Becker's Hospital Review

58 Executive Briefing Sponsored by: Supply Chain Optimization: How Mercy Leaders Took an Idea on a Napkin to $1B in Savings — and Are Now Doing it for Others D ecreasing reimbursements amid rising operational costs can threaten a healthcare organiza- tion's bottom line. Supply chain costs continue to represent the second largest operating expense for hospitals and health systems after labor, according to a 2014 Market Realist report. Efforts to effectively allocate finances for supplies are challenged by pressure to satisfy physicians' demands for prefer- ence items. A 2016 survey from Premier found 98 percent of C-suite leaders cite standardizing physician preference items as a major concern they expect to ad- dress in the near future. Many healthcare executives are identify- ing the supply chain as an area of strategic opportunity to cut costs and improve the bottom line, but they don't always have the right tools to do so. Organizations of- ten lack the time, money and resources necessary to standardize products, up- date ordering practices or find the most cost efficient items for their facilities. A solution is born In the late 1990s, leaders at St. Louis-based Mercy set out on a quest for operational efficiency. Their journey — and the devel- opment of their supply chain organization Resource Optimization & Innovation (ROi) — started with notes on the back of a napkin. They envisioned a more strategic opera- tional approach that internalized and inte- grated key functions within the supply chain and group purchasing process. Those dreams were recognized in 2002, when Mercy officially founded ROi as its own ac- countable supply chain organization. "From 2002 to 2011, ROi exclusively ran Mercy's supply chain and kept adding ser- vices to its offering to help drive down costs for Mercy," says Greg Firestone, vice presi- dent of strategic customer relations for ROi. "We found a lot of opportunity to increase supply chain efficiencies and to improve the quality and safety of care delivery." ROi operates the end-to-end supply chain activities — including self-distribution and logistics — for the 43-hospital system on a daily basis. Over the past 15 years, ROi has helped Mercy save more than $1 billion, according to Mr. Firestone. ROi's first step to achieve these cost sav- ings was setting up its own consolidated service center to take control of Mercy's supply chain. "We felt like we could deliver the prod- ucts to our own facilities in a more efficient manner," says Mr. Firestone. ROi also built its own self-contracting portfolio to better manage supply costs by building closer relationships with industry suppliers. After working with Mercy for nearly a de- cade, ROi has established a large breadth of knowledge and first-hand experience by executing critical elements of the sup- ply chain, says Mr. Firestone. Mercy and ROi commercialized their supply chain and GPO services in 2011 to help other healthcare providers recognize similar op- erational improvements and cost savings. The accountable supply chain organization now provides multiple cost management and supply chain services to more than 240 hospitals and about 2,800 non-acute facili- ties across the country. Services include: 1. Contracting and sourcing ROi offers a very broad contract portfolio for its member organizations, with a special emphasis on physician preference items. "These items represent 35 percent to 50 percent of total supply costs, depending on the health system," says Mr. Firestone. Since Mercy's size and scope drives a large demand for physician preference items, ROi can commit to purchasing a high volume of these products from suppliers, which results in sustainable controlled costs. Our model has fostered highly collaborative relationships with physician preference item suppliers that allow us to gain commitment from key stakeholders," says Mr. Firestone. 2. Manufacturing and packaging operations ROi implemented a self-distribution model that allows the supply chain or- ganization to manufacture and distribute its own products at much lower costs, ac- cording to Mr. Firestone. Services include custom procedure trays, pharmaceutical repackaging, medical device reprocess- ing, private label products and, most re- cently, IV compounding. "There are many supplier companies that do not manufacture their own products, which provides us the option to go di- rectly to the source of manufacturing to create our own private label at a substan- tially reduced cost." Mr. Firestone says this helped ROi and Mercy achieve a 10 to 30 percent cost re- duction for supplies. "We essentially re- turn a mass majority of these cost savings over to our member facilities," he says. 3. Consulting ROi also offers GPO members supply chain optimization consulting free of charge, says Mr. Firestone. Consultants with extensive clinical and operational expertise visit provider locations in per- son, helping them develop more efficient inventory management processes within their facilities and build collaborative re- lationships with physicians. "If organizations are interested in setting up a consolidated service center, we've also gone in and shown them how to do that after conducting a feasibility study," says Mr. Firestone. Case study: Mercy's custom procedure tray operations One of the best examples of ROi's initial success with Mercy's supply chain was its transformation of the health system's cus- tom procedure tray operations. In 2007, each of Mercy's hospitals man- aged its own unique pack program, yet there was no effective way to manage item usage. The lack of structure and organi- zation contributed to a large amount of

• Cover