By Vishal Patel, Ivalua
The healthcare industry is in dire need of change. With costs going up and reimbursements and margins going down even before Covid-19, transformation is afoot. A major area of transformation and one that this crisis has highlighted is the supply chain. The healthcare supply chain is unique in its own right but in many ways, it lags behind other industries in terms of best practices and digitization.
According to 2019 Definitive Healthcare data, analyzed by Navigant Research, US hospitals spend over $25 billion on supply chain products, operations, processes, and procedures. For the average hospital anywhere from 30-40% of overall operating costs are non-labor supply chain-related expenses. This presents a significant opportunity to reduce costs.
However, as health systems go down this road, many face a common fork in the road – Should we stick with our ERP or use a Best of Breed Supply Chain Solution. ERP provides a compelling argument as more are now in the cloud and appear to offer many of the same capabilities as Best of Breed Solutions. Often IT prefers the ERP due to the investment already made, the knowledge, the preference to keep fewer IT vendors, and more. However, is that the best path for healthcare supply chain organizations that are in desperate need to improve margins, reduce risk, while improving patient care? Could this approach delay or even put those priorities in jeopardy? The promise of the single ERP for all organizational needs has largely failed, most leading organizations are or have moved towards having a handful of platforms to serve specific needs – customers, financials, operations, and suppliers and spend.
Supply chain management in healthcare must catch-up to more mature industries such as manufacturing. This became evident across many industries but especially healthcare providers when COVID-19 struck. Many within the healthcare industry have been a little disconnected for their supply chain and supplier relationships but in recent times have turned a more critical eye toward gaining more control over the entire value-chain. More and more healthcare organizations are looking to build up their supply chain functions and as a result, are looking towards more specialized and best in class supply chain management technology.
Of course, ERPs are still valuable, as systems of record for financial and business information. Largely an internal system as opposed to a system designed for a modern eCommerce experience or to collaborate with suppliers. Also, when it comes to supply chain management, it is often added on as part of a larger ERP project and so often seems lower cost. However, customers can experience long, complex, and costly implementations and poor adoption from both users and suppliers, both leading to lower ROI and higher total cost of ownership (TCO).
One of the main goals of investing in a supply chain management solution for hospitals is to better manage and control purchasing but also provide an easy/intuitive experience so people can focus more on their jobs as caregivers. However, the system must be able to address all types of spend from basic indirect spend to low and high preference items, capital expenditure, temporary labor, etc. If not, users are likely to go “off-system”. For instance:
- If starting from an immature state, addressing basic indirect spend may be the first step. This involves building up internal sourcing expertise and better understanding and managing indirect spend. Establishing processes to identify and capture savings by category. To do this effectively, a strategic sourcing solution is likely required as ERPs typically have limitations here, particularly in collaborating with vendors. Those with enough in-house expertise can even increase self-contracting activities to provide more visibility into and control of vendor relationships.
- The next phase would likely involve tackling some low and maybe high preference items and therefore should involve more collaboration with clinicians and suppliers. Connect key IT systems so that you can leverage data wherever possible to drive better decisions around standardization. Establish a supply chain risk and performance assessment, monitoring, and mitigation plan, so that you’re not caught off-guard. Perhaps explore a self-distribution model and more transactional automation with procure-to-pay solutions.
- Finally, when the time is right and you’ve been able to automate much of the source-to-pay process, then you can engage in more supplier collaboration and innovation activities. Explore more performance-based contracts, be involved in more M&A discussions to take full advantage of scale. Establish a more advanced self-distribution model.
Overall, the big question will be what additional benefits healthcare organizations will gain by moving away from an ERP and achieving supply chain excellence through a best of breed supply chain platform. As we noted, ERPs do not do everything you want it to do and you will find higher costs, bigger challenges, and not getting business value in a time when many healthcare organizations desperately need that. Investing in supply chain technology and managing supply chain costs should be the number one priority for healthcare and supply chain leaders.
About The Author
Vishal Patel is the VP of Product Marketing at Ivalua, a leading provider of global Spend Management Cloud solutions.