The Healthcare Hub

The Healthcare Supply Chain Index: How Do We Measure Up?

Wednesday, August 13, 2014

I made my plane reservations yesterday for Supply Chain Insights’ 2nd annual Global Summit being held in Phoenix, September 10 and 11, and I hope to see some of you there as well. At last year’s event, Annette Pummell, RN, (then the chair of AHRMM, the supply chain organization for the American Hospital Association) and I had the pleasure to be on a panel with Vincent Pizziconi, Ph.D., a bioengineering professor at Arizona State University who works on 3-D printing in healthcare. Just imagine how the discussion of the healthcare supply chain changed when Professor Pizziconi literally pulled out a prototype 3-D printed hip from his pocket. As we continue to struggle with unique device identification (UDI) for medical products or automate the highly manual implantable device supply chain (both highly valuable initiatives that GHX and its network are actively involved in), we must remember to take a break from the immediate tasks at hand and “Imagine the Supply Chain of the Future,” which is the theme for this year’s Global Summit. After all, what would it mean to things like UDI and implantable devices if those replacements parts are made to order, using the patient’s own cells, at the facility where the surgery is performed.

That’s the kind of cutting edge (no pun intended) discussions that you can expect at this year’s Global Summit. So what does that have to do with the title of this blog post: The Supply Chain Index?

Along with plenty of techy topics like robotic supply chains and business imperatives such as talent acquisition, this year’s Global Summit agenda will explore the Supply Chain Index – a new composite metric that measures a company’s improvement on balance (which measures both revenue growth and return on invested capital), strength (operating margins and inventory turns) and resiliency (the tightness of the relationship between operating margin and inventory turns). Across industries, Lora says “supply chain leaders are attempting to balance four distinct priorities: growth, improving profitability, reducing cycle time and managing the ever-increasing complexity.”

Supply Chain Insights recently published a supply chain index report that seeks to understand the state of the supply chain in the healthcare value network. Like all of founder Lora Cecere’s research, the Supply Chain Index report for healthcare is free and available to download at:

The report focuses on hospital/healthcare providers and medical device and pharmaceutical manufacturers, which she says have not yet excelled at intercompany cooperation to drive value. As she explains it, “Today, it is more of a supply network than one aligned to improve value....As a result, there is little progress being made across the network in aggregate.”

Lora says one question that highlights the lack of alignment is: “Who is the customer?” Is it the physician, the hospital, the payor, the patient? From my perspective, while there may be different customers along the supply chain, the entire network needs to focus on the needs of the patient. It’s not only the right thing to do, it’s becoming a requirement, with new payment methodologies including a significant patient satisfaction quotient when determining reimbursement.

Lora defines the healthcare value network as a group of trading partners focused on improving healthcare outcomes. That’s certainly in keeping with AHRMM’s Cost-Quality-Outcomes Movement, which looks at the unique role the supply chain plays at the intersection of clinical, financial and operational performance in healthcare.
At AHRMM, we have begun work – but are still far from where we need to be - to define the kinds of metrics necessary to measure supply chain performance in this new environment. After all, we pay attention to what we measure, so those metrics better be the right ones. It’s no longer about supply costs per adjusted patient day (especially as care moves out of the acute care setting), or even net patient revenue, when so many factors influence supply chain costs and the role products play in both the cost and quality of healthcare.

The Supply Chain Index is worth consideration as we explore the metrics question. Does it provide us with the answer? No. But it does start asking the right questions, or at least posing the questions in a new way. Perhaps most importantly, it takes a systems-based approach, looking at a portfolio of metrics and their relationship to one another. And in healthcare, that is critical: it can no longer be just about cost, or just about quality. It has to be about value, and that is a function of both quality and cost.

Even in the world of e-commerce, it’s not just about a single metric. I had this conversation at the AHRMM annual conference with some of my GHX colleagues and our participating healthcare systems. While it used to be primarily about how many purchase orders and other transactions you could automate, now trading partners working with GHX are identifying ways to reduce the number of POs, while increasing lines per PO, the number of trading partner connections, and the percentage of spend handled electronically. Automation is also not just about efficiency; it’s about having an accurate electronic record of what is being bought and consumed, at what price and in what quantity, by and from whom, all of which come together to measure both the efficiency and the effectiveness of the supply chain and those trading partner relationships.

The report looks at two time frames: 2006-2012 and 2009-2012, with the latter designed to focus more narrowly on what has happened since the most recent recession. It will be interesting to repeat this same study in 5 years to measure the progress made as healthcare reform rolls out. If some of the aspects of the Affordable Care Act achieve their intended benefits, e.g., more focus on patients (their satisfaction makes up 30 percent of a provider’s value-based purchasing score) and reduced waste (which I hope goes beyond clinical to include operational processes, e.g., cycle time, inventory costs, etc.), we could see greater alignment among the players.

The challenge for Lora and her team is getting the kind of financial data needed to conduct the detailed analysis. For example, all of the providers studied in this first report are publicly traded, for-profit entities. It would be interesting to see if there is any difference in performance based on not-for-profit and for profit status, or for different types of accountable care organization structures (e.g., provider-payor, provider-physicians, provider-retailers, etc.). I would also like to see the the performance trends for manufacturers, not only large vs. small, but also based on the kinds of products in their portfolio and their primary customers, e.g., home health care, implantable devices, preventative care and diagnostic testing material and equipment, etc. Interestingly, implantable device manufacturers did much better in the relative rankings in the 2009-2012 time frame, compared to the earlier and longer time period. What do you think is the reason?

Take a look at Lora’s research and let’s continue the dialogue – here in the Healthcare Hub and better yet in person at the Summit - on what will drive better supply chain performance in healthcare and how to measure its ability to increase value. 

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Karen Conway

Vice President, Healthcare Value