Active Supply Chain Management Can Cut Costs, Improve Service
Kurt Kuehn is SVP of worldwide sales & marketing for United Parcel Service (UPS) so it seems legitimate to take what he has to say about supply chain management with a grain of salt since his company provides such services. However, these two articles published in Healthcare Purchasing News and Materials Management in Health Care respectively contain a wealth of valuable information. First, supply costs (pharmaceuticals included) are second only to labor and amount to up to 30% of total spend, so hospitals that try to save mostly on big, expensive equipment are missing cost control opportunities. Second, up to 40% of hospital supply-related costs are dedicated to handling, moving and processing material and supplies as opposed to less than 10% in other industries such as consumer goods and manufacturing, because of a high volume of manual transactions and the prevalence of paper-based purchases.
Many hospitals have focused on driving prices down through price negotiations, either themselves or through group purchasing organizations. That’s a good first step, but these centralized contracts don’t necessarily reign in off-contract purchases and since they typically account for delivered price, the bundled delivery and handling costs are not necessarily transparent and competitive. Moreover, poorly-tracked inventories lead hospitals to pile up on supplies because inventory failure could have highly adverse patient care effects.
Mr. Kuehn lists various opportunities to widen the scope of negotiation and how to think about supplies procurement in a more holistic ways. Among others, he cites “supply chain financing,” a sort of reverse factoring where an external vendor buys your suppliers’ receivables at a discount under your payment terms, pays them faster (which will please said suppliers) while you pay the third-party vendor under agreed-to terms (incidentally UPS provides such a financing service). This can improve short-term liquidity for cash-strapped hospitals, though obviously that flexibility comes at a cost. Tracking tools such as scanning or radio frequency identification (RFID) solutions can help reduce inventory levels without risking running short of vital supplies. A good first step would be to acquire more cost transparency which would let purchasing departments evaluate potential savings.
December 31, 2005 Related topics: Finance, Supply chain/SCM, Supplies, IT & software, Cost savings