Is Supply Chain Management a
‘C’-Worthy Enterprise?

Edition: September 2002 - Vol 10 Number 09
Article#: 1309
Author: Rick Dana Barlow

After years of neglect, more hospital and IDN CEOs are paying attention to their second-largest business operations expense – supply chain management – than ever before. While the vast majority have yet to recognize the strategic value that supply chain management can bring to their organizations, a growing and vocal minority are promoting their supply chain management experts to the executive ranks.

For innovative buyers who welcome the rewards and challenges that senior-level responsibilities bring, this could be the best of times. But for those in the basement on career cruise control, it could be the worst.

Rick Dana Barlow, editor of FirstMoves Magazine (a sister publication of Repertoire, servicing hospital buyers), recently spoke with four provider executives for whom managing the supply chain just makes good business sense. The four are:

• Dan S. Wilford, president and CEO of Houston-based Memorial Hermann Healthcare System, and a former National Football League referee. His institution has been the subject of an ongoing ABC-TV series, “Houston Medical.”

• Michael C. Riordan, a Marine Corps veteran with an industrial engineering background, who spent the early part of his career as a materials manager before rising to become president and CEO of the University of Chicago Hospitals & Health System.

• James R. Nathan, president and CEO of Lee Memorial Health System, Fort Myers, FL. Nathan has led Lee Memorial from the time it was a single hospital in the mid-1970s to the multifacility IDN it is today.

• Richard P. Miller, president and CEO of Virtua Health, a Marlton, NJ-based IDN, who came from the finance side of hospitals before leading his multihospital system to merge with another to form the four-hospital Virtua.

Following is an excerpt of the interview.

FirstMoves: What is your supply chain strategy and how does it involve the materials management department?

Nathan: Lee Memorial Healthcare System did not have the critical mass necessary to make a huge difference in supply change management, either in purchasing (acquisition) costs, or leveraging distribution savings. We therefore partnered with Sarasota Memorial Healthcare System to create two unique entities that would drive down total supply chain costs.

Those two entities are: First, Cooperative Services of Florida, a co-op focused on lowering total acquisition cost. One difference between our co-op and larger organizations is that we are able to focus more on the direct needs of the department heads, clinical personnel and physicians working in our healthcare system, thereby driving 90 percent compliance to contracts. This permits our two systems to leverage substantial cost savings that we previously did not achieve. Second, LeeSar, our own in-house distribution center. This entity has permitted us a vehicle to reduce the costs associated with handling products and also to receive manufacturing rebates that were typically sent to the distribution houses that serviced our hospitals.

We are now currently working on additional centralized services, which may include purchasing, sterile processing and any other initiatives that could help reduce total supply chain management costs for both healthcare systems.

Wilford: We’re very centralized, so what our hospitals buy individually is very, very, very limited. Our strategy is to look out for the efficiency of the organization and to buy as efficiently as we can. Materials management is a staff department that services the organization.

Miller: I think materials management departments typically are looked at as getting the supplies in and making sure they get to the clinical departments on time. Ours is part of our strategy development. Quite frankly, I consider all of our departments – including materials management – part of patient care. They’re part of the process and we tell them that. We try to show them the end product of what they’re doing. It’s patient care. I think that’s the key differentiator – making sure people understand how they affect the end game, which is the patient.

Riordan: Our materials management area is directed by a vice president, who sits on our senior management team. Her area sets and drives our supply chain strategy, and she is responsible for leading this process.

Currently, we do not have the information systems to provide sufficient information for materials management decision-making. Our current supply chain strategy is to develop an “administrative replacement system,” which will provide us with data that will allow us to manage the supply chain more effectively. We are well into the planning process to acquire and launch an administrative replacement system early in 2003.

How have you been able to reduce expenses without an information system for materials management?

Riordan: Initially, installing an ARS was not the highest priority for our materials management area. When we hired our vice president of materials management 18 months ago, other more pressing issues required her immediate attention. In her first year, she focused on restructuring the department, re-training and cross-training employees, and managing union issues regarding job fragmentation and employee accountability for performance.

Who should be making key decisions about your organization's supply chain management activities - the CEO or the materials manager – and why?

Nathan: Neither. All decisions related to supply chain management are made with input from appropriate management personnel, who are expected to be facilitators bringing the right people/stakeholders together and helping create the right climate for them to make the right decisions.

But strong support from a forward-thinking, knowledgeable and respected CEO and/or materials manager can make a difference, can’t it?

Nathan: System leadership demonstrating commitment and explaining the importance of supply chain management certainly helps create the right climate in the organization to support the department managers who are responsible for implementation.

Riordan: In our organization, the key decisions can be made prudently by our vice president of materials management, because she sits on our senior management team. In organizations that lack senior level leadership for materials management, key decisions must necessarily be made with CEO and/or COO input to assure alignment with overall organizational priorities.

How is it that the University of Chicago recognizes the need for senior-level leadership in materials management? How did your organization arrive at this conclusion and what do you recommend for other organizations to recognize it?

Riordan: The critical issue is not whether the materials manager sits on the senior management team, but rather, whether the hospital is staffed and organized to assure strategic thinking regarding materials management. Any number of configurations and organizational structures can work as long as the skill sets, communications, and opportunities exist somewhere in the organization to link the overall strategic direction of the hospital with strategy development and implementation for materials management.

In hospitals that lack strategic oversight for materials management, the CEO or COO would be wise to insist on recruiting or appointing a manager who could direct and align department activities with the goals of the hospital.

Wilford: We depend on them to do it. I don’t technically get involved with very many purchasing decisions, but I do get involved with major contracts. So the materials management staff and the CFO really have accountability for watching that. It’s a system that works well for us.

What’s an example of a big contract in which you get involved?

Wilford: We use Owens & Minor as our distribution organization. We have recently contracted with them to basically operate our warehousing and inventory management operations. I would get involved in a decision like that, [but] I would not get involved with looking at the quotes we get on food products or that kind of thing.