell my classes that healthcare generally allowed suppliers to write the contracts, they stared at me in disbelief. Very few of them would ever consider allowing that to happen. Then, I explained that it was as a result of upper management’s lack of understanding of the value of good contract management in the supply chain and, therefore, they often would not provide the department resources in staffing and educational opportunities. Then they would shake their heads in dismay.

There has been a significant change for the better in healthcare. This is in part due to hospital systems doing more direct contracting with the suppliers and, to a degree, less dependence on group purchasing organizations (GPOs). Also, there has been a realization of the negatives that occur when the selling side controls the writing on the paper. This is another case of those SC departments with limited staff not having the tools available to optimize their contracts.

Contracts’ legal terms and conditions are an essential part of all contracts. Healthcare has made substantial advancements in their methods of addressing them. Other industries are heavily focused on addressing them in advance to ensure their legal and organizational goals and objectives are met. They work with the legal counsel to ensure that all critical issues are addressed in a manner that deals with the suppliers’ concerns while protecting themselves should any problem develop during the documents’ lives. If this is your methodology in the healthcare environment, you are to be commended. If not, perhaps you need to confront this situation.

While those outside of healthcare are shocked by the power that surgeons and physicians have in the contracting process, they often face a similar burden of working with engineers and R&D departments. The primary difference I have noted there is the willingness of their senior management to get involved and listen to the SC’s side before a final decision is reached.

In the area of negotiation other industries’ SC people are more schooled and trained to carry out this key function. They are also more empowered to represent their organization. They are just as frustrated as healthcare SC professionals with internal negotiations. In fact, over the past 20 years when asked, 100% of them respond to my question and say that internal negotiations are consistently more difficult than the external ones. Like healthcare, they use a team approach on a regular basis with the internal departments, but limit the participants when facing the suppliers’ representatives.

Value Analysis Synergy

Michael Bohon

There are four areas where healthcare and other industries are vastly different. These are:

Group Purchasing Organizations (GPOs) –Outside of healthcare they are referred to as buying consortiums and are very (!) limited in number across all industries. While their people seem intrigued by the concept, they remain wary of it as they express concern about losing some of their management’s control with contracts and supplier selection.

Benchmarking Services –Such tools are virtually unheard of outside healthcare. When I mention them in my classes they display an interest in the details. When I provide more information, they express envy that such means are available elsewhere and wish they had access to something like them. They do, in some cases, benchmark pricing within their own company and its multiple sites, but have little or no access to the blind pricing from others in their industry. They also question the breadth, depth, and accuracy of the information.

Multi-site Operations –Yes, healthcare is gradually morphing into more hospital systems that have sites in many areas across the country; Ascension Health, for example. Again though, the examples of this type are a relatively small number when you consider all the 5,500 hospitals around the country. On the other hand, it is common for many other industries to have sites not only across the US but also in multiple countries around the world. This can lead to significant issues both in number and complexity.

International Operations –In the polls I take of my class participants, about 70% acknowledge that they are involved in international business dealings, either with suppliers or within their own company. In healthcare, there are a few of the largest systems that have an international presence, but they are a small minority. International commerce adds a whole new and complex layer of required knowledge and skills necessary for successful conduct of business. It is so relatively common in many industries that the Institute for Supply Management includes questions on international business issues in its exam for certification as a Certified Professional in Supply Management (CPSM).

Many of the readers of this missive will quickly say that what was stated here does not apply to their or their company’s situation. That may well be true. Remember, the statements here are simply a summary compilation of years of my observations and information collected in a relatively unscientific manner. It is a taste of comparisons and by no means all-inclusive. Should any readers wish to provide their comments or ideas, please contact me via email at bohon@hcsbureau.com. I will be glad to respond. www.hcsbureau.com

VA Purchased Services

Applying a Value Analysis Approach to Purchased Services: Case Studies in Clinical Engineering

Mike Maguire, Senior Vice President and Chief Supply Chain Officer at PartsSource

The U.S. healthcare system is the most costly across the globe. Seeking to cut waste from the system, American healthcare organizations are under ever-increasing pressure to optimize their performance and drive value to their bottom lines.

As a result, hospitals are laser focused on three goals: 1. Improving the quality of healthcare 2. Reducing the cost of healthcare 3. Increasing operational efficiencies

VA Purchased Services

Mike Maguire

One of the most critical areas of focus is Medical-Surgical spend, which is largely driven by a health system’s formulary, the product of agreements between Clinicians and Supply Chain. To contain costs, and ensure standardization and quality, clinical preference items are increasingly sourced through a value analysis process. The model has worked well. Yet, the value analysis process could also be used to address the cost, quality, and efficiency of purchased services in an often overlooked area of the health system: Clinical Engineering.

Managing cost, quality, and efficiencies comes with numerous challenges in supply chain, and specifically within Clinical Engineering departments. Clinical Engineering has a mission critical role within the health system to ensure that the equipment that supports patient care is available (“uptime”) and working optimally per the manufacturer’s specifications. Their work includes both regularly scheduled maintenance as well as unplanned repair work. The procurement of a wide variety of parts supports their mission but is often handled in what Procurement would call an “unmanaged” fashion. To streamline the process, what’s needed is a simplified, collaborative supply chain process that delivers on-demand products and service to clinical engineering. Such a process is critical to the high level of efficiency required for the survival and health of large organizations, and to ensure that medical equipment is ready when and where patients need it. Yet, large-scale quality issues, service deficiencies, and increased costs are among a plethora of factors that continue to negatively impact profits.

How can supply chain apply value analysis for purchased services to improve the efficiency of clinical engineering? The answer may be found in some of the nation’s high-quality leaders.

Organizations such as the Mayo Clinic, Cincinnati Children’s Hospital and HCA have all found a viable solution for evaluating quality vendors and products and applying a process to standardize the workflow and costs of clinical engineering purchases. Results include efficiency through consolidation, and significant cost savings to help reduce the total cost of ownership of medical equipment.

Dartmouth-Hitchcock

Dartmouth-Hitchcock Health (Dartmouth–Hitchcock), a leading nonprofit academic health system serving a population of 1.9 million in New England, implemented this approach for their clinical engineering department.

VA Purchased Services

Mike Maguire

“I was in need of a parts procurement solution that allowed me to leverage my team’s time in a positive manner, while at the same time provided visibility to everything that was going on with ordering parts,” said Dartmouth-Hitchcock Director of Clinical Engineering, Jon Kocurek. “As a manager, I wanted to start finding areas of low-hanging fruit and doing a better job of saving my organization valuable resources.”

The challenge for Dartmouth-Hitchcock was that limited access and the inability to get historical spend data meant they had to rely on a manual record keeping process. It was vital to their strategy to have the right technology in-house to store purchasing data for future analytics and reporting.

“Not only would we receive parts that were dead on arrival, but we would also receive parts that worked okay on installation, and then failed two weeks later. In the event of a failure, my team would have no way of really tracking warranty terms on parts. Many times, I would find we purchased a new part only to realize later that it should have been covered under warranty by the manufacturer. Additionally, I had no way of knowing or seeing metrics regarding lead or backorder times from different manufactures and vendors. The inability to truly understand these performance indicators was a substantial limiting factor in understanding how I could make my team as efficient as possible,” said Kocurek.

So Dartmouth-Hitchcock introduced a resource management program using a cloud-based software platform to standardize process for order entry, management and reconciliation from multiple OEMs and suppliers. Visibility into spend and supplier performance are achieved through evidencebased best practices, process automation tools and reporting and data analytics. “My team now follows a process that allows them to make confident quality and cost decisions when acquiring parts. It also provides visibility of their impact on driving costs down for the organization.”

Dartmouth–Hitchcock Results

Prior to implementing the resource management program, Dartmouth-Hitchcock’s estimated time spent in procurement was 730 hours over a six-month period. After implementation, time spent in procurement dropped to 112 hours over six months and resulted in a cost savings of 27%.

VA Purchased Services

Mike Maguire

UCHealth

Another top health system in the U.S., University of Colorado Health System (UCHealth), was looking for a way to improve process and workflow in Clinical Engineering that could easily be integrated into their current system. They wanted to manage service reports and tracking and shipping of product orders and assets in one centralized program. After an exhaustive search for the best option, the team chose a resource management program to help achieve their goals.

UCHealth Results

The software solution proved popular with UCHealth’s clinical engineering team, driving rapid adoption, said Tori Kennedy, Vendor Services Manager. Within 6 months of the program’s start date, 95% of UCHealth’s 40+ team members were using the program across 26 modalities and 9 facilities. While cost savings is always an important factor, it was a secondary goal for UCHealth. Still, in less than 6 months, UCHealth saw a 43% cost reduction in spend, and consolidated 160+ vendors. In addition, the program connected various departments and sites as an unintended outcome of the program.

As these examples demonstrate, implementing a formal process for the sourcing and procurement of parts to support Clinical Engineering’s mission can have a profound impact on a health system’s bottom line. If the process incorporates the operational needs of Clinical Engineering with the sourcing expertise of Supply, it can identify opportunities to consolidate vendors, gain visibility to quality outcomes and supplier performance, and identify future opportunities. Such a process can pave the way for developing a fine-tuned centralized system using value analysis in purchased services for better financial outcomes and patient care.

Healthcare Supply Chain Best Practices Podcast

Now Over 300,000 Listens!

Generate Actionable Bottom Line Savings Open Up a Whole New World of Savings Beyond Price Lead Your Organization to the Next Level of Supply Chain Performance

Provide Solutions and Tools to Save You Time, Money, and Effort

Purchase Cost Is Just the Tip of the Iceberg Reining in Your Multimillion Dollar Purchased Services Comparative Value Analysis Analytics Will Maximize Your Performance 5 Biggest Myths About Healthcare Supply Utilization Management 4 Things to Make Your Cost Management Job Easier