July 14

Defining Healthcare Supply Chain Expense Optimization for Better Results


I am seeing more and more healthcare supply chain publications, white papers, and supply chain vendors using the term supply chain expense optimization (SCEO) to describe saving more money. But supply chain expense optimization is much more than this. SCEO is the action of making the best and most effective use of supply cost expense management strategies, tactics, and techniques, or wringing the towel dry on your expenses. The only problem with this definition is, how do you know that you are employing the optimum supply cost expense management strategies, tactics, and techniques at your hospital, system, or IDN? Here are three questions to help you with this challenge:

1. Do you have an on-going benchmarking system? Benchmarking is still the best way to uncover best practices from your peers. Otherwise, how would you know that you are lagging behind on strategies, tactics, and techniques (like supply utilization management) to optimize your savings? We are not talking about price benchmarks, but we are talking about overall cost to operating metrics (i.e., average cost per pacemaker/CRM device implant or oxisensor cost per patient day, etc.). This is where you will truly find your next level of savings beyond price and standardization.

2. Do you have a high-quality analytics system? Meaning, “The extensive use of data, statistical and quantitative analysis, explanatory and predictive models, and fact-based management”1 that drive your supply expense management strategies, tactics, and techniques. Most organizations have some form of analytics that they employ, but does it pinpoint areas for you to attack and be strategic about? Does it cue up a list of savings opportunities that are realistic and actionable each and every time (period) you update it? This is expected now and in the future.

3. Do you employ KPIs (key performance indicators) to measure your supply expense management performance? Or a quantifiable measurement (e.g. total supply expense per patient day) to evaluate the success of your supply chain expense management efforts? AHRMM just published a list of their top key performance indicators which is a great start and you should be tracking your supply chain with these. However, you should also go to the next level of KPIs and look for cohort, system-wide, and historical best practices to go after as well. You can’t rely on just one single key performance indicator to point you to savings (we call this “Triangulation”). It is better to have two or three or four KPIs to assure you that the savings are real and attainable every time.

If you aren’t employing all these systems in combination to optimize your supply chain expense savings, I would suggest that you aren’t “wringing the towel dry” on your supply expenses. This is because you can no longer depend on your GPO contracts to continue to reduce your supply spend due to the law of diminishing returns. You now need to employ scientific management to uncover those hidden supply chain expense savings – beyond price and standardization – that are needed to sustain your healthcare organization’s financial health.

Source: Thomas H. Davenport, “Competing on Analytics”

Below are some similar articles that you may find interesting.

4 Reasons Why Supply Utilization Savings Are Better Than Price Savings

3 Fundamentals for Building a Resilient Healthcare Supply Chain of the Future

4 Approaches to Contain Your Supply Chain Expenses

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