Sourcing Snapshot - University of Pittsburgh Health System Reengineers Their Process

UNIVERSITY OF PITTSBURGH MEDICAL CENTER’S PROCUREMENT SYSTEM REDESIGN

The University of Pittsburgh Medical Center (UPMC) is a large hospital system with $8B in revenue, and over $1B in spending on medical supplies. The system has 50,000 employees, 20 hospitals, 5000 physicians, and 4200 beds. Two years ago, the hospital recognized the importance of supply chain management in driving operating revenue. Executives recognized that by improving profit, money could be reinvested into the hospital, drive investments in technology, and increase the number of patients who chose UPMC as their hospital of choice for surgery and care.

UPMC’s supply management team faced a number of challenges in 2009. They had uncontrolled sourcing processes, with thousands of suppliers, hundreds of thousands of transactions, and a huge manual Accounts Payable process. The procurement process produced poor data quality, and there was a need to drive more compliance at the point of purchase for physicians and doctors. Several major pain points were recognized by Michael DeLuca, Director of Supply Chain. First, data quality was poor. There were bloated line item masters data files (indicating that the number of products purchased was massive, with more added daily.) All purchase requisitions were paper-based and were handled manually through Accounts Payable clerks. Second, there was poor supplier connectivity. Most transactions were manual, even though many suppliers had websites and online catalogs (including Grainger, Staples, HP, Sysco, and GFS).Third, the user experience for procurement was not effective. One physician complained “I can go online to Amazon and review what I want to buy before Christmas – why can’t I have the same experience for medical supplies? I can’t memorize all of the product identification codes and vendor codes, especially using this ‘outdated’ technology.” There was a need to get better data out of the system, and make the buying process more efficient and easier (e.g. a “shopping cart” model similar to the Amazon experience). Fourth, there were major resource constraints. Not only were there significant layoffs as a result of the economic recession, but a series of waves of layoffs often began with purchasing staff. The rationale was that if procurement could streamline procurement processes, then not as many transactional accounts payable people were required, and that profit generated through the savings could also be generated and reinvested into the system.

DeLuca was also intent on building a capability called “strategic sourcing.” This was a sevenstep process that could allow category teams to focus on clinical and nonclinical purchase families, and focus more effort on these processes, and less on transactional work. His rationale was, “If I could replace three of my AP people with one good strategic sourcing manager, I could generate significant savings.” He also recognized that many of the internal services, including catering, print shops, and telecoms, were not being fully utilized. For the most part, UPMC had relied on a Group Purchasing Organization to manage all of their purchased items—in order to leverage. He recognized that the GPO was NOT a one-size-fits all strategy for all their purchases, although it could be useful in some situations.

The procurement team began to put in an e-procurement system that would work through the company’s PeopleSoft ERP system. The guiding principle was to improve data management. This began by tracking inventory in the system, and establishing daily replenishment levels at constrained designated locations throughout the hospital system. There were individuals assigned to strategically support the Operating Room and who challenged the OR’s to show the usage on products, and to reduce procurement of those items which are not used regularly and keeping them out of inventory. The number of items in the item master database was reduced from 100,000 to 53,000, and further reductions are planned. The IT organization also developed a capability known as “punch out,” which allowed a user working in a PeopleSoft ERP environment to go out to a supplier’s website, and created a search capability that allowed them to find products. The website showed pictures of the items, pricing, and descriptions. Users could now create a shopping cart by pulling requested items from contracted suppliers, such as McKesson, Grainger, Airgas, or others. The website was called the UPMD Marketplace, which also allowed users to search item master data, using a tool as a point of consolidation for services (catering, print, telecom, and others). Deluca noted, “We have created a UPMC Marketplace website, which is a single point for all procurement requests, that anyone can use. It is a point and click shopping cart technology, it is easy to view products, and on the back end, the team put in standard UNSPSC codes which allow procurement to process orders in a ‘lights out’ environment. In the marketplace, there is a world of content, which allows users to filter out what they need quickly, and find those items that are required in their particular hospital. Supplier on-boarding into the system is controlled by a single procurement person, meaning that suppliers who are NOT on the system (and not approved) cannot be used, which improves compliance. The supply base ecosystem continues to grow, and suppliers are recognizing that they need to improve the content on the site to win over hospital users. The goal in 2010 is to have 30% of ALL purchase orders (POs) in a ‘lights out’ no-touch environment, which means no AP person or procurement per- son touches the order, and that it proceeds through the system electronically and effortlessly.” Re- sults have been impressive. UPMC has enjoyed $3M in annual savings, 40% increase in contract compliance, 100% e-enabled requisitions, 40% reduction in special buyer-assisted purchase or- ders, and 40% less time cleaning up the item master database. Thirty-five suppliers were on boarded in 24 months, representing close to 60% of total spend. Deluca noted, “The single biggest factor for our success was our senior leadership. Every hospital needs a ‘Peyton Manning’ leader who can take the team forward; who studies the business case, calls out what he sees, and drives action!”

Source: Handfield, Robert, Interview with Michael DeLuca, presenter at World Health Care Congress, January 25, 2010, Dallas, TX.