Seeing the Future
"^ Innovative Supply Chain Management Strategies
T
here is no greater illustra-
tion of the importance
of efficient supply chain
management in the healthcare
industry than the 2004--2005 flu
vaccine shortage. While hospitals
around the country struggled to
provide the vaccine to their local
populations, shopping malls, drug-
stores and grocers managed to
deliver flu shots to customers when
doctors could not.
The shortfall was the result of the
contamination of the vaccine pro-
vided by a major supplier. Because
so many hospitals relied on so few
vaccine suppliers, the United States
lost nearly 50 million doses. In
response, the Centers for Disease
Control and Prevention (CDC)
took a cue from the supply chain
management strategies of other
industries and developed an auto-
mated system that locates both
.surpluses and shortages of flu
vaccines. This will give the C D C
' the information it needs to redis-
tribute the vaccine to
areas that need it most.
by Tequia Burt
Though the shortage exemplifies
problems with supply chain manage-
ment in the healthcare field on a
large scale, examining the reasons
behind and the response to the prob-
lem can help hospital executives
understand why having an efficient
supply chain is paramount—not only
because of possible savings but also
because of the potential for improved
patient care.
Look to Other
Industries
Supply chain management in other
industries, like those of grocers or
retailers, is much more successful
than in hospitals. Experts say this
is because there is a broader accep-
tance of the need for supply chain
excellence. Corporations like Wal-
Mart are more organized and more
willing to accept and adopt new
technological innovations quickly.
But this is changing, according to
Tom Slagle, group president of
Supply Chain Services/Medical
for Ohio-based Cardinal Health.
"Leaders in the healthcare field are
starting to realize the advantages of
having a world-class supply chain
system," he says.
When executives at Trinity Health,
one of the country's largest health
systems, initiated their new supply
chain management program five
years ago, they hired industry out-
sider Lou Fierens from Ceneral
Motors to come to Novl, Michigan,
to head their efforts. "I would say
that, conservatively, we are still in
an industry that is 10 years behind,"'
says Michael A. Slubowski, FACHE,'
president of Hospital and Health
Networks and ACHE Regent. "Lou
came to us from GM because we
wanted to bring the thinking of
other industries to our industry.
When he says we're ten years
behind, it means that with him here
at Trinity, weVe seeing the future."
Trinity's supply chain management
program has been so successful that
it has exceeded their five-year goal.
Originally, Trinity expected to save
Si20 million over five years; in just
four years, they saved $125 million.
These savings benefit Trinitys entire
 S e e i n g the F u t u r e : Innovative Supply Chain Management Strategies

business, says Fierens, senior vice
president of Supply Chain and Capi-
tal Project Management, and has
meant improved delivery of care and
expansion of Trinity's mission to assist
underserved communities.
Best practices in supply chain man-
agement align an organizations
internal and external systems with
those ot its suppliers and customers
to improve the flow of products, ser-
vices, information and monies across
the supply chain. Typically, hospitals'
issues stem from a lack of standard-
ization, slowness in implementing
automation technology and a lack
of high-quality data on which to
base important strategic decisions.
Improvement in these areas can lead
to excellent operating room and
pharmaceutical management, better
inventory management, enhanced
vendor relationships, more satisfied
patients and more effective work
flow for hospital employees.
According to David M. Zimba,
CHE, vice president of Corporate
Contracting at West Penn Allegheny
Health System (WPAHS) in Pitts-
burgh, healthcare organizations
should adapt strategics from other
industries. He believes healthcare
organizations can control ballooning
costs by modeling their supply chain
management strategies after those of
grocery stores. "To improve supply
chain outcomes we must challenge
ourselves to change and create a new
expectation," he says. "To produce
this change, the healthcare industry
should begin to look beyond to other
industries. It can start with our own
personal experiences at the grocery
store or the mall when we ask our-
selves why we don't have the same
level of performance. It can start

What will autotnatitig your supply chain look like?

Select Product
This graphic represents improvements in the WPAHS
Purchasing
distribution process. Before automation, the WPAHS
supply chain was confusing, cost the hospital more
--• Reviews

money than it should have and involved 20 steps.The

current WPAHS distribution process only requires
six steps;
1) A product is ordered by the automated system.
2) After a product arrives at the hospital, it is directly
delivered to a specific department.
Electronically
ces Orden
i Manually
Inventories
3) It is then stored in supply cabinet.
4) A nurse removes the supply and
5) provides patient care. [Transported
» ^ ^
I to Depts
6) Finally, the cost of the supply is automatically
charged to the patient. (automated
The blue boxes represent the steps eliminated ordering)

through ValueLink and the green boxes represent

steps eliminated through Pyxis.The orange boxes Step eliminated Step eliminatd
through ValueLink through Pyxis
represent the remaining steps in the WPAHS
distribution process

Source; David Zimba, WPAHS

\ 3 Healthcare Executive
JAN/FEB 2006
with a review of our suppliers and
asking why we don't have the same
kind of performance as their inter-
nal supply chains."
Zimba says embracing these supply
chain management strategies could
save the industry at least a billion
dollars. "Hospitals would see sav-
ings m the 10 percent to 20 per-
cent range," Zimba says. "If we
saved that much money, we would
improve patient care and enhance
productivity for positions with
market shortages, like nurses, phar-
macists and others. We also would
have more resources to improve
patient experiences and address
issues of medical errors and adverse
reactions. Hospitals would ulti-
mately run more smoothly."
Zimba's savings estimate is conserv-
ative when compared to estimates
made by VHA, a healthcare
provider alliance based in Irving,
Texas, in a November 2004 study.
"Taking Control of Your Supply
Chain: The Buck Starts Here"
found that by implementing best
supply chain practices, healthcare
organizations could save between
15 percent and 30 percent, which
could be $11 billion industry-wide.
Since implementing its strategic
sourcing and grocery-style supply
chain management strategy in
2000, WPAHS achieved in excess
of $78 million in annual run-rate
savings, which is more than $227
million in total savings since its
inception. It makes sense for hospi-
tals to explore new approaches in
supply chain management because
hospital supply costs have risen at a
greater tate than labor or employee
benefit costs over the last two years

Delivery Product
Recieved Electronically
at Dock Rec'd

Special
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Patient Order
Delivery to
Charge Put Away
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Stickers

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Put Away Removes Automatical
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Remaining steps ollected ,
pharge Sheet ^ Billed

Healthcare Executive 19
JAN/FEB 2006
S e e i n g the F u t u r e : Innovative Supply Chain Management Strategies
Supply chain experts in the
healthcare field recommend
healthcare executives adopt
management strategies such as:
• Conducting a spend
analysis. Where am I today?
Where are my dollars going?
How do we compare to
national standards? How do
I prioritize goals?
• Making sure you have a
value analysis team in
place. Do I have proper
structure and resources in
place to go after these initia-
tives? How strong are our
physician relationships? What
does a value analysis process
entail?
•Taking a look at your
information systems. Are
cost, utilizations and revenue
aligned? Are information sys-
tems tied together so that
you can take a look at costs?
• Developing strong part-
nerships. Where are you
going to get information you
need? How strong is your
relationship with your group
purchasing organization
(GPO)? Are you fully utilizing
your relationship with the
GPO to assist with national
benchmarks? How do I stand
up to my GPO? Am I getting
the best price?
20 Healthcare Executive
JAN/FEB 2006
and is the second largest expense
behind labor.
Institute Change
Zimba realized that one of the first
things WPAHS needed to do was
strengthen vendor relations. "Imag-
ine you are a car manufacturer that
needs multiple parts to construct
vehicles. You are not going to rely
on a vendor that doesn't get you the
supplies you need when you need
them." In hospitals, departments
have their own methods of ordering
supplies. When this happens, differ-
ent departments often order the
same product from different ven-
dors at different prices. This poten-
tially drains thousand of dollars
because of overstock and inflated
prices and also translates into long
waiting-room times, increased med-
ical errors and overall confusion.
Grocery stores, on the other hand,
know exactly what products they
have, how many units of each
product they have and how many
they need to reorder. They also get
the best price. This is because gro-
cers have all the information they
need at their fingertips. Grocers
have more effective supply chains
where participants and technology
play key roles: The distributor
restocks the shelves; customers are
responsible for choosing products
from the shelves and using them
(eliminating everything in
between); and the scanner at the
cash register handles payments, and
receipts, keeps track of inventory
and reorders supplies.
Before implementing the grocery
store model, WPAHS employed a
complicated distribution system
involving 20 steps. Now, using the
lean supply management strategy of
grocery stores, WPAHS uses at most
a six-step process {see sidebar, pg. 16-
17). Zimba says the new strategy has
transformed the organization. "Weve
automated our supply chain," he
says. "We have much higher reliabil-
ity rates and customer confidence.
End users now have product in the
quantity they need it, when they
need it and where they need it."
Not only will increasing efficiency in
the supply chain save money, Zimba
says it will improve customer satis-
faction and employee effectiveness.
For example, after partnering with
its vendor, WPAHS integrated
low unit of measure distribution
(ValueLink and CardinalASS 1ST}
and Pyxis automation in its hospitals
and has seen a dramatic improve-
ment in the medical/surgical and
pharmacy distribution process. The
integrated approach replenishes sup-
plies and drugs in efficient units of
measure directly to point-of-service
dispensing devices. Decentralizing
distribution streamlined product
handling and movement while elimi-
nating redundant steps in the logisti-
cal process and achieving 99 percent
fill rates. Customer satisfaction now
exceeds 90 percent.
Think in the
Long-Term
One of the first steps in implement-
ing a successful supply chain manage-
ment strategy is to make it an orga-
nizational strategic initiative,
according to David M. Markoski,
senior vice president for VHA.
Many executives realize the savings
associated with a more efficient sup-
ply chain management plan, but do
not fully understand the benefits on
a larger scale. The consequence is
that plans may be thought of in the
short term rather than as a long-
term strategic imperative that affects
the hospital on many levels.
One reason this happens is because
many hospitals do not have inte-
grated information systems. Ironi-
cally, having a superior supply
chain management system can help
to integrate this information. VHA
helps hospitals make important tac-
tical decisions on an ongoing basis.
"In hospitals, there is an enormous
amount of information and data
kept in separate information sys-
tems and very few are integrated,"
Markoski says. "So the question is,
how will that information be used
to make strategic and actionable
decisions? It can't. Its at a point
where hospitals don't know how
much a procedure costs because
the information is spread out."
Donald Walker, senior vice presi-
dent of Distribution Operations
at McKesson Corporation, agrees.
"When hospitals start to under-
stand and fully document existing
processes, they see a lot of bene-
fits," he says. "Taking a strong
process improvement approach
allows them to see how technology
can enable them to mistake proof
their processes."
This was a problem for Trinity Health
before changing its supply chain man-
agement. "We wanted to understand
what we were buying, when we
bought it and how much we paid for
it," Slubowski says. "Before starting
this process we could not easily
answer all of these questions."
Making an effort to get good infor-
mation based on high-quality yield
data has made it easier to get
physicians on board with supply
chain changes. And this is no easy
feat as physicians are one of the
groups most resistant to changes in
hospital supply chain management.
This is because physicians often
have preferences for certain prod-
ucts and vendors, which negates a
hospital's ability to negotiate with
manufacturers for the best prices.
But when hospitals have informa-
tion proving to physicians that
having a leaner supply chain man-
agement strategy can actually
improve patient care, reluctant
doctors will support these initia-
tives. This has been key at Trinity,
Fierens says. "If you don't have
good data, nor understand it, you
are lost. We provide the data and
benchmark pricing information
across the system to make the case
to physicians," he says. 'A physi-
cian's main job and mission is to
deliver excellent patient care. We
can show ways in which operations
can be improved to benefit the care
delivery process and patient care
through the cost savings associated
with the sourcing initiative. This
is a very delicate and sophisticated
process, which takes great effort,
but given the amount of influence
manufacturers have built with
physicians there are no shortcuts."
Rethinking supply chain manage-
ment in healthcare can improve
bottom lines and ultimately make
hospitals run much more smoothly.
At Trinity, it is acknowledged that
being an innovative leader in this
area takes a lot ot work, but it is
worth it.
"It's an important journey. It's not
a quick fix and not only includes a
huge amount of process change but
a huge amount of cultural change,"
Slubowski says. "We've seen a more
efficient work flow process for
associates. We have a better ability
to network within organizations.
We are more efficient in our use
of hours in terms of inventory
because restocking is done in a
timely manner. All of these things
translate directly into delivering
better care. The more minutes a
nurse can spend with a patient,
rather than going to a different
floor or leaving the operating room
to get supplies, the better. Improv-
ing supply chain management
benefits patients and improves out-
comes. This comes down to more
than just economic benefits."
Tequia Burt is associate editor for
Healthcare Executive.
Healthcare Executive
JAN/FEB 2006