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Squeezing costs out of supply chain management

October 02, 2015
Tina Vatanka Murphy
From the October 2015 issue of HealthCare Business News magazine
As we seek a more value-based health care system, one that delivers better quality care at a more affordable cost, hospitals and health care systems are working with their suppliers to take costs out of the system, rather than just shifting costs from one to another. The more historic approach, with providers and suppliers primarily engaged in contentious discussions over the acquisition price of a product, is no longer the most effective strategy. Instead, the more “valuable” conversations between the two parties are those that take a holistic view, examining the total delivered cost of a product, including direct and indirect supply chain costs, as well as the role products play in improving quality care and reimbursements.
Health care providers and suppliers that have collaborated to address the inefficiencies and costs associated with procuring and delivering finished goods, known as cost-to-serve, have not only made tremendous gains in process efficiency, but also achieved significant hard dollar savings. By coming together, trading partners have identified outdated and inefficient business practices and implemented more effective processes that eliminate costs and improve quality for all involved.

Why is the cost-to-serve in health care so high?
Because the supply chain crosses organizational boundaries, the actions of one party impact all of the parties with which it transacts business. This can result in unintentional but very real costs. We convened a 64-organization roundtable to discuss why the cost-to-serve in health care is so high compared with other industries. In those discussions, the participants identified ways in which trading partners increase costs for one another and highlighted how they are collaborating to address those issues. Below are the top cost drivers identified.
• Mistrust and lack of communication (between the right people):
Historically, there has been a high level of distrust between providers and suppliers in the health care industry, much of it stemming from the traditional focus on product price versus value delivered. With supplier sales representatives serving as the primary liaisons with provider organizations, it’s been difficult to change the nature of that discussion to seek out ways to reduce costs across the supply chain.

• Freight charges and excess inventory:

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