Executive Briefings

Changing Healthcare Supply Chain From Cost to Profit Center

After curing the ills of its founder's broken supply chain, ROi set out to remedy supply chain problems throughout the healthcare industry, and now services more than 100 hospitals.

Changing Healthcare Supply Chain From Cost to Profit Center

Nearly 14 years ago, ROi began a transformation for its founder, Mercy Health, a top 20 non-profit U.S. health system based in St. Louis, Mo., to reinvent what supply chain looks like in healthcare. Through the journey, ROi has successfully grown from a supply chain department servicing solely Mercy into an end-to-end supply chain solutions provider, servicing 100-plus hospitals in the U.S.

In a time when some health systems are just starting to consider consolidated service centers with commercial 3PL partners, ROi has a proven track record of leveraging extensive internal supply chain expertise to innovate, expand into self-manufacturing and build numerous shared services — creating a stable, ongoing incremental revenue stream for Mercy while driving significant clinical, operational and financial results for all of the healthcare providers it now serves.

ROi ranks as the No. 4 source of operating income for Mercy, despite comprising just 1 percent of Mercy’s personnel, while delivering close to $1bn in supply chain savings to all health systems it has served since inception.

Healthcare C-suites are looking to their supply chain — an area widely reported to constitute up to 50 percent of healthcare costs, only second to labor costs — and are re-thinking the traditional supply chain model where key decision makers (i.e. clinicians) for the majority of supply usage have no stake in the cost of the goods they use, where too much variation and a lack of common metrics exists, and where transparency and strategic alignment with other supply chain stakeholders (i.e. suppliers) are lacking.

Not only did the supply chain leaders/founders of ROi want to find a new solution to the fragmented and duplicative supply chain common in healthcare, they saw how decentralized work, from many areas, was redundant at each of Mercy’s locations and wasn’t managed for enterprise process efficiency or cost savings.

The transformation within Mercy began by driving significant cultural change to move Mercy from a holding company to an operating company — with supply chain taking the lead. The theory was that if key stakeholders could join together to make common decisions on supplies, they would eventually join together to make other high impact strategic decisions. Centralized management of supply chain would later lead to consolidation of other shared service functions within Mercy (e.g. human resources, IT, finance, marketing, etc.).

Mercy’s pre-ROi supply chain of the ’90s and early 2000s was too dependent on outside consultants, group purchasing organizations, commercial distributors and manufacturers. Mercy used six disparate materials management systems with each Mercy hospital acting independently to make purchasing decisions. Outside consultants and suppliers had a better understanding of Mercy, and enjoyed better relationships with key stakeholders inside Mercy, than its own supply chain leaders.

After being presented with a business case for the creation of ROi in 2002, the Mercy Board approved the goal of taking control of the supply chain from the manufacturer to the patient, invest in top-notch people, processes and technology, build internal capabilities and optimize where possible. ROi brought in new supply chain talent, from outside the provider organizational setting, to rapidly develop an Integrated Supply Chain Strategy that allowed Mercy to take greater accountability for an end-to-end supply chain.

ROi helped consolidate the supply chain throughout Mercy by establishing a common ERP platform, created a Strategic Contracting and Sourcing arm to handle the evaluation, selection, contracting, standardization and utilization of all products and services for patient care, consolidated all purchasing activities, and opened a consolidated service center (CSC) to internalize medical product warehousing/distribution, including a privately-owned and operated transportation fleet to support all Mercy facilities 24/7, 365 days a week. ROi delivered 99.8 percent next day, first-time fill rates in contrast to the 85 to 90 percent that other commercial distributors had historically achieved.

ROi streamlined the receiving process at the hospitals by combining delivery of med/surg and pharmaceutical supplies. The CSC’s warehouse capacity permitted bulk purchasing to take place, achieving significant discounts from economies of scale.

From its CSC, ROi started the process of innovating new services. ROi launched Mercy Meds, a U.S. Food and Drug Administration- and Drug Enforcement Administration-regulated pharmacy repackaging operation that uses medication dispensing machines, bedside scanning and verification equipment to track medication all the way to the patient. Annually, this new service avoided than 18,000 adverse drug events, along with nearly $14m in quantified cost avoidance and nearly $3m in hard cost savings.

ROi internalized many of its then third-party processes and services, including sourcing, manufacturing, packaging, distribution and transportation. It launched the first provider-owned private label brand of products in the U.S., known today as Regard. Through a product portfolio of 2,000-plus SKUs available from more than 30 domestic and international manufacturers, ROi has removed steps from the supply chain to secure high-quality products at a lower cost — as much as 20 percent savings. ROi works directly with OEMs to design and manufacture Regard products under specifications of equal or higher quality than their name brand counterparts. ROi’s clinical team validates these products with physicians and clinicians prior to launch to ensure quality and consistency, and its quality assurance team works to ensure that all manufacturers and products meet strict regulatory guidelines.

ROi opened the first provider-owned custom procedure tray manufacturing facility in the U.S. after conducting a Six Sigma project at one of Mercy’s ambulatory surgery centers. Unused surgical products in the CPTs — which were thrown out but always paid for — revealed that Mercy’s CPT program was in need of a major overhaul. A 6,000-square-foot CPT production facility was built inside ROi’s CSC.

When the decision was made to internalize CPT manufacturing, Mercy was using 93 unique custom packs approximately 90,000 times per year. Fast-forward to today: ROi is building 650 unique packs at a 5.8-plus Sigma quality level that are used over 500,000 times per year by multiple healthcare providers in the U.S.

As part of a focus on promoting sustainability, ROi developed a single-use device reprocessing program for non-critical medical devices. The program reduces supply costs through the cleaning and subsequent reuse of non-critical medical devices while also having a positive impact on public health by removing medical waste from the nation’s landfills. Through this program, 1 million devices are reprocessed annually, resulting in a $565,000 annual cost reduction and 85 tons of landfill waste avoided per year.

From Cost to Profit Center

With Mercy as a powerful proof point, the organization began to roll out its supply chain innovations to additional providers. ROi’s commercialization initiative encouraged providers to identify their own unique business challenges, working alongside ROi leadership to build out a path that would ensure they reached their goals quickly and efficiently. In 2011, ROi signed its first commercial customer, Franciscan Missionaries of Our Lady Health System (FMOLHS) in Baton Rouge. The partnership has resulted in FMOLHS realizing significant cost savings, including the reduction of its Supply Expense Per Adjusted Discharge (CMI Weighted) by 7 percent over three years, and the opening of a 125,000-square-foot CSC in Louisiana, along with a private transportation fleet — all operated by ROi.

Since then, other healthcare systems have taken advantage of ROi’s innovations in custom procedure trays, private label products, strategic sourcing, distribution and transportation.

Resource Link:
ROi

Nearly 14 years ago, ROi began a transformation for its founder, Mercy Health, a top 20 non-profit U.S. health system based in St. Louis, Mo., to reinvent what supply chain looks like in healthcare. Through the journey, ROi has successfully grown from a supply chain department servicing solely Mercy into an end-to-end supply chain solutions provider, servicing 100-plus hospitals in the U.S.

In a time when some health systems are just starting to consider consolidated service centers with commercial 3PL partners, ROi has a proven track record of leveraging extensive internal supply chain expertise to innovate, expand into self-manufacturing and build numerous shared services — creating a stable, ongoing incremental revenue stream for Mercy while driving significant clinical, operational and financial results for all of the healthcare providers it now serves.

ROi ranks as the No. 4 source of operating income for Mercy, despite comprising just 1 percent of Mercy’s personnel, while delivering close to $1bn in supply chain savings to all health systems it has served since inception.

Healthcare C-suites are looking to their supply chain — an area widely reported to constitute up to 50 percent of healthcare costs, only second to labor costs — and are re-thinking the traditional supply chain model where key decision makers (i.e. clinicians) for the majority of supply usage have no stake in the cost of the goods they use, where too much variation and a lack of common metrics exists, and where transparency and strategic alignment with other supply chain stakeholders (i.e. suppliers) are lacking.

Not only did the supply chain leaders/founders of ROi want to find a new solution to the fragmented and duplicative supply chain common in healthcare, they saw how decentralized work, from many areas, was redundant at each of Mercy’s locations and wasn’t managed for enterprise process efficiency or cost savings.

The transformation within Mercy began by driving significant cultural change to move Mercy from a holding company to an operating company — with supply chain taking the lead. The theory was that if key stakeholders could join together to make common decisions on supplies, they would eventually join together to make other high impact strategic decisions. Centralized management of supply chain would later lead to consolidation of other shared service functions within Mercy (e.g. human resources, IT, finance, marketing, etc.).

Mercy’s pre-ROi supply chain of the ’90s and early 2000s was too dependent on outside consultants, group purchasing organizations, commercial distributors and manufacturers. Mercy used six disparate materials management systems with each Mercy hospital acting independently to make purchasing decisions. Outside consultants and suppliers had a better understanding of Mercy, and enjoyed better relationships with key stakeholders inside Mercy, than its own supply chain leaders.

After being presented with a business case for the creation of ROi in 2002, the Mercy Board approved the goal of taking control of the supply chain from the manufacturer to the patient, invest in top-notch people, processes and technology, build internal capabilities and optimize where possible. ROi brought in new supply chain talent, from outside the provider organizational setting, to rapidly develop an Integrated Supply Chain Strategy that allowed Mercy to take greater accountability for an end-to-end supply chain.

ROi helped consolidate the supply chain throughout Mercy by establishing a common ERP platform, created a Strategic Contracting and Sourcing arm to handle the evaluation, selection, contracting, standardization and utilization of all products and services for patient care, consolidated all purchasing activities, and opened a consolidated service center (CSC) to internalize medical product warehousing/distribution, including a privately-owned and operated transportation fleet to support all Mercy facilities 24/7, 365 days a week. ROi delivered 99.8 percent next day, first-time fill rates in contrast to the 85 to 90 percent that other commercial distributors had historically achieved.

ROi streamlined the receiving process at the hospitals by combining delivery of med/surg and pharmaceutical supplies. The CSC’s warehouse capacity permitted bulk purchasing to take place, achieving significant discounts from economies of scale.

From its CSC, ROi started the process of innovating new services. ROi launched Mercy Meds, a U.S. Food and Drug Administration- and Drug Enforcement Administration-regulated pharmacy repackaging operation that uses medication dispensing machines, bedside scanning and verification equipment to track medication all the way to the patient. Annually, this new service avoided than 18,000 adverse drug events, along with nearly $14m in quantified cost avoidance and nearly $3m in hard cost savings.

ROi internalized many of its then third-party processes and services, including sourcing, manufacturing, packaging, distribution and transportation. It launched the first provider-owned private label brand of products in the U.S., known today as Regard. Through a product portfolio of 2,000-plus SKUs available from more than 30 domestic and international manufacturers, ROi has removed steps from the supply chain to secure high-quality products at a lower cost — as much as 20 percent savings. ROi works directly with OEMs to design and manufacture Regard products under specifications of equal or higher quality than their name brand counterparts. ROi’s clinical team validates these products with physicians and clinicians prior to launch to ensure quality and consistency, and its quality assurance team works to ensure that all manufacturers and products meet strict regulatory guidelines.

ROi opened the first provider-owned custom procedure tray manufacturing facility in the U.S. after conducting a Six Sigma project at one of Mercy’s ambulatory surgery centers. Unused surgical products in the CPTs — which were thrown out but always paid for — revealed that Mercy’s CPT program was in need of a major overhaul. A 6,000-square-foot CPT production facility was built inside ROi’s CSC.

When the decision was made to internalize CPT manufacturing, Mercy was using 93 unique custom packs approximately 90,000 times per year. Fast-forward to today: ROi is building 650 unique packs at a 5.8-plus Sigma quality level that are used over 500,000 times per year by multiple healthcare providers in the U.S.

As part of a focus on promoting sustainability, ROi developed a single-use device reprocessing program for non-critical medical devices. The program reduces supply costs through the cleaning and subsequent reuse of non-critical medical devices while also having a positive impact on public health by removing medical waste from the nation’s landfills. Through this program, 1 million devices are reprocessed annually, resulting in a $565,000 annual cost reduction and 85 tons of landfill waste avoided per year.

From Cost to Profit Center

With Mercy as a powerful proof point, the organization began to roll out its supply chain innovations to additional providers. ROi’s commercialization initiative encouraged providers to identify their own unique business challenges, working alongside ROi leadership to build out a path that would ensure they reached their goals quickly and efficiently. In 2011, ROi signed its first commercial customer, Franciscan Missionaries of Our Lady Health System (FMOLHS) in Baton Rouge. The partnership has resulted in FMOLHS realizing significant cost savings, including the reduction of its Supply Expense Per Adjusted Discharge (CMI Weighted) by 7 percent over three years, and the opening of a 125,000-square-foot CSC in Louisiana, along with a private transportation fleet — all operated by ROi.

Since then, other healthcare systems have taken advantage of ROi’s innovations in custom procedure trays, private label products, strategic sourcing, distribution and transportation.

Resource Link:
ROi

Changing Healthcare Supply Chain From Cost to Profit Center