Home' The Source : Third Quarter 2014 Contents I
ncreasingly, consumers and pay-
ers are requiring more value from
healthcare providers. As providers
focus on delivering value, many are
looking at their supplier portfolios
to lower costs. Clearly, quality cannot be
significantly compromised in the pursuit of
cost reduction without diminishing value.
Fortunately, the pool of viable alternatives
often is large enough to allow for leverage
in pricing negotiations.
The balance between quality improvement
and cost reduction is the fundamental prob-
lem supply chain managers must solve on
a daily basis. With constraints everywhere,
this is where the services of your GPO—
HealthTrust—is essential. Price reductions
always have a limit, and savings often are con-
tingent on clearing implementation hurdles.
Supply chain management must carefully
consider changes to purchasing procedures,
as well as education on those procedural
changes, because force of habit and personal
preferences regularly compete with a new
As a result, supply chain managers should
prioritize projects based on the greatest sav-
ings available in the shortest amount of time.
Data is required to determine where projects
fall in a matrix of size and speed to savings.
To aid in this process, here are three data
Effective spend reduction requires
continual review of the AP file. It’s im-
portant to minimize risk by ranking
projects by item category (e.g., physician
preference items and commodities) and
by market scope (how easily and readily
alternative supplies can be substituted).
Spend management works best when substi-
tutes are properly assessed. A supply chain
manager should create clusters of spend
organized both by the ability to substitute
and the risk of substitution. (See “Substitute
Assessment Matrix” below.)
When a supply category is low on risk
and high on ability to substitute, price re-
ductions are usually small and short-lived.
Commodity price fluctuations must be
monitored and periodically reassessed.
Examples in this spend cluster include plas-
tics and many consumables.
When the substitution risk is medium,
cost reductions require greater planning and
less frequent switching to achieve savings.
When there are many substitutes, focus-
ing more volume on one source allows for
greater discounts and economies of scale.
In this scenario, the selection of a preferred
vendor is recommended. When there are
few substitutes, the development of a stra-
tegic relationship and/or the selection of a
direct source rather than a vendor source
are advised. Cogeneration of power and
facilities management are examples in this
When supply-related risk is high but
substitutes are readily available, a sourcing
portfolio should be developed. The pricing
sacrifices caused by spend consolidation are
offset by the reduction in risk of supply or
Finally, when supply-related risk is high
and substitutes are few, the best course
is to engage in recovery and contingency
The ability to tie together supply
chain information with clinical care
patterns allows managers to search
for suboptimal utilization and cost reduc-
tion opportunities. Examples of this kind of
analysis include mash-ups of clinical bench-
marks and spend analytics dashboards, such
as HealthTrust’s inSight spend analytics
tools. Distributors also offer data and tools
that illuminate opportunities to substitute
lower-cost alternatives in high-volume
areas, such as kits.
Utilization analytics that result in cost re-
ductions are dependent on the involvement
of managers in the pharmacy, operating
room, ED, ICU and other departments.
This kind of analytics has resulted in the
development of items such as standardized
Savings from utilization analytics can
accrue in areas beyond the core supply. For
example, the background work required
to maintain supply stock levels, order and
schedule can be streamlined around a sup-
ply initiative. Although these savings do not
directly hit the supply budget, labor costs
are reduced and efficiency is improved.
Patient flow and quality improvement also
can be realized. It’s important to capture
these more distant cost savings in the supply
chain initiative scorecard.
Better Data or
Improving quality and cost outcomes through stronger
Continued on page 10
SUBSTITUTE ASSESSMENT MATRIX
High Ability to
Low Ability to
SOURCEBOOK PURCHASING POWER
8 The Source | Third Quarter 2014
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