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The value of strategic sourcing in healthcare

Strategic sourcing is defined as an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company

By Jack Roach / Special to Healthcare Facilities Today
November 3, 2016

The primary objective of any organization’s sourcing and procurement department is to maintain a continuous supply of goods and services, supporting the operational needs of the organization. Their efforts integrate with the organization’s mission and prime objectives, while seeking to develop and maintain successful relationships with supply chain partners. Establishing key criteria and protocols for the supply chain network ensures success and minimize barriers, challenges, and pitfalls.

What is strategic sourcing?

The procurement process predominantly includes buyers, purchasing products and services. However, these efforts alone do not constitute strategic sourcing.

According to Wikipedia, strategic sourcing is defined as an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. In the services industry, strategic sourcing refers to a service solution, sometimes called a strategic partnership that is specifically customized to meet the client's individual needs. In a production environment, it is often considered one component of supply chain management.

Strategic sourcing aligns the procurement efforts with other significant benefits such as: cost reduction, improved inventory management, reduction in contract administration, and streamlining the (re)ordering and payment processes. Other advantages include: a single point of contact (“SPOC”) person, leverage for future cost escalations, ensuring consistent internal contract review and compliance, enhanced standardization and control, improved quality of service and increased customer satisfaction. Strategic partners can also provide expertise in spend management and analysis, development of system-wide guidelines, innovations, new technologies, and personnel training. This all improves the end user experience and satisfaction.

Mergers and acquisitions

Traditional independent hospitals lacked significant leverage in purchasing goods and services due to their limited scale. Accordingly, they began to form or join group purchasing organizations to improve their market positions and purchasing power. Subsequently, many joined regional and national healthcare systems. This strategy improved scale, enabling increased efficiency and the ability to deliver a higher quality of care. From 2007 to 2013, more than 600 hospitals were acquired or merged, according to the American Hospital Association and the Center for Healthcare Economics and Policy. Mergers and alliances forced a revision of organizational structure and brought further opportunity for improvement to the healthcare delivery model. This realignment in structure also increased sourcing leverage and thus Strategic Sourcing partnership opportunities for both clinical and non-clinical goods and services.

This newly acquired scale delivered significant opportunities for facility operations groups to improve utilization of personnel, cost of utilities, repair and maintenance expenses, and purchase services costs. In many instances, forging strategic sourcing partnerships has delivered improved quality and efficiency while simultaneously reducing cost. Developing strong, strategic business relationships and partnerships with the facilities department’s suppliers has provided healthcare systems with savings of 20% or more (on average) against previous facility spend. These savings are effectively a reduction in cost of goods that directly improves the healthcare system’s margin on a dollar-for-dollar basis. The additional savings can potentially be redirected to investment in the system’s core mission.

Since these newly formed larger healthcare systems are a compilation, or aggregation of smaller traditional independent hospitals, some challenges to developing a robust strategic sourcing program do exist. They include: gaining end user engagement, overcoming comfort with their status quo, limitations of current contract terms, educating associates, gaining full partnership, analyzing spend data, evaluating current suppliers’ performance criteria, and resistance to changing suppliers.

In addition to strategic sourcing, outsourcing of facilities management has also had a significant impact on the healthcare industry and its purchasing power. Similar to the effect of the mergers and acquisitions, large global outsourcers are able to provide additional scale and thus new opportunities for healthcare organizations. These opportunities include: deeper costs savings, robust performance metrics, benchmarks by geographic region, access to subject matter experts, and most importantly best practices across their sector.

Benefits of strategic sourcing

An example of the benefits of a Strategic Sourcing Partnership can be found at a MidAtlantic health system. The system has 10 hospitals and numerous ancillary sites. Prior to their sourcing partnership, each location independently purchased maintenance and supply products.  A request for proposal (RFP) was issued for air filter maintenance and supplies. Upon award, multiple contracts were combined and coordinated through one supplier. While ordering was bundled to ensure economies of scale and reduce costs, invoicing and full reporting were individualized per site. The reduced purchase price structure was also extended to third party vendors that served the client’s off campus locations. Spend/savings analyses conducted at six months and one year showed a 36% annual savings.

A second example of savings was found at the same MidAtlantic health system, this time with the emergency generators. Much like the air filters, the generators had been maintained and serviced independent of one another. After completing an RFP process, generator service and maintenance was awarded to two vendors to cover a disperse geography. While the new process dictated a standardized scope of work for preventative services, all work was invoiced on a per site basis. This new process also provided additional savings with reduced labor rates for work outside of the standard preventative maintenance. The outcome was an annual savings of 31% from the current spend.

Conclusion

As the healthcare market continues to evolve and adapt to new regulations and controls, it is becoming more and more difficult for hospitals to identify opportunities for cost reductions or savings. However, when an independent hospital joins a larger healthcare system, as described above, substantial synergy can be created. And when a healthcare system partners with large global outsourcers, even more synergy is created. All parties benefit from these alliances through lower operating costs, access to robust benchmarking data, improved quality control, and access to subject matter experts. All of this effort ultimately creates Strategic Partnerships which contribute to better outcomes and thus a more satisfied patient experience.

Jack Roach is the Alliance Director for MedStar Health, a 10-hospital system.

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