The Importance of Controlling Supply Chain Costs in Healthcare

In any organization that handles tangible goods, the design of the supply chain is crucial to the execution of the organization's business processes. Hospitals are no exception. In fact, due to the complex nature of hospital supply chains, having efficient SCM processes are especially important. Some of the factors that contribute to the complexity of hospital supply chains are:

• A mix of both high-cost and lost items.
• A mix of both perishable and durable goods.
• Items that are consumed in both very high and very low volumes.
• Varying item requirements depending on the specific use area within the hospital.

While the importance of optimizing hospital supply chain processes is generally acknowledged, it is often not given the level of attention it deserves. In an influential article in Hospital Material Management Quarterly entitled "Improving health care means spending more time with patients and less time with inventory," the authors found that a typical hospital spends between 17% and 35% on Inventory Management. This includes the cost of the inventory itself, the internal costs associated with the associated labor, and other costs related to inventory. To illustrate how better control of supply chain processes can impact hospital profitability, consider the following hypothetical example:

• A hospital has total annual expenses of $100 million.
• Annual supplies and related costs are 30% of total expenses, or $30 million.
• The hospital has excess revenue over expenses of 5%, or $5 million.
• If this hospital can reduce supply chain costs by 10%, that translates into a $3 million savings over the course of a year.
• This means the hospital's operating excess revenue would grow from $5 million to $8 million.  
• In other words, in this case, a reduction of just 10% in supply chain costs results in a 60% overall increase in excess revenue.

As another example that illustrates the high cost of poor supply chain management, consider the case of obsolete inventory. In 2020, GHX, a leader in healthcare SCM management, conducted audits of several hospital inventories. A 2000-bed hospital was found to have nearly $200,000 worth of expired inventory. Another 500-bed facility was found to have over $60,000 in expired stock just for the operating rooms. Having so much obsolete inventory on hand is costly and can lead to other adverse consequences.

Modern ERP Systems Provide Tools to Streamline Hospital Supply Chains

One of the keys to optimizing supply chains is having back-office systems that enable best practices. Oracle's Cloud ERP and PeopleSoft ERP both have a full suite of tools to help healthcare organizations optimize their supply chains. Examples include:

• The ability to have Just-In-Time inventory management at Par locations and central stores.
• Tools for calculating optimal replenish parameters to minimize stock-outs while simultaneously reducing on-hand inventory levels.
• The ability to integrate directly to healthcare SCM networks such as GHX or directly to JIT suppliers such as Owens and Minor or Cardinal Health in order to be able to process purchase orders and receipts with virtually no human intervention.
• The ability to use handheld devices for common inventory transactions such as Par Location Counts, Receiving/Putaway, Inventory Movement, and Stock Level Inquiries.
• Barcode printing and scanning capabilities to both reduce data entry errors and increase worker efficiency.  

Optimizing the Supply Chain

Having the right supply chain management systems is necessary, but not sufficient, to achieve a highly efficient supply chain. Even the best systems can be undermined by not having proper business processes in place or by not fully taking advantage of the capabilities of those systems.  

Too frequently, when implementing new systems, organizations fall into the trap of wanting to do things the same way they always have before rather than embracing the improvements that the new systems provide. It is common, when implementing these systems, to make speed of implementation a primary goal. This means some new functions are pushed to a "Phase II." Unfortunately, that "Phase II" project doesn't always happen. Another issue is the frequency with which modern ERP systems are upgraded. It used to be that ERP systems were only upgraded every few years, and organizations would only periodically engage in large upgrade projects to get up to date. Oracle and other ERP suppliers now typically deliver updates to their systems much more frequently. Oracle Cloud ERP, for example, delivers new functional updates every quarter. With such frequent updates, organizations often struggle to keep up with the latest enhancements. These factors can all contribute to an organization falling into the trap of having state-of-the-art IT systems but still having poor supply management processes.  

One strategy that hospitals can utilize is to bring in a third party to perform an ERP "health check." The health check process can be conducted against one or more business processes. The output of such an engagement would typically consist of the following:

• An overview of the "as-is" state for each business process being studied.
• Challenges currently being experienced as a result of the as-is state.
• Recommendations on changes to business processes and IT systems to move to a "desired future state" that helps to overcome the challenges.
• A road map that lays out a plan to get from the current as-is state to the desired future state.

Engagements of this type, provided that they are conducted by an organization that has both industry knowledge and a deep understanding of the IT system involved, can often be completed in a relatively short period of time. The cost of such an engagement is usually recouped very quickly once the recommendations are implemented.

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