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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