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Alan McQueen isn't sure why the healthcare industry has lagged so badly behind consumer products and retail, when it comes to the application of radio frequency identification (RFID) technology to inventories. But the director of supply chain logistics with BJC HealthCare knows it's a problem – even as his own organization is making big strides toward correcting that deficiency.
McQueen has only been in the industry for about five years, having come from the government sector. There, he could track supplies and aircraft globally. “I could tell you at any given time where my supplies were,” he says. “But when I started in healthcare, the supply chain was not as integrated, and tracking ability not as sophisticated.”
BJC was well aware of the deficiency. Formed more than 20 years ago, the non-profit healthcare organization currently encompasses 12 hospitals within the greater metropolitan area of St. Louis, Mo., southern Illinois and mid-Missouri. One of the largest integrated delivery networks (IDNs) in the country, its expenditures on consumable supplies, including pharmaceuticals, exceeded $900m over the past year.
McQueen’s awareness of the company’s failure to exploit RFID technology was triggered by a white paper issued four years ago, detailing the tremendous amount of waste residing within supply chains of high-value, consumable medical devices. The dollar amount for the industry as a whole has been estimated at $5bn a year.
The excess is split almost evenly between hospitals and medical-device manufacturers, according to Jean-Claude Saghbini, general manager for inventory management solutions with Cardinal Health. The developer and distributor of pharmaceuticals and medical products teamed up with BJC to implement RFID, and wash a good portion of that waste out of the system.
What happens is that hospitals and care centers order too many supplies, to guard against being out of stock in a critical situation. Inventory gets dispersed through the facility, with no easy means of identifying the location of any given item. Suppliers and hospitals also lack visibility of physician preference items (PPIs), which tend to be especially pricey. And doctors themselves may not keep track of what they actually use.
As a result, expensive drugs often pass their expiration dates without ever being consumed. Up to a year’s worth of inventory might be sitting on shelves, “taking up extremely valuable capital,” says Saghbini. On top of that, the industry suffers from the problem of shrinkage – products that have simply vanished from the system.
A Do-Or-Die Situation
McQueen was determined that BJC break free of traditional inventory-management practices. Facing reduced reimbursements and steadily increasing expenses, the company needed to slash hundreds of millions of dollars from its run rate. And there were only two ways to accomplish that: labor cuts, and the supply chain.
On the supply-chain side – McQueen’s domain – the challenge was how to make drastic cuts in inventory. The obvious move was to address contract-negotiation and pricing policies, but the company quickly realized that it lacked the basic data to proceed. Just getting the relevant information about one item might take days. BJC, however, needed instantaneous intelligence on everything in the pipeline. And that called for implementation of a whole new inventory-management system – one that allowed for the management of products at the system level, not just that of the individual hospital.
BJC knew from the start that RFID would play a major part in achieving that goal. It was looking at the technology of RFID vendor WaveMark, to help launch a pilot initially involving a single supplier.
That partner would turn out to be Cook Medical, a manufacturer of minimally invasive medical devices. Cardinal Health entered the picture when it acquired WaveMark in 2013, and integrated the latter’s technology into its Inventory Management Solutions unit.
The goal of the three-way pilot was to deploy RFID tags at the manufacturing stage, so that BJC and Cardinal Health could track every item purchased from Cook on an end-to-end basis. McQueen says BJC had previously used some barcoding applications to scan product upon receipt, but it lacked a system that could meet the more ambitious goal of visibility throughout the supply chain.
Cardinal Health saw the solution as consisting of three elements: sharing information across the supply chain, having access to “intelligent” data, and acting on that data. Saghbini says it was a question of melding new technology with revamped business processes, which would create strong incentives for users to embrace the system.
It’s not just a matter of fixing the location of a given product in the chain. RFID tags applied to outside packaging are continuously scanned – up to 20,000 times a year – when the items are stored within “smart cabinets” at the hospital. The information is then relayed to the inventory-management system on a real-time basis. As a result, the manufacturer or distributor “can see data about their own product, and be a partner in the optimization of inventory,” says Saghbini.
Eventually, the pilot was extended to three sites. McQueen says the benefits were almost immediately evident. One area saw a 57-percent reduction in inventory levels. Other facilities showed improvements of between 40 and 50 percent. Expired product, which makes up around 15 percent of items industry-wide, was nearly eliminated, says Saghbini. McQueen adds that BJC has realized more than $3m in savings on bulk buys of just two products over the last 12 months. (Intelligence generated by the use of RFID tags allows the company to make money-saving bulk buys without the risk of getting stuck with expired product.)
Doctors and clinicians, who previously didn’t trust the system’s ability to provide them with critical supplies on demand, loved the new setup, McQueen says. What’s more, BJC was able to initiate constructive conversations with doctors about their true requirements. In the process, it could cut down on on-site buffer stock and manage most inventory from a centralized, BJC-owned distribution platform, with the promise of speedy delivery of needed items.
BJC now has six suppliers participating in the RFID-driven supply chain, with more on the way. “They’re calling us now,” says McQueen. Still, the company has a long way to go, with only about 1 percent of suppliers tagging their products at origin. For the most part, BJC is using price as the deciding factor for what to tag, setting a $50 minimum.
McQueen envisions the day when everything in the healthcare supply chain will be RFID-tagged, although he won’t speculate when that will become a reality. “I get goosebumps thinking about it,” he says. “When that happens, patients and healthcare will be in a better place.”
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