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Healthcare: Driving Out Waste

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In 1968, the United States spent 6.2% of its gross national product on healthcare, or roughly $58 billion. Fifty years later, in 2018, that percentage had climbed to 17.7%, amounting to a staggering $3.6 trillion. Based on projections, by 2028 the percentage could climb to 19.7%, and the total amount spent on healthcare could rise to $6.2 trillion. Clearly, the idea of cost management doesn't seem to have found a home in the healthcare industry.13

But that could be changing, at least if supply chain professionals and lean proponents are successful in convincing skeptics that the waste and inefficiencies that characterize hospitals and healthcare systems don't have to continue. And part of that convincing will come by way of supply chain technology, in particular track and trace methods developed by standards body GS1. In 2010 five large healthcare systems—Geisinger Health System, Intermountain Healthcare, Kaiser Permanente, Mayo Clinic, and Mercy—banded together to launch a collaborative effort called the Healthcare Transformation Group, to drive the adoption of GS1 product identification standards and to share best practices across the healthcare supply chain. (In 2019 another healthcare system joined the group—Franciscan Missionaries of Our Lady Health System.) The group's efforts have focused on getting the manufacturers who supply the healthcare industry to use GS1 standard bar codes or labels on their products, and to date roughly seven out of every 10 suppliers to the industry are compliant with those standards.

One of the big problems, however, isn't the manufacturers but the hospitals themselves. “Healthcare is the only industry in the world that has not converted to a data synchronization-common format that uses bar coding to track products through the system,” points out Brent Johnson, vice president of supply chain with Intermountain Healthcare, a not-for-profit system of 24 hospitals throughout Utah, Idaho, and Nevada. There is a distinct lack of trust between the hospitals and their suppliers, Johnson says, which he hopes is starting to improve. “We'd like to break down the barriers between us and the suppliers, and through increased trust and collaboration continue to not only reduce costs but improve outcomes and quality.”

Gaining that trust at Intermountain began, Johnson explains, by adopting lean practices to drive out waste from the healthcare system's cost structure. “We started by simplifying our supply chain, which meant we had to take over the contracts from third parties and distributors.” Intermountain alerted roughly 150 suppliers that instead of sending their products to a distributor, they needed to start shipping them directly to Intermountain. The next step, Johnson continues, was to hire inventory control specialists from outside the healthcare industry who were experts at managing inventory from the suppliers' factories all the way into Intermountain's warehouse.

Doctors and nurses would often order products they were familiar with and believed were essential to patient care. However, many of those products were commodities, so by enlisting input from nursing product committees, Intermountain was able to reduce the number of SKUs it was ordering by more than half—from 13,000 to 5,000. The healthcare system also built a Supply Chain Center, which includes a distribution center, materials management, logistics, and administration facilities, and is powered by various supply chain technologies, including warehouse management software, an automated conveyor system, and a cubing and dimensioning system to create a more efficient process at the loading dock. Within two years the center helped reduce supply chain costs by $80 million.14

Supply Chain Management Best Practices

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