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3 ways to improve supply chain performance in & out of the hospital

From ineffective inventory management to lack of standardization, health system organizations face many challenges in managing their supply chains. However, by ironing out some of these supply chain management challenges, hospitals, health systems and other providers can become more efficient and free up cash flow.

Here are three ways to help build a top-performing supply chain:

  1. Align around a common goal
  2. Use data analytics to improve inventory management
  3. Standardize products across care sites

The supply chain is a prime target for health system leaders looking to cut costs. This isn’t surprising given the large portion of a hospital’s operating budget dedicated to the supply chain. Outside of labor costs, the supply chain is often the second biggest expense for hospitals, according to the Healthcare Financial Management Association.1

Although health system executives know it’s important to effectively manage supply costs, the complexity of the supply chain prevents many organizations from maximizing savings in this area.

How can health system leaders reduce cost and excessive waste in their organizations’ supply chain? By leading change across the organization through alignment around a primary goal: improving inventory management through standardization of products.

1 | Align around a common goal

Before beginning any efforts to improve the supply chain, it’s vital for health system organizations to establish a main goal. This is especially true on the non-acute side, where the diversity of specialties, recent acquisitions and hundreds of facilities spread over a broad geography can complicate supply chain management.

“In many non-acute supply chains, it’s not super clear what the goal is,” said Brad Hilton, Senior Vice President of Customer Experience at McKesson. “Sometimes people say the goal is the lowest cost possible, sometimes they say the goal is the best patient outcomes possible, and sometimes they say it’s to be the most provider-centric. I don’t think you can maximize all three of those at the exact same time.”

Many health system organizations partner with experts, such as those from McKesson, to help implement efficient supply chains. However, even with outside help, providers may see their efforts to correct supply chain inefficiencies fall short if they aren’t aligned around a common goal.

“Nobody really wants to change unless everyone understands the goal and is rowing in the same direction,” Mr. Hilton said.

health system business meeting

2 | Use data analytics to improve inventory management

Ideally, hospitals and other providers would always have enough supplies to meet demand without carrying excess inventory. However, this is rarely the case.

Many providers err on the side of excess to ensure they’ll have supplies available when they need it. Buying in bulk pushes costs higher, as products sometimes expire before they can be used. For hospitals with lean inventories, drug shortages, natural disasters and other unexpected circumstances can leave them in a difficult position.

To strike the right balance when stocking medical supplies, healthcare providers should begin by examining the most-recent inventory report, according to Barbara Giacomelli, PharmD, Vice President of Strategy, McKesson RxO®.

“Typically, healthcare organizations will do one to two inventories a year,” she said. “The report can show you where you potentially have too much inventory and where you have inventory that is at risk of expiring and being obsolete.”

After examining the inventory report, the next step is to use data and analytics to help ensure supplies are being replenished in a more efficient, less costly way. For example, McKesson offers a subscription service that gives customers access to a robust data analytics tool that looks at purchasing, reimbursement and other trends.

“There’s many sources of data in a healthcare organization, and pulling that data together in an easy-to-use fashion is important when you’re trying to manage your inventory and your supply chain process,” Dr. Giacomelli said.

The use of aggregated data offers health system leaders visibility into utilization and spend and enables them to make more informed purchasing decisions and track performance. This insight is critical for creating a more efficient supply chain. It’s also crucial for healthcare organizations to have a distribution model that enables them to order the exact quantity of supplies they need. This is especially important for clinics and medical offices with limited storage space.

“Over 75 percent of what we process for our primary care customers is in low unit of measure,” Mr. Hilton said. “That allows them to not tie up inventory … and to really hit the right quantity that they need to take care of their patients, while not occupying too much valuable real estate in the supply room and too much working capital in inventory that they don’t need.”

Dr. Giacomelli noted there is more than one way to improve inventory management, and providers will need to use a variety of strategies. For example, she said effectively managing high-cost therapies that have unpredictable demand requires a different inventory management strategy than other types of pharmaceuticals. She recommended a consignment model to help improve inventory efficiencies for high-cost drugs.

“Consignment is a strategy … for when you want to have a drug available, but it’s expensive,” she said. “A distributor provides the drug, but the hospital doesn’t pay until they’re actually used.”

3 | Standardize products across care sites

Standardizing medical and surgical supplies is an important part of driving down supply chain costs because product variation pushes inventory costs higher. However, as health systems expand their reach by adding new physician practices and other facilities, they struggle to standardize products across care sites.

Product standardization can be a daunting task for health system supply chain leaders, who are trying to manage the process at both acute and non-acute facilities that are spread over a large area and use disparate operating systems. However, it must be done to create a more efficient supply chain and to knock back costs.

“Without standardization you can’t begin tracking metrics to know where the outliers are,” Mr. Hilton said. “Without standardization it’s very difficult to use automation.”

In non-acute facilities, it is highly likely that a clinician is managing the supply chain. Standardizing products means less inventory for that clinician to manage. It also reduces clinical variation. Consolidating products into fewer SKUs means that clinician has less to manage, leaving more time for patient care.

Because the process is so complex, health system leaders may feel defeated before they even begin. To overcome the inertia, Mr. Hilton recommends taking the process slow and being strategic about which changes to make.

Recommended steps include reviewing purchasing data across care setting by specialty. Decide on a product cost strategy – will products be standardized based upon cost source or through clinical usage? After evaluating products, be sure a formulary is loaded into purchasing programs to lock in the approved items. Finally, track compliance across all care settings and specialties.

“It sounds pretty overwhelming, but you’ve got to chip away. Pick one, two or three areas to standardize and build on that,” he said.


A large portion of a hospital’s operating budget is dedicated to supply chain, making it a prime target for cost-cutting initiatives. Creating a more efficient supply chain is challenging for both acute and non-acute providers, but they don’t have to tackle the problem alone. Many healthcare organizations are partnering with experts, such as those from McKesson, to maximize savings in this area.

1: HFMA Value Project Report: Strategies for Reconfiguring Cost Structure.