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How Operationally Effective and Efficient is Your Supply Chain?

05/23/17

In today’s health care landscape, supply chains exist in varying degrees of effectiveness and efficiency. In some cases, a supply chain manager tries to tame rogue spend within their facility. In other cases, recent mergers or acquisitions present supply chain managers with challenges in acclimating new locations, new procedures and new people to the existing supply chain. Gaining organizational efficiency is paramount to achieving supply chain optimization.

“While cost savings are important, demonstrating operational efficiency and having the infrastructure in place to drive and sustain cost savings is even more critical for the organization,” said Sindi Kelly, senior consulting director, advisory solutions at Vizient.

Without operational efficiency and a solid infrastructure, a supply chain can suffer from challenges such as items not being tracked, not having contracts for items (or not realizing contracts exist), incorrect pricing or not having items set up in the item master.

Helping supply chain leaders achieve optimization is a key component of the Vizient Care Equation. It starts with a foundation of sound operational processes and then the addition of infrastructure and technology to ensure the appropriate level of supplies are in the right place at the right time.

According to Kelly, creating that sound foundation starts by tracking key performance indicators, or KPIs, in four major areas: sourcing and contracting, purchasing, inventory management and accounts payable. “If you can track robust data and metrics in those four areas, that bodes well for efficient supply chain operations.” 

Sourcing and contracting efficiency

One of the data points most important in measuring contracting efficiency is tracking the percentage of contracted supply spend across all GPO relationships. This allows a supply chain manager to know how much spend is being actively managed at any given time. Leading practice organizations ensure at least 80 percent of their supply spend is through GPO contracts.

Another solid indicator of efficiency is the percentage of contracts that are completed without delay.

“Obviously, their goal should be 100 percent, but if internal processes such as product conversion or legal review routinely delay the completion of local contracting efforts, that presents a clear opportunity for improvement in trying to achieve operational efficiency,” Kelly said.

The third sourcing and contracting efficiency indicator to monitor is the percentage of annual savings goals achieved. Cost reduction is a known deliverable for any supply manager and with this in mind, it’s critical to demonstrate the savings realized through supply chain initiatives. Quite simply, an efficient supply chain is one that meets or exceeds annual cost reduction goals.

“There isn't really an average benchmark for this KPI as it is entirely internal,” Kelly said. “Organizations should strive to achieve a savings target, but they also need to gain positive outcomes and operational efficiency.”

Purchasing

The purchasing realm is a critical area where supply chain leaders should monitor which processes are running smoothly and which can be streamlined. For starters, it’s imperative to track the percentage of purchases made through a purchase order. Kelly recommends an effective target is 70 percent.

“If you’ve defined a process that purchasing should follow, highlighting exceptions is a logical next step,” Kelly advises. Therefore, knowing the percent of “special” orders that take place outside of the defined process is important to remaining efficient. Hospitals will always have some amount of special orders; however, these items should account for less than 10 percent of all purchases.

It is equally important to know the percentage of purchase orders conducted electronically. Electronic ordering demonstrates an increase in efficiency as opposed to those made on paper.

“While 50 percent is good, 75 percent would be a leading practice,” Kelly said.

Inventory management

Performance indicators for effective inventory management start with the number of times inventory is turned over. Inventory turns tend to vary, with target ranges for storeroom and warehouse inventory being 18-24 months, while the OR range falls between six and 12 months.

Variance in inventory is another key indicator to track, especially if there’s a discrepancy between what is reported to be available and what is truly in stock. With good inventory management processes in place, the variance should fall between 0.5 and two percent.

Slow or no-turn inventory percentage is also an important metric to measure because it can signal a change in physician practice or product selection. Having a pulse on the percent of supplies that are not turning over can help a supply chain manager align inventory more efficiently with need.

Accounts payable

One key indicator in accounts payable is tracking the percentage of invoices paid electronically compared to a paper check, as paying invoices electronically saves time and is more efficient.

“Considering all of a hospital’s electronic purchase orders, roughly 25 percent of that is electronically invoiced. That figure needs to be closer to 50 to 75 percent,” Kelly said.  

Monitoring the percentage of invoices that are paid on time is another key metric. The higher the percentage the better, as this prevents vendors from putting supply chain invoices on credit hold and allows for prompt-pay discounts to be negotiated.

“If your supply chain team wants to be measured by success that goes above and beyond cost savings, it must first demonstrate quantifiable performance improvement in these four areas,” Kelly said. “Tracking these performance indicators is the key to seeing just how efficient your supply chain really is.”

As part of the Vizient promise to drive performance improvement in health care, the company published a white paper, “The Supply Chain Role in Supporting Exceptional, Cost-effective Health Care,” outlining how a health care organization can optimize the performance of its supply chain operations. To read more, click here.

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