Applying Proven Business Practices to Help Solve the Healthcare Dilemma
posted by: Charles Poirier
Monday, June 2, 2014
At the recent GHX 2014 Supply Chain Summit, I sat in the audience and listened to CEO Bruce Johnson and others describe the many challenges inherent in our healthcare system. Consumers will say the cost of care is too high. Economists will say the rapid rate at which the cost of delivering care is increasing is unsustainable. And healthcare business leaders will say that we must act fast to reduce costs while increasing quality and safety for successful outcomes. Johnson described this situation as the rebalancing of the cost/quality equation, and called healthcare leaders at the Summit to collaborate to help drive elimination of redundancy, variability and waste in our system.
It was clear throughout the conference that while there are many good things about the level of care and quality we receive, the problems that are coming to light put our entire system at risk. At this conference, the attendees and presenters believe that the lever that can be healthcare’s game changer is the supply chain.
I’ve spent years researching what are the qualities of the world’s greatest supply chains, across multiple industries. From this work, I’ve got some recommendations for the healthcare industry.
- Inventory – Consider first, the amount of inventory that exists across the US Healthcare supply chain network. If total healthcare costs in the US are around $3 trillion, the system probably requires inventories equaling at least $300 billion. If a conservative 20% could be eliminated through better supply chain practices, $60 billion could be saved in working capital. With carrying costs usually estimated at being at least 10%, such a reduction would yield a decrease in working capital of $6 billion. That is a lot of new free cash flow.
Supply chain leaders make inventory an early target for improvement. One speaker at the GHX conference noted his organization reported “visible” inventory at $800,000, when it was actually $1,900,000. So what can we do? Extraneous supplies, redundant materials, items no longer in demand and still kept in storage, and wastes can be eliminated. With a concerted effort, and beginning with non-critical categories, considerable reductions can be made without harming customer service. Whatever the actual potential for healthcare, inventory savings have to be compelling opportunity.
- Standardization – Most advanced industries faced the issue of standardization long ago. From a business perspective, the concept is to establish reliable standards for performance and measurement of just about everything of importance to the business and then reaching best operating practices. The aerospace industry offers a good example where industry-wide efforts led to such standardization. Healthcare efforts are already underway in this arena, but past experience indicates it could take four to five years to complete. A faster timetable must be demanded.
As one example of using the insight, consider reaching best standard practice in hospitals. Ask the question: Does our hospital have a critical procedure that is performed to world-class standards by one of our surgeons? When that individual is identified, the business analogy would be to make contact with the best performer and make an offer that cannot be refused. He or she would then be observed, filmed, and otherwise studied to document what makes the difference and synthesize that data into a best practice that can be duplicated. If surgery is too difficult an area for testing the concept, find other services and use pilot experiments to see if standardized procedures can be developed. Keep the business lesson in mind: Standards will always trump complexity and variability.
It’s hard toaccurately estimate of potential savings in this area. One part of the business financial statement, however, that has always yielded significant savings is the category labeled General, Sales and Administrative costs. A reasonable estimate of that cost in healthcare is around $60 billion. Reducing errors, eliminating waste, minimizing variability and streamlining services through use of standard procedures might yield a conservative 5% improvement to GSA, or another $3,000,000,000.
- Transparency – World class businesses have seamless transparency across their supply chains. Case studies from Amazon, Nike, Procter and Gamble, Wal-Mart and many others testify to the ability for supply chain partners to move beyond the normal emphasis on cost reduction to collaborating on how to use common systems to share critical data across the full network. Opacity must be replaced by transparency. This area is critically inhibited in healthcare by traditional distrust of data and suppliers.
That condition must be attacked, through industry diagnostics of important processes, beginning with what service is needed to satisfy the patient and working upstream in the supply chain. With a process map that defines what takes place in the supply chain, business partners work at establishing best practices. Information technology becomes a vital element to determine what information is needed and how to make it available, with high accuracy, at the time of need to the right parties. This procedure has become common in many major business sectors, leading to shorter cycle times, less out-of-stocks, fewer errors, perfect orders and dramatically better sales and administrative costs.
- Finally, best practice sharing – One distinguishing feature of business leaders is the presence of centers of excellence used to develop best practices across a full supply chain network. The characteristics of these centers take time to develop, but once attained are shared across the business network. What is the lesson for healthcare? Throughout the GHX conference, the author listened to presentations of seriously successful case studies. The healthcare industry is building islands of success, or its own centers of excellence. To use a geographic analogy, these islands can become peninsulas, then sectors and hemispheres. Sharing of best practices must be documented, accelerated and accepted across the industry. Get rid of the “We are different,” and “Only ideas invented here are any good” syndromes. Replace them with “Together we can defeat the healthcare dilemma.” Such efforts are already underway. The suggestion is to augment them with learning from best business practices, to accelerate achieving positive results.
This blog is from the first in a series of white papers I’m writing on the healthcare supply chain. Watch for more of this discussion in the next several weeks.