Lowering costs in the health care supply chain begins at the negotiating table. Multiple vendors are considered and clinicians are often deeply involved in product selection. The volume commitment is factored in, and the price is set. Supply chain places orders and the savings begin—right? Well, maybe.
“In my experience, the contract is just the beginning of savings, not the end,” said Bejan Shamsy, senior vice president, procure-to-pay solutions at Vizient. “A hospital must receive the lower contract price at the point of purchase, or there is no savings. Everything must align in a transaction for the savings to be realized. Getting the right contract price and lowering the total acquisition cost for supplies are key to optimizing a provider’s supply chain operations.”
In evaluating Vizient customer data, a typical hospital with $100 million in supply chain spend generates roughly 53,000 purchase orders (POs) annually. Of those, as many as 60 percent are issued, or even worse, paid at the wrong contract price. When an invoice is received from a supplier, and entered into a hospital’s Materials Management Information System (MMIS) and matched against the PO with the wrong price, the transaction is suspended from payment. It then falls into a category known as a price-match exception. These discrepancies require a tremendous amount of time for supply chain staff to manually research, reconcile and resolve. Fixing each discrepancy can cost a hospital approximately $20, according to a Gartner study entitled, The Redesign of B2B ‘Order-to-Cash’ Processes. For a hospital generating 53,000 POs annually, of which 60 percent contain the wrong price, this can equate to $636,000 in lost efficiency.
“The MMIS systems commonly used by hospitals today originated from the manufacturing sector and were designed to manage simplified transactions and pricing structures. They were never designed to handle the intricacies and complexities of the transactions and pricing in health care today,” said Shamsy. “That’s where a robust e-Commerce strategy comes in, to bridge those gaps.”
The eCommerce Exchange from Vizient, a proprietary e-commerce platform, dates back to 2000, and it currently processes approximately one million transactions each year. Looking at the data, patterns begin to emerge that help explain some root causes of price-match exceptions. One of the most common reasons is a lack of integration between a hospital’s MMIS system and the GPO contract catalog. As a hospital changes product standards, moves from vendor to vendor, or selects a new pricing tier with the same vendor, the pricing in its system remains static and is not updated to reflect these changes. As a result, many POs contain wrong prices.
Alignment between the PO price and a hospital’s current GPO contract portfolio pricing is imperative if savings are to be realized. Supply chain transactions not only need to be automated, they need to be validated in real-time against a hospital’s contract portfolio to ensure that the hospital gets the right price at the point of purchase.
Shamsy offers supply chain leaders these four tips when evaluating the effectiveness of an e-commerce solution:
Tip #1: Understand where procurement staff spend their time
“It’s important to know what tasks are taking up most of the staff’s time,” said Shamsy. “When assessing hospital operations, we typically see that a majority of staff time is spent on manual order processing and dealing with post-order price exceptions. This time-consuming work drains hours that could otherwise be spent on more strategic, higher value-added projects. Knowing where the largest inefficiencies are in current operations is the first step in the right direction.”
Tip #2: Review the percentage of automated POs
“This number is usually a surprise for supply chain leaders. Most believe they are close to 80 percent EDI PO automation, but what we find is that the number is usually less than 40 percent,” said Shamsy. “When we see this, we make the supply chain staff aware of the potential to automate more POs with vendors they’re utilizing. Our goal is to help get that number closer to 85 percent. Automating POs, even with suppliers that aren’t EDI-capable via virtual EDI, not only reduces transaction processing time, it also helps to identify and minimize price-match exceptions.”
Tip #3: Fix the root causes of price-match exceptions
Resource constraints are common in the supply chain: purchase transaction volume grows through increased supply demands; hospitals go through acquisitions and mergers; and price management becomes more complex due to changes in product standards or vendor acquisitions. Yet, the headcount in the procurement department often stays the same. The focus remains on product fulfillment to avoid disruptions in the flow of supplies. So rather than determining the root cause of a recurring price discrepancy, staff will override and approve an exception, only to face it again on a future transaction. Shamsy notes that automation alone will not resolve price discrepancies, “At a certain point, it requires people to use critical-thinking skills to research and resolve root causes of price exceptions to prevent future occurrences,” he said.
Tip #4: Maximize utilization of prompt-pay discounts
If supply chain staff issue several manual POs with the wrong prices, they will spend significant time reconciling price-match exceptions. This prevents invoices from being paid promptly, putting an organization at risk for a credit hold. More importantly, they miss potential early-payment discounts. A hospital can take maximum advantage of its contracted prompt-pay discounts with an effective e-commerce strategy that focuses on automating POs and avoiding price exceptions.
Hospitals can save as much as 7 to 10 percent of their supply chain spend by implementing these tips. Staff can be more productive because automation is handling a higher percentage of transactions. And, when root causes of price-match exceptions are addressed, future financial losses can be avoided and replaced with increased usage of prompt-pay discounts.
For more information about how Vizient can help you improve efficiency, realize greater savings and attain long-term supply chain goals, contact Bruce Moilan.