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To Cut Hospital Costs, Leverage Vendor Relationships

 |  By kminich-pourshadi@healthleadersmedia.com  
   May 09, 2011

Once the ink dries on your vendor contracts, do they simply get filed away? Many financial leaders would likely respond "Yes", but there's more to supply chain management than getting the best price. Actual supply chain management requires cultivating relationships that can reduce revenue cycle expenses and help a hospital or health system achieve strategic goals.  


What is SRM?

Supplier relationship management is an approach to managing business interactions with the vendors. Practiced by many in the business world, it is rarely used in healthcare, though with a larger number of providers using Lean and Six Sigma process improvement initiatives, the numbers are growing. The goal of SRM is to make the processes between an enterprise and its suppliers more streamlined and efficient. SRM encompasses both business practices and software, and falls under the information flow area of supply chain management.

SRM creates a common communication and goal-setting structure between the hospital and supplier, both of whom frequently use different business practices and terminology. In doing so, both the hospital and the vendor increase the efficiency in acquiring goods and services, managing inventory, and processing materials. Advocates of SRM say it lowers production costs and improves quality.

How does it work?

Intermountain Healthcare, a 24-hospital, $3.6 billion net revenue Utah-based healthcare system, embraced SRM eight years ago as part of its supply chain management. Brent Johnson, vice president of supply chain and imaging services and chief purchasing officer, says he found that building a relationship with his vendors opened up a variety of opportunities and cost savings.

Johnson joined Intermountain Healthcare in 2003 after working in the utility industry. He was brought aboard after McKinsey Consulting completed an analysis of the large health system and recommended that senior management bring in a supply chain leader from outside the healthcare industry to spark process innovations.

"When I got to Intermountain, I asked who the top 10 biggest suppliers were and who was managing them. They didn't have an answer," he says.

The system had a $1 billion annual non-labor spend, yet no one was managing the top contracted vendor. The system was overrun with vendors, working with nearly 12,000. Moreover, contract negotiations and vendor selection (often based on physician supplier preference) was done by a variety of personnel at each hospital.

"When you let personal preferences drive you, you'll pay too much; if you don't have standards, you pay too much; and if you don't have leverage, you'll pay too much," says Johnson.

Getting the situation under control would be a large undertaking, but Johnson added to the task by pledging to leadership that he'd knock $20 million off of the bottom line each year over four years. To help him achieve this $80 million goal, 25 new hires were added, many of whom were brought in to help with analytics, strategic sourcing, and supplier relationship management.

Intermountain centralized the ordering and began managing each supplier based on why it was chosen. As part of their supplier relationship management, Johnson and his team communicated what the goals of the system were and they looked for opportunities for the vendors to work with them to achieve success.

For instance, by working with a sterilization vendor for six years to improve outcomes, Intermountain reduced costs by $2 million per year, and reduced medical waste. Both companies developed opportunities to share information and tracked monthly performance metrics against annual goals, Johnson says. 

Another instance where mutual goal setting is paying dividends developed over a four-year period of working closely with a manufacturer of smart infusion pumps; Intermountain reduced costs, increased quality, and reduced medication errors. Both companies committed resources to develop an improved pump with more advanced technology. 

Some financial leaders may believe that SRM can only work if a facility has the financial clout of an Intermountain. However, smaller facilities can also reap the benefit of creating a strategic relationship with a key vendor.

At 69-bed Gordon Hospital in Calhoun, GA, it took a new physician to prompt a review of vendors. Gordon Hospital, which has net revenue of $85 million annually, had recruited a young, tech-savvy urologist who encouraged the hospital to reassess the number of vendors and products it was using, explains Cory Reeves, CFO at the hospital.

Reeves, along with Pat Aaron, the director materials management, decided to work with one vendor representative to do a full assessment of the inventory. The assessment revealed that the hospital was overstocking—keeping some 31,000 different products on hand. Through a process I'll explain momentarily, it narrowed that list to 10,000, which yielded annual savings of $16,000. 

"$16,000 is a nice chunk of change for our hospital, Cook [Group Inc., the vendor] also helped us to look at ways we could reduce our overall inventory," Reeves explained. "Actually, they helped us reduce our inventory by 75%."

To accomplish this, they brought together a physician—in this case the urologist that had sparked the hospital's effort—and the vendor who worked to assess which products were necessary. For instance, the physician reviewed the materials for a specific urology procedure and determined that the hospital was using two products by one vendor, when a single product by another vendor would work equally well.

"We were able to reduce our inventory, and our costs, and pass the cost savings onto the patients," explains Aaron.

Although Gordon Hospital works with a group purchasing organization for many of its supplies, their process assessment clarified that it was using too many vendors. A situation they corrected by narrowing five vendors down to a single vendor. The change has made the process of ordering and tracking supplies easier and more efficient.

"Having a vendor get so highly engaged in what our needs are and helping us [reach our goals] made us feel like a much bigger fish, and it's saved money," adds Aaron.

Though Reeves and Aaron may not put the formal tag 'supplier relationship management' on their interaction with the vendor, Gordon Hospital applied one of the key principles to SRM: It leveraged the vendor's expertise to help attain the hospital's goal of cost reduction.

 

Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
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