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Is Healthcare Materials Management Stuck in a Rut?

At a recent conference, Wharton Professor R. Lawton Burns, PhD., author of The Healthcare Value Chain, emphasized that while medical technology continues to evolve at a rapid pace, healthcare delivery has remained relatively stable for decades. Although there has been an emphasis on making products better, easier, and safer, the process by which they’re ordered, delivered, distributed, and used has remained the same.

When, in 1979, I entered healthcare Materials Management Information Systems consulting and product management (having a production background in scheduling, materials planning, inventory management, and procurement), I was surprised to see that healthcare materials management lagged manufacturing by a wide margin. Instead of a streamlined process for analyzing, forecasting, sourcing, procuring, distributing, and storing materials, I found a largely manual, disjointed process filled with inefficiencies, errors, duplication and excess costs, and — most importantly — non-optimized patient care.

In the early 80s’ aftermath of the adoption of DRGs and Prospective Payment, and the subsequent change in reimbursement to hospitals, emphasis was placed on maximizing revenue, and even though much was said about controlling material and material-related costs (which account for up to 30% of many hospitals’ budget), relatively little was done to advance MM and rein-in material costs. Those of us who were advocating the critical need for cost reduction (every dollar saved goes directly to the Bottom Line) had limited affect on hospitals’ willingness to invest in a better Materials Management Information System [MMIS] and use the savings to fund other projects. Even today, which is a hospital more likely to fund: a new piece of medical equipment, or a better MMIS or Business Information System?

In 1987, I left healthcare and joined a software company in a role that put me in more general Materials Management software, and I did a lot of software development and support for utilities and telecoms, with some healthcare.

So, while I never completely lost touch with healthcare MM, helping colleagues in that and various subsequent software management and consulting positions, I again was surprised to see so little progress when I re-entered Healthcare MMIS in 2005. While I did see some users who were advanced in their use of Materials Management tools (category management, automated forecasting and replenishment planning with system-calculated ordering parameters, strategic sourcing, extensive use of Group Purchasing Organizations (GPOs) and contracts, and use of BAR Coding and RFID), I also saw that many customers — too many — still were doing things in the same way that they were doing them in the late 80s, and even where they had deployed an advanced Materials Management Information System, they were using but a fraction (30% on average, per Gartner) of their MMIS’ capabilities. — and what was being used was primarily operational in nature and of limited value. Some examples:

1. Manually-determined and -maintained Reorder Points, Safety Stocks, Maximum Stock Levels (where up-to-Max is used), and Order Quantities, based on manual review of usage history; updating was done annually or when the department had time to review them.

2. Limited use of automated replenishment/MRP; much manual intervention required by purchasers

While supplier-managed inventory (something that the Retail industry has benefited-from for many years) could address these concerns to a large degree, many organizations are reluctant to relinquish control of what they consider to be an inhouse function

3. Manual, paper-based approval processing

4. Limited contract compliance (made even more difficult by a lack of analytics)

5. Little, if any, use of Bar Coding and RFID (even though the Healthcare Financial Management Association (HFMA and the Association for Healthcare Resource & Materials Management (AHRMM,, and other organizations have been advocating it for years)

6. Limited reporting and analytics — mostly retrospective operational reporting

7. MM still is primarily an operational area and treated as overhead, rather than as a strategic area that can provide a competitive advantage

8. Limited, if any, use of eProcurement (with Amazon-style shopping and catalogs to provide ease-of-use and rollout to the entire user community) with automated workflow and alerts.

At virtually every healthcare conference, there are multiple sessions related to materials management and, especially, RFID and Bar Coding. The latter has been around for years, but adoption rates still are low, despite their many uses (receiving, distribution, cycle and physical counting, equipment tracking). And RFID? Everyone’s talking about it, but very few are doing anything about it – at least, until tag prices come down.

In a recent article “The Future of the Healthcare Supply Chain” in the Healthcare Financial Management magazine, the author states that “suppliers wield considerable power, but healthcare organizations can benefit from virtual centralization of the supply chain.” The author goes-on to propose:

To achieve savings in the healthcare supply chain, healthcare organizations need to cooperate, instead of compete.  By forming a consolidated service center (CSC), healthcare organizations can centralize their contracting, procurement, distribution, and logistical operations The CSC would enable organizations to improve efficiency and reduce costs.

But if healthcare organizations can’t get “their own house in order,” how can they participate in consolidated activities and realize the benefits (isn’t the same true for Group Purchasing Organizations, who negotiate contracts for a consolidated membership? And for those organizations that participate in such group activities, will their compliance rate be sufficiently high to underscore their commitment to the group and realize the projected savings?

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  • Jon,
    Does Oracle or any other SCM company offer an On-Demand model for contract management, e-sourcing?
    Now that I think of it, Ariba might also offer this? Can you confirm?
    Thanks – Greg
  • Hi, Greg

    Ariba is firmly into on-demand (Software-as-a-Service, SaaS), and offers the following  applications on-demand:
    • Contract Management
    • Sourcing (Basic) — provides a foundation in
       RFX capabilities, including
       o RFX Creation and Management – Including
         Public RFX
       o Competitive Bidding and Timing
       o Supplier Response Management with Excel
         Bidding and Automatic Updates to Supplier
       o Communications and Messaging
       o Global, Multi-Lingual and Multi-Currency
       o Team Grading
       o Sourcing Library
       o Document Repository
       o Total Cost and Forward Auctions
       o Basic Reporting
       o Integration to 3rd party systems
    • Sourcing (Professional) — provides RFX,
      process management, and advanced
      analysis tools for organizations seeking more
      process standardization and collaboration
       o RFX Capabilities of Ariba Sourcing – Basic,
         • Matrix and Tiered Pricing
         • Bid Optimization for Award Scenario
         • Dutch Auction events
       o Project Management
       o Workflow
       o Knowledge Management
       o Resource Management
       o Sourcing Analysis and Reporting
       o Supplier Performance Management (Optional)
         – Collaborative workspace with best practice
           SPM templates
         – Scorecard creation and maintenance tools
         – Pre-populated and configurable KPI
         – Surveys to collect qualitative feedback
         – Out-of-the-box analysis templates
         – Savings Pipeline and Tracking (Optional)
         – Category Playbooks integrating Ariba
           Expertise Optional)
         – Performance targets
         – Alerts based on thresholds
    • Enpowerment Package (including Product
       Support, Sourcing Support Desk for RFX
       development and execution assistance, Event
       Day Management and Site Administration services
    • Sourcing Expertise — time to value, achieve
       savings results and enable our customers’
       sourcing and procurement organizations to
       maximize their capabilities
       o Global Supplier Expertise
       o Category Sourcing Expertise
       o Sourcing Operations Expertise
       o Buyer Enablement Expertise
       o Advanced Sourcing Expertise

    I have been unable to find any Oracle Materials  Management applications that run in a SaaS mode.