October 14, 2005

Plan in place to reduce cost of supplies

Featured Image

Edna Johnson, a clinical supply specialist, checks supplies on a cart in the Emergency Department in preparation for the afternoon restocking. The Medical Center is rolling out plans to reduce supply costs by 10 percent per year.
photo by Dana Johnson

Plan in place to reduce cost of supplies

Annual spending for supplies and equipment at Vanderbilt University Medical Center — which includes everything from blood products and wonder drugs to mouse pads and paper clips — is estimated to reach roughly $250 million this year.

With help from consultants, a team of Medical Center executives has determined that the institution has a good shot at reducing these supply-chain costs by as much as 10 percent, or $25 million, per year, all without sacrificing quality or impeding doctors and nurses.

“Supply chain” is a management term encompassing decision-making about what types of supplies and equipment are necessary, product analysis, purchasing agreements, inventory management, product utilization, disposal and payment.

The goal for this fiscal year is $6 million of annual supply chain cost reduction, with another $19 million of annual reduction by July 2007, said Norman Urmy, executive vice president for Clinical Affairs. The VUMC initiative will involve every link of the supply chain.

“This is the most comprehensive review of our supply chain that we've ever had,” Urmy said. “Every dollar we manage to save will be available for investment in programs, people, buildings and new equipment needed to support our mission.”

The experts who analyzed the supply chain cost savings opportunity at VUMC were from Accenture, a global management consulting firm. A group from Accenture has returned to VUMC to assist the initiative.

While there have been significant efforts all along at VUMC to control these costs, “We haven't previously applied the level of discipline to this process that we hope we are about to apply,” said Dan Beauchamp, M.D., J.C. Foshee Distinguished Professor and chairman of the Section of Surgical Sciences. “I think this initiative has the potential to significantly enhance the bottom line of the Medical Center, with major impact on the availability of capital for new programs and for support of the Medical School and its departments.”

Two primary strategies to reduce supply chain costs were identified:

• Standardizing supplies and equipment — The more you buy of a particular item, the more inclined the supplier will be to lower the unit price of that item, which will allow the best possible volume purchasing agreements.

• Efficient inventory management — the fewer items you have sitting around waiting to be used, and the fewer versions of each thing there are to keep track of, the lower your inventory and handling costs will be.

Staplers used in surgery provide an example of a product in need of greater standardization at VUMC, Beauchamp said.

“We're asking groups of clinicians to agree to standardization of supplies and equipment — within reason,” he said. “Standardization won't be extremely rigid, but it will be tighter than it is now. We're going to require justification based on medical necessity or safety, and backed up by evidence, if equipment and supplies not included in our contracts are requested.”

One of the major steps to achieving greater standardization and efficiency will be to consolidate accountability for the VUMC supply chain, said Barbara Walczyk. An assistant hospital director at Monroe Carell Jr. Children's Hospital at Vanderbilt, Walczyk leads the supply chain initiative.

A new administrative position, soon to be filled, carries responsibility for the full length of the supply chain at VUMC. Also, a faculty physician will be recruited to a new half-time position of medical director of the supply chain initiative.

As cost reductions are certified by the Department of Finance, dollars will be appropriately removed from budgets. Launched this spring, the initiative has already verified reductions of $970,000 per year, Walczyk said.

Operating rooms, pharmacy, clinical labs, Radiology and Cardiology top the list of areas where spending is highest and the opportunity for supply chain cost reduction is greatest, Urmy said.

All new supplies and equipment will be subject to value analysis before they enter the supply chain, Walczyk said, adding that evidence regarding medical efficacy and quality will be the starting point for all product evaluations.

Beauchamp said experimental products will be disallowed unless they are at least revenue neutral; that is, unless donated by the vendor or taking the place of customary products of greater or equal cost.

While standardization of supplies and equipment will eventually impact many people at VUMC, purchasing strategies and inventory management will also be important to the success of the initiative. Staff costs for handling of supplies and equipment fall outside the scope of the initiative. A decision has already been reached to continue using service centers, the specialized medical supply distribution points located throughout VUMC hospitals and clinics.