Streamlining the supply chain has become an important cost control strategy for hospitals and health systems. Yet many physician groups have been slower to grasp the opportunities stacked on supply room shelves.

It is true that medical supplies generally make up less than 5% of a physician group's expenses. But the real savings don't necessarily come from better prices on bandages. Rather, it is the manner in which supplies are ordered, inventoried and controlled that can have the biggest impact on overhead.

"Practices have a tendency to focus on pricing and don't always take into consideration the labor component that is involved in inventory and order management," said Greg Colizzi, vice president of marketing for corporate accounts with McKesson Medical-Surgical.

"In fact, there are a wide range of materials management applications out there that can make those processes far more efficient. With labor costs representing at least 60% of practice expenses, it makes a lot of sense to look for ways to optimize your employees' workload."

Technology-driven materials management systems not only save time, Colizzi said, but also reduce the amount of cash tied up in excess inventory. In addition, better inventory control makes life more predictable for clinicians who actually utilize the materials.

Scott McDade, national vice president, health systems and corporate accounts with McKesson Medical-Surgical, said groups can also pursue product standardization, private label conversion and one-stop-shop opportunities to further ratchet down materials management costs.

'Just in time' versus 'Just in case'

Electronic inventory and ordering systems represent the backbone of modern supply chain and materials management. Although sophisticated, stand-alone systems are readily available, inventory management capabilities embedded in many practice management and accounts payable applications are more than adequate for most small-to-medium sized practices, McDade pointed out.

In addition, most major medical supply firms provide customers with a range of powerful, web-based tools to help streamline inventory and orders. These built-in applications can suggest orders based on purchasing history, monitor inventory and flag expiring or expired products.

"Unfortunately, a lot of practices don't even know these systems exist," McDade said.

The McKesson SupplyManager™ platform, for example, can help groups establish formularies and also facilitate order consolidation. Another feature, Colizzi said, is a spend manager that allows managers to pre-load maximum monthly budgets for a specific cost center, then monitor the drawdown as supplies are purchased throughout the month.

Hand-held scanners are also used to expedite inventory management and ordering. An employee simply walks through the supply room, scans bar codes on items that need replenishment, plugs in the number of units required, then docks the scanner to upload the order.

Beyond boosting efficiency and productivity, Colizzi said a primary goal in utilizing automation is to avoid tying up cash in excess inventory. Put another way, the tools help groups shift their supply mindset from "just in case" – e.g., maintaining an excess of materials in anticipation of some unspecified and unlikely spike in demand – to "just in time," a leaner approach that more closely tracks actual product utilization.

Standardize and save  

Harnessing an electronic inventory management system will also help practices standardize around specific product brands or types in order to improve purchasing power. Standardization, utilizing private label products, and creating purchasing formularies are especially important today, McDade noted, given the wave of provider consolidations and disparate purchasing habits of newly combined entities.

The ability to "one-stop-shop" through a single distributor can similarly produce savings in terms of time and efficiency, Colizzi said.  A key goal is to minimize inventory costs by improving just-in-time replenishment. With all suppliers, McDade pointed out, it is important to monitor invoices to ensure that orders don't include any hidden, additional costs, such as delivery or order fees.

"You pick the best product, you have everybody stick to it through a formulary and then you work on the price," he said. Last but not least, ensuring proper supply labeling and store room organization will not only make it simpler to track inventory, but make life easier for end-users.

"The bottom line is that there are a wide range of tools and strategies available to help even the smallest groups reduce their material expenses," Colizzi said. "But it is important to remember that while pricing and hard costs are part of the equation, the major savings come by reducing soft costs through greater efficiency and process improvement."  

McKesson

About the author

McKesson Business Performance Services offers services and consulting to help hospitals, health systems, and physician practices improve business performance, boost margins and transition successfully to value-based care.