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PREFACE

According to The Beryl Institute research, the patient experience is one of the top three
priorities of hospital leaders over the next three years.
It is clearly time to refocus on the person at the center of care. Many organizations are
struggling to understand what patient-centered care truly means, and what it really looks like.
Every caregiver has a role in the patient journey, from the valet attendant, to the CEO and
clinical sta
Successful hospitals provide an exceptional patient experience. Organizations with a culture
that focuses on patients are rewarded with higher clinical quality and eciency, a safer
patient environment, greater caregiver engagement, and improved nancial results.
The supply chain is a critical component of a hospitals success towards providing an
exceptional patient experience. It hosts a vast network of products, services and players all
intended to serve the patients, their family and caregivers.
Managing the ow of information, supplies, equipment, and services from manufacturers to
distributors to providers of care is especially dicult in clinical supply chains, compared with
more technology-intense industries like consumer goods or industrial manufacturing.
As supplies move downstream towards hospitals and clinics, the quality and robustness of
accompanying management and information systems used to manage these products
deteriorates signicantly. Technology that provides advanced planning, synchronization, and
collaboration upstream at the large supply manufacturers and distributors rarely is used at
even the worlds larger and more sophisticated hospitals.
This paper outlines the current state of healthcare supply chain management technologies,
addresses potential reasons for the lack of adoption of technologies and provides a roadmap
for the evolution of technology for the future.
This piece is based on both quantitative and qualitative research assessments of the
healthcare supply chain conducted during the last two years..

The Patient Experience is not about making


patients happy over quality. Its about safe
care rst, high quality care, and then
satisfaction.
James Merlino, MD
President and Founder, Association for Patient Experience

THE PATIENT EXPERIENCE SUPPLY CHAIN

INTRODUCTION
Technology to better plan and manage the acquisition and replenishment of key resources,
such as pharmaceuticals, supplies and equipment, are severely lacking in hospitals today,
compared with other industries. Driven by continual cost pressures and other operational
constraints, the supply chain represents one of the largest opportunities for cost savings and
value creation in the healthcare enterprise, but a comprehensive roadmap is needed to help
assist hospitals.
This white paper suggests that hospitals create an evolutionary path for supply chain
technologies, implementing better business practices and more advanced technologies to
increase vendor collaboration, optimize pricing and sourcing eorts, and improve the
prediction of required order quantities and inventory levels.
When hospital executives talk about technology, they most commonly refer to clinical decision
support, medical informatics, or electronic medical records (EMRs). A wide range of
technology and systems are developing that bring advanced decision support to the forefront
of healthcare practice in the front oce, which is the point of care or place at which care is
provided to patients.
In the back oce, representing the administrative and nancial functions, there has been
only minimal progress in implementing technology. There is continued deployment of
enterprise resource systems, but these tend to focus primarily on business processes that are
generally considered more visible and seen as strategic, such as human resources or nancial
management.
Although most of these enterprise systems have procurement, inventory, and distribution
capabilities, they are rudimentary in scope and function, providing mainly transactional and
limited reporting capabilities. This limited functionality needs to be expanded to take a wider,
strategic perspective on the clinical supply chain.
Supply chain management (SCM) is dened as the planning, organizing, and controlling of
functions inside and outside a company that enable the chain to make products and
provide services to the customer. 1
All of the parties in the clinical chain patients, providers, materials department, vendors,
distributors, and manufacturers need to work together to create a chain that is eective, even
as each entity in the chain is ghting to carve out a prot or cost saving.
The focus on the entire supply chain, from suppliers through the delivery of care, is a relatively
new concept in hospitals; it represents a departure from the normal materials management
perspective of managing internal, discrete business functions separately. However, it
represents a major opportunity for patient value enhancements, as other industries have
learned over the last decade. 2
Optimizing the supply chain is important, because pharmaceutical supply and materials
expenses consume approximately 35 percent of hospital expenditures in most organizations.
When accounting for all supply chain expenses, including the administrative cost of procuring,
receiving, and administering the chain, total expenses for this area can account for nearly 43
percent of all hospital expenses.

THE PATIENT EXPERIENCE SUPPLY CHAIN

Because hospitals have tackled a number of other automation projects with easier returns on
investment, supply chains for clinics and hospitals now are primed to begin the transformation
that most other consumer-based industries have undergone in the past 20 years. This area,
known as supply chain technology, has yet to receive signicant attention in hospitals. In the
healthcare industry, SCM technology has been widely used by medical supply manufacturers
and large distributors, but has yet to trickle down the chain into hospitals and to the point of
care.
In other industries, such as manufacturing, automotive, and retail, there has been signicant
deployment of supply chain management systems. However, hospitals have not signicantly
adopted the majority of these technologies, and they remain far behind in scope and
sophistication compared with virtually every other industry.
A meta-search of healthcare information systems books published in the last 5 8 years shows
very little coverage of supply chain systems, their importance, or their future. Even when
supply chain technology topics were addressed in publications, they were discussed in the
generic sense, mentioning the most common functions of automating inventory control,
purchasing, and receiving.
Advanced texts on supply chain management and technology hardly ever mention the hospital
industry in cases or context. Regardless of the current state of hospital supply chain technology,
the direction is clear even though the pace of change is not.
While the hospital industry has unique concerns and challenges, the basic requirements
remain the same in all industries; that is the need to predict the right location, the right price,
the right time, and the right products.
That suggests that hospital SCM systems will evolve as they have in consumer-driven and
manufacturing industries. The only unknown is the timing of when individual hospitals will
begin this evolution, which will partially be based on each organizations nancial condition
and the vision of their executive and operational leadership teams.

THE PATIENT EXPERIENCE SUPPLY CHAIN

EVOLUTION OF SUPPLY CHAIN TECHNOLOGY


Consumer-driven industries have led eorts to develop and deploy enterprise systems and
associated supply chain technologies. Historically, the scope of enterprise systems has focused
on automating specic transactions, such as order processing and invoice generation. The
initial spotlight on automation during the 1960s through the 1980s saw information
technology primarily as a means to reduce costs and improve operational eciencies.
This early focus on internal activities, eciencies, and execution resulted in some early success
in minimizing costs. When enterprise resource planning (ERP) systems were rst being
introduced, they were seen as the way to handle large volumes of enterprise data in terms of
sales transactions, materials masters, and other manufacturing and sales data required to
manage the entire business.
Since then, there has been a gradual shift away from execution towards planning processes.
New processes and technology were developed for material requirements planning (now
called manufacturing resource planning), which began the shift towards better planning of
production and inventory requirements to manage logistical operations (now called supply
chains). The continued evolution towards MRPII was an extension of this focus on planning.
During the last decade, SCM technology began to focus on planning and eectiveness instead
of execution and eciency.
Business process re-engineering and total quality management helped force a process view
of the enterprise, and prompted companies to start looking not only at inputs but also at
outputs, as well as the processes used to link the two.
Advanced planning systems (APS) were the rst to focus on areas such as production
scheduling, demand forecasting, capacity planning, and network optimization. Customer
relationship management (CRM) emerged and began to focus on capturing all customer data
in one location to improve call center management, sales force automation, and marketing
automation.

The focus on the entire supply chain, from


suppliers through the delivery of care, is a
relatively new concept in hospitals

Now that operational and tactical processes have been addressed, SCM technology will begin
to focus on what the software industry calls demand-based systems, which include predictive
modeling, data mining, and business intelligence. These systems continue the evolution
towards more strategic planning solutions for SCM optimization because they help focus rms
on eectiveness and margin enhancement.

THE PATIENT EXPERIENCE SUPPLY CHAIN

CLINICAL SUPPLY CHAINS


But where are clinical supply chains in this evolution?
While hospitals have focused on bringing decision support to clinical practitioners, there has
been a general neglect of management systems to support supply chains. Recent research on
supply chain business practices was performed by the author at several hospitals throughout
the United States. The research found that fewer than 25 percent of hospitals use statistical
forecasting to support inventory planning and replenishment.
If forecasting was performed at all, the most common methods were using the ERP systems
auto-forecast or simple trending through conventional spreadsheet analysis. The inability to
accurately forecast supply usage and convert such predictions into an automated procurement
and replenishment plan results in sub-optimal, manual, and inaccurate processes. The survey
also found fewer than 10 percent of hospitals are using inventory optimization techniques to
manage inventory. Among surveyed hospitals, no formal collaborative forecasting, planning
and replenishment projects were under way.
The most cited reason for lack of tighter collaboration and integration was trust with key
vendors and distributors. Collaborative processes that stretch beyond organizational
boundaries are an initial step in reducing expenses throughout the entire chain.
Hospitals have not widely deployed point-of-use systems for managing supplies, mainly
because of capital costs and systems integration issues with supporting systems. Surveyed
hospitals also indicated a high degree of interest in using radio frequency identication for
managing key drugs and materials, but none of the facilities had such a system in place. The
facilities exhibited a widespread redundancy in systems, especially on the patient billing side.
Most hospitals use one system as their primary billing system, and use their ERP system for
managing supplies and inventories, thus creating the potential for re-keying data or hard-wired
integration between systems. Based on these ndings, hospitals and the healthcare industry
generally lag signicantly behind other industries in deploying management systems to
support supply chain management.
Most hospitals still have the mindset of capturing transactions and have not yet made the
mental leap of seeing an optimized supply chain as a tool for competitive advantage.

THE PATIENT EXPERIENCE SUPPLY CHAIN

AN EVOLUTIONARY MODEL FOR HOSPITALS


Figure 1 shows a theoretical evolutionary model of development for hospital supply chain
technology.
Nearly 10 years of research into more advanced supply chains, like aviation and industrial
manufacturing, suggests that hospital supply chains will move in a similar pattern.
Directionally, SCM technologies will focus more on becoming strategic, enhancing planning
and eectiveness (in this gure, moving up the y-axis of the model), and less on the more
tactical processes of automation and eciency. On the x-axis, hospital technology generally
will move through three phases as hospitals become strategic.
This three-phase approach was rst discussed in literature to represent how technology is
changing the worlds most successful consumer-driven value chains.
Most hospitals, including the largest and most advanced hospitals, are only in Phase 1 of
development on this evolutionary model. During this stage, there is a strong emphasis on
automating the key business processes and transactions. Ensuring that procurement sta are
using electronic requisitions and purchase orders and that electronic order entry is being used
for supply requests are examples of this focus on transaction automation.

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In many hospitals, paper requisitions remain the norm, but they get in the way of maturing
supply chain technologies. This is a necessary step to create a transaction history, which is a
requirement for organizations as they move to subsequent phases and need to rely on this
information for analysis and intelligence.
Also in Phase 1, hospitals will explore limited use of electronic data interchange (EDI) with key
vendors or distributors. Typically, this means that of the most common EDI transaction sets,
only one or two are commonly in use, such as EDI 850 for purchase orders.
Additionally, there is a general lack of trust in key vendors and distributors during this early
phase of development, so technology strategy is not focused on building collaboration or using
electronic commerce to bridge processes.
Finally, the overall technology is focused on managing and minimizing supply costs, which
produces a strategy involving centralization and automation. While Phase 1 produces stable
results in the supply chain, there are no stellar performers. During Phase 2, there is a signicant
amount of transaction history that has been captured, typically about two to three years
worth.
Hospitals that have reached this phase want to use this data in creative ways and replace
manual, people-intensive processes with more intelligent system processes. Using advanced
analytical systems, such as forecasting and predictive modeling, supply chains can make more
intelligent replenishment decisions, can optimize inventory levels, can analyze spending
patterns in key categories, and can track performance metrics in signicantly greater detail.
Hospitals also begin to value collaboration with key suppliers and distributors and expand the
use of electronic data interchange for more than one or two transaction sets.
Typically, EDI progression in Phase 2 supports several transactions, such as EDI 840 (request
for quotation), EDI 843 (response to RFQ), EDI 850 (purchase order), EDI 855 (purchase order
acknowledgment), EDI 856 (advanced shipment notice), EDI 870 (order status report), and EDI
810 (electronic invoice).
Additionally, hospital supply chains in this phase will start to explore the use of broader ecommerce tools. The initial use of XML in collaborative planning and forecasting processes for
example and Internet-enabled e-procurement and online catalogs for suppliers are ways in
which hospitals will move beyond EDI towards more scalable, exible Internet technology.
Overall, the technology strategy in this phase focuses hospital management systems on
optimization.
As hospitals progress to Phase 3, there is a much higher concentration on collaboration and
integration, both of internal business processes and with external parties in the supply chain.
While supply chains tend to focus inwardly on supply costs and eciencies in the rst two
phases, there is a heightened focus on alignment with the revenue cycle during this phase.
Ensuring seamless integration of the supply chain and the revenue cycle is vital to obtain higher
eectiveness. Tracking a supplys history into the chain, ultimately ending at consumption or
the point of use by a specic patient is important in aligning revenue and supply processes, as
well as reducing system redundancies.
In Phase 3, hospitals and suppliers become integrated through systematic processes and
technology. For example, consider an environment in which a facilitys patient acuity or

THE PATIENT EXPERIENCE SUPPLY CHAIN

procedural case mix changes; analytics would automatically suggest dierent buying and
replenishment plans, and key suppliers could be instantly alerted to this change.
Plans are adjusted, causing fewer inventories to be held in the chain, reducing expenses and
ensuring strong collaboration with all parties. While such systems seem futuristic, they are in
use today in many manufacturing industries.

The focus on the entire supply chain, from


suppliers through the delivery of care, is a
relatively new concept in hospitals
Technology used during this phase helps support many advanced decisions that are today seen
as unpredictable. For example, a hospital will have the capability to instantly determine how
many items to purchase, how and where the product should be stored, key timings in the chain,
which vendor they should use, what the patient chargeable price should be, and what the
overall nancial margin impact will be on the chain.
Most of these questions cannot be answered by most hospitals that are in the rst two phases
of the evolutionary process. Most of the hospitals in the U.S. today are still in Phase 1 of this
model, with very few at the early stages of 2.
Many have not focused their limited IT resources on the supply chain, but that will begin to
change as hospitals begin to use their supply chains as a competitive tool.

THE PATIENT EXPERIENCE SUPPLY CHAIN

MORE COMPREHENSIVE SYSTEM


As hospitals begin to move beyond Phase 1, they will need to develop a more comprehensive
SCM technology solution, with integrated systems and functionality to better support supply
chains.
As of today, there does not appear to be a single technology vendor that oers the
functionality required in all areas of the chain to move toward Phase 3. Most integrated
systems, such as ERP vendors, attempt to provide limited scope in many areas, but they do not
oer rich content or sophistication in most of them. Many of the point solutions or niche
technology vendors oer sophisticated tools, but only in one or two areas.
Consequently, the optimal management system will probably be composed of several tightly
integrated solutions that have key functionality in optimization and analytics, collaboration,
integration, and performance reporting.
Regardless, it will be up to supply chain and hospital executives to create a technology strategy
to help their organizations evolve to subsequent phases.
Figure 2 shows the components of an optimal SCM management system. Optimal
management systems will have an analytics layer that helps drive analysis into all core business
processes, such as spend analysis by commodity or category; forecasting on supplies; and
inventory optimization in materials storage and warehousing.

THE PATIENT EXPERIENCE SUPPLY CHAIN

This analytics layer helps to produce real-time intelligent analyses, reducing the need for
extracting large amounts of transactions, importing data into spreadsheet systems, and
generating one-time analyses that are manual and time-consuming. These systems also will
have a collaboration layer that supports external business processes with key suppliers, such
as e-procurement, collaborative planning, forecasting, and replenishment.
As the supply chain matures, collaboration with key vendors and partners will become
commonplace. Similarly, these systems will have integration layers that ensure complete
alignment with revenue cycle systems and processes as well as underlying ERP solutions.
Integration between the charge description master and patient billing systems, and the
inventory management and materials costing system, is necessary to ensure full capture of all
revenues and expenses. To aid in analysis, these systems will need a performance reporting
layer, supported mainly by a graphical user interface that highlights key performance metrics
and, decision support.
Finally, these systems must possess technology capabilities that concentrate solution
functionality on each of the key areas that support optimization and collaboration. These
include warehouse management, e-procurement, demand planning and forecasting, use of
multidimensional planning, real-time inventory management, including RFID where
appropriate on select materials and equipment, and enhanced exibility in modeling the
supply chain to meet desired results.
Potential obstacles that stand in the way of the development and delivery of this integrated
supply chain management system are numerous and well documented. There are literally
dozens of impediments, including the lack of nancial resources, lack of physician sponsorship,
too many competing interests, low prioritization from IT, and lack of leadership and vision from
supply chain management. However, the two most signicant, yet manageable roadblocks, are
trust and discipline. Trust must be broadened internally between the various functions in the
hospital; more than that, trust must be engendered to share information openly with external
vendors and distributors.
The movement towards e-procurement and other Internet enabled processes linking multiple
parties requires signicant trust with key business partners. Hospital supply chain executives
have historically lacked this trust. Additionally, the lack of disciplined strategic thinking in
materials management has limited the deployment of SCM technology.
Disparities in disciplined thought to build a technology plan, to build required business cases,
to explore new technologies, and bring them into healthcare, and to take a disciplined
approach to implementing and following through has contributed to the quality and
robustness chasm in SCM technology that exists between hospitals and other industries.

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10

CONCLUSION
Hospital nancial operating margins continue to be negative or marginally positive, forcing
facilities to look at all opportunities for reducing costs and enhancing revenues.
As clinical supply chain management focuses on becoming more strategic and eective, the
management systems must evolve substantially. Regarding the evolution of supply chains,
hospitals lag signicantly behind other industries in deploying advanced management systems
to drive supply chain optimization.
Hospitals must begin to value the supply chain as a potential tool for competitive advantage
and focus on management systems in this area if they are to catch up to other industries or
make progress. Also, hospitals need to shift their internal information technology strategy to
focus more resources and vision on the supply chain.
CIOs and their sta must become more engaged in dening SCM business processes and
performance metrics, and helping to align the SCM technology strategy and respective
roadmap accordingly.

SCM technology will begin to focus on what


the software industry calls demand-based
systems, which includes predictive modeling,
data mining, and business intelligence.
Moreover, an integrated portfolio of management systems must be deployed to achieve the
vision of an optimal SCM system, because it is highly unlikely that a single vendor will be able
to provide advanced functionality in each of the areas specic to the hospital industry.
This integrated approach requires an organization to prioritize functionality and establish a
single supply chain technology strategy, knowing which areas will add the highest value for
each individual hospital.
Finally, this integrated SCM system must focus on collaboration, optimization, planning, and
eectiveness. Opportunities exist for signicant cost reductions and revenue enhancements,
just as they do in other non-healthcare industries, if they are pursued ambitiously and with
vision and discipline.
If executed appropriately, based on experiences from implementations in multiple industries,
hospitals can expect signicant improvements in performance, such as a 15 percent to 20
percent decrease in inventories, an improvement of several percentage points in revenues, a
10 percent reduction in returns, and signicant declines in the cost of goods sold.

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