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Provider Post: improving supply chain performance

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For every $1 of cost of goods, a provider organization spends $1.80-$2.00 in managing resources.

Summary: In today’s environment, organizations need to pursue even greater reductions, and many are looking beyond the cost of goods and supply standardization to the cost of supply chain operations.

Cutting beyond "staff" and "stuff"

In the post-health care reform environment, provider care organizations will need to better manage and reduce expenses.

Their two targets are labor, which makes up 50% of spend for provider care organizations, and the supply chain, representing 40% to 45% of expenses.

In other words, the option for providers has been to cut either "staff" or "stuff." For most organizations, the supply chain is the less painful of the two choices.

Provider care organizations typically order, manage and consume hundreds of thousands of discrete products from a multitude of suppliers. You can optimize sourcing agreements by:

  • Reducing acquisition prices
  • Standardizing products, using fewer brands of equivalent products through these tactics, providers are reducing annual spending by 5% to 8%.

But that’s not enough.

It’s time for provider care organizations to clearly see the changing landscape and emerging opportunities for improved supply chain management.

We offer the following insights to help you manage your supply chain more efficiently:

Considering the components: goods and operations

Total supply chain costs include two broad categories:

  • Cost of products and services. This cost includes the total acquisition cost of all products and services for provider organizations. Cost of goods, depending on which products and services are included, typically account for about 13% to 18% of a provider’s net operating expenses.
  • Cost of operations. While most provider organizations focus on the cost of goods, they don’t focus as much on supply chain operations. The costs of operating the supply chain trend to as much as 30% of a provider’s total operating expenses.

For years, the "second dollar" of supply chain costs — the actual costs that a provider organization incurs in handling and administering products and services — has been a significant operating cost not captured for evaluation like the costs of supplies or services.

For every $1 of cost of goods, a provider organization spends $1.80-$2.00 in managing resources, including process activities for ordering, receiving, inventory management, logistics, distribution, reprocessing and replenishment activities.

While the provider’s supply chain/materials management department typically accounts for much of this expense, these costs are also prevalent throughout the organization. They may be embedded within major supply consuming departments such as the operating room/surgical services and the pharmacy.

Provider operating expenses

EY - Provider operating expenses

Source: “The State of Healthcare Logistics,” University of Arkansas Center for Innovation in Healthcare Logistics, July 2009.