Sourcing Snapshot-Healthcare Purchasing Mission Statement
A major hospital in the Midwest hired a new Chief Procurement Officer, whose prior experience was working in the oil and gas sector. Upon his arrival, his first meeting was held with the CEO of the hospital chain. The CEO shared with him the high level statistics of the system. The health system had approximately $2 billion annual revenue, and with 12,000 employees in two states, making it one of largest Integrated Delivery Networks (IDN) in the Midwest, as it owned and operated 15 hospitals and 30þ clinics in this region. When the new CPO asked the CEO how much the spend under management was, the response was that there was approximately $200M in spend. “That doesn’t sound right,” he noted to himself. Sure enough, after further investigation, the CPO discovered that the total spend of the hospital was $600M! After further discussion and many meetings with stakeholders, the CPO developed a mission statement for the supply management group, that set targets for scope of responsibility and for savings.
Healthco is projected to spend an estimated $600M annually with third party suppliers. Our comprehensive Spend Analysis shows our major categories of spend (80/20) that we have across Healthco, and hence we will focus and target our strategic management on those 4 to 6 major categories with the aim of managing risk of supply and improving financial performance. The process for managing this spend today is heavily disbursed, with each business area mostly managing its materials and services expenditures independently. A significant opportunity for improved spend coordination and more sophisticated supply category strategies exists. First, we must ensure that all business areas are aware of contracts in place and are maximizing their take-up/compliance and second, since a significant amount of our spend is not covered by agreements, a clear opportunity for establishing new and smart contracts is here.
We estimate that a deliberate and focused effort to better manage our major supply categories should mitigate Supply Chain risk and yield sustainable cost savings of approximately 4–10% price improvement on the spend under review. However, the real prize will be capturing the additional 10–30% total cost improvement per above by creating deeper supplier relationships and fundamentally changing the way Healthco buys and utilizes materials and services.
The ultimate prize will not be an easy one to achieve. It requires a coordinated effort across the enterprise that relentlessly focuses on seamless execution of robust category strategies and incorporating new ways of getting work done that is driven by a structured review of existing practices and integration of leading-edge thinking. We can only achieve this level of return if we are committed to investing the time and resources required to fundamentally change our Supply Chain model. As leading change management experts are apt to quote …“The definition of insanity is doing what you have always done and expecting a different result.”
Source: Michael DeLuca, Interview by Robert Handfield World Health Congress, January 25, 2010, Dallas, TX.