Featuring a White Paper
from Priya Kamani, M.D.
of Neoforma, Inc.
June 2004

Thought Leadership FromMRI
Montgomery Research

Sponsored by2

ASCET | Vision

Hospital Supply Chain Savings
Priya Kamani

Hospital executives are strengthening their institution’s financial position
through judicious cost savings initiatives and strategic technology investments.

U.S. hospitals are under great financial pressure. The hospital
supply chain presents enormous opportunities for hospital
executives seeking to reduce costs and gain new efficiencies. Costsavings opportunities from operational analyses and efficiencies
from upgrading or replacing enterprise resource planning (ERP)systems rely on a foundation of accurate, reliable data for theirsuccess. With limited resources, hospitals should outsource theirdata accuracy and analysis projects to a trusted third party toensure that the underlying information is available in a timely
manner, is accurate and reliable, and drives improvements in thesupply chain.
Modern Healthcare and Arista Associates reported in August
2001 that 61 percent of U.S. hospitals are either losing money orjust breaking even. In 2003, Healthcare Financial Management
Association reported that the median hospital operating margin
was in the red 1.8 percent. Never has financial pressure on U.S.
hospitals been greater.
Hospital executives are looking for ways to save that do not
adversely affect their ability to deliver high quality patient care.
Supply expenses, which typically make up 25 to 30 percent ofa hospital’s spend, are an increasingly important target area forcost reduction. Hospital supply chain executives can contributeto strengthening the financial position of their institutions bydriving cost savings initiatives and making strategic technologyinvestments that drive efficiencies. Clean, accurate product,vendor, and contract data provide the foundation for maximizing
the ROI of technology investments and for completing meaningful spend analysis to drive cost-reduction efforts. Additionally,
given the heavy investment in resources, reference data, and technology required to drive a successful data cleansing initiative,
hospital supply chain executives should look to outsource data
cleansing and to continue to maintain the integrity of the dataover time.
We will discuss how hospital supply chain executives canmaximize the investments made in implementing ERP/MMISsystems (enterprise resource planning/material management
information system) and how to use the clean data for spend
analysis. Spend analysis is essential to supporting any cost reduction efforts by providing visibility into exactly what is being spentfor supplies and with which vendors. In addition, the paper
will provide criteria for selecting a trusted data cleansing andmaintenance partner.

Driving Efficiencies, Maximizing Investments
IDC states that spending on health care information technology byproviders is likely to increase from $15.1 billion in 2003 to $17.3 billion in 2007. Fifty-eight percent of hospital supply chain executives
surveyed by Healthcare Information and Management Systems
Society (HIMSS) in 2003 indicated that electronic resource planningsystems were most important to the facility in the next two years.
One of the key supply chain benefits of ERP systems is to automate
supply chain processes and increase procurement efficiencies.
Unfortunately, poor quality data in the systems is a significant contributor to manual workarounds, manual exception processing, andrework. HealthCare EBusiness Collaborative indicates that as muchas 80 percent of all transaction errors are directly related to inaccurate product information. For ERP systems to deliver on their promise,the underlying data must also be accurate. Commonly encountereddata problems include:• Incomplete vendor and/or product information;• Nonstandard vendor names;• Vendor product numbers with missing information or additional characters;• Overly abbreviated product descriptions;• Product descriptions that are not normalized or may havemissing attributes; and• Unclassified products.
These problems lead to difficulty in identifying the right supplies, as
procurement personnel cannot effectively search and find supplies

Priya Kamani, M.D., vice president of Data Management Solutions at Neoforma, is responsible for Neoforma’s data cleansing and maintenance technology, information, and services. With more than 15 years of experience in health care, she leads a team of Neoforma professionals with decades of healthcare experience in clinical areas and materials management. Dr. Kamani completed her residency in pediatrics at University of California, San Francisco andhas an M.B.A. from the Wharton School of Business.

Vision | ASCETin the system. The result is usually a proliferation of duplicate itemsicant discount with a single supplier. Neoforma has discovered that,in the item file – with the same supply being purchased at varying
unfortunately, more than 70 percent of hospital spend can beprices, not necessarily the right price. These issues are often magniunclassified, or misclassified, making it difficult to identify patterns
fied significantly for multihospital systems that have many item andand direct initiatives. Figure 2 describes a common hospital scenario
vendor files to manage.
before UNSPSC classification.
Figure 1 illustrates how inaccurate entries appear in a hospital’s
Increasingly, participants in the health care supply chain are
item file. Both items are actually the same product, but it is not clear
adopting UNSPSC. It is a global reference taxonomy for products
which item has the correct vendor and product information. It may
and services, developed with significant input from industry
be that neither has the correct information. Incorrect product inforparticipants over several years. It is free, does not lock the hospitalmation can lead to a:
into a data services provider’s proprietary taxonomy, is updated on• Delay in delivery of medically necessary, urgent supplies asa regular basis by the United Nations, and reduces the resource
the supplier tries to reconcile the part number disFigure 1 Common Inaccurate Data Scenariocrepancy;• Waste of scarce resources as the hospital personnel
work with the supplier to resolve the price discrepVendor
Hospital Product
Hospital Hospital
Vendorancy created; andProduct Number Description
UOM
Unit Price
Name• Delayed payment from the hospital to the supplier,
RBP094632PR
AGC, Inc.
PF LTX GLV, PREA
$30
preventing the hospital from taking advantage of
Powder-free gloves, 6 Each$44
Acme Glove AGC-94632
supplier discounts for timely payment and possiblyCompany
incurring late payment fees from the supplier.
Often, despite the significant time invested in manual discrepancy
management, the errors are never corrected in the system, perpetuating this vicious cycle.
Investments made in software without accompanying efforts toimprove the quality of data mean that goals for automation andincreased efficiencies are not met and the return on investment is
not fully realized. To maximize the return, savvy hospital supply chain
executives today are combining a data cleansing initiative with anERP/MMIS system implementation or major upgrade.
So, the value of accurate data is achieved when hospital
personnel are able to find the right product at the right price thefirst time, eliminating the rework and maximizing the value of theERP system.

Categorized Data Provides
the Framework for Analysis
Meaningful spend analysis is essential fuel for hospitals pursuing
supply chain cost reduction efforts. The analogy to the clinical environment is patient diagnosis. Clinicians evaluate information about
the patient’s history, symptoms, and other factors to develop a diagnosis and treatment plan. Analogously, hospital supply chain personnel armed with intelligence on spend patterns can begin theprocess of understanding how to reduce costs. The analysis of spend
patterns depends on having accurate product information that isproperly classified in the item file and the purchase order history file.
In addition, the choice of classification system is critical. A classification system such as the United Nations Standard Products andServices Code (UNSPSC), which provides an appropriate level of
granularity, yet is hierarchical, is the cornerstone of successful spend
analysis. The right schema will allow appropriate aggregation of like
supplies and facilitate drilldown to a more granular level so that users
can view spend data at the most useful level. For example, a CFO will
be interested in high-level buckets to understand the top 10 areasof spend, but a contracting manager will like to see the data bucketed into families of products that can be used to negotiate a signif-requirements for developing and maintaining a proprietarytaxonomy. Additionally, UNSPSC is consistent and complete,encompassing all the supplies (not just medical/surgical supplies)that a hospital consumes. Figure 3 reveals the UNSPSC Hierarchy.
Once the item file and PO history file in the ERP system is categorized to the UNSPSC standard, hospitals are able to generate information that helps them analyze their spend patterns. Specifically,hospitals are able to track:• Top vendor spend including manufacturer and manufacturer
division by UNSPSC category; and• Top item spend by UNSPSC category.
UNSPSC allows the hospital supply chain executive to understandwhere the dollars are being spent and to identify the highest spend
areas to focus on and look for cost savings opportunities. UNSPSC
also enables supply chain personnel to limit the view of the data toa manageable group. For example, a report on top spend by category may reveal that hospital A spent $100,000 in the past 12
months on the UNSPSC class medical gloves and accessories.
Further drilldown may indicate that 50 percent of that spend iswithin the UNSPSC commodity medical exam or nonsurgicalprocedure gloves and that the hospital is buying these gloves from
more than five different suppliers. This represents a supplierconsolidation opportunity. Driving procurement from a more
limited set of suppliers will enable the hospital to maximize tieropportunities and potentially drive for better contract prices basedon higher purchasing volumes.

Data Drives Deeper Savings
For hospitals, a deeper level of strategic supply chain initiatives iscontract utilization and contract savings. Hospitals overpay 2 to 7
percent on contracted medical-surgical products.1 Inaccuracies indata and lack of analysis lead hospital personnel to buy similar
products from multiple manufacturers. The consequence is that3

4ASCET | Vision

Hospital Supply Chain Savings

Figure 2 Common Hospital Scenario Before UNSPSC Classification
70% of items are grouped as“other” or “blank”
Generic
Product Categories
Anesthesia Agent and Gas
Bandages/Dressing
Blood and Blood Derivatives
Catheters
Circuits
Contrast Media
DrainsEndomechanical/Sapling Device
Endomechanical/Stapling Device
ET Tubes
Films
Gloves
Implants
IV Solution
Maintenance Supplies
Needles/Syringes
Other Medical Supplies
Other Nonmedical Supplies
Other Surgical Supplies
Plates/Screws/Wires
Reagents
Sterile Packs and Gowns
SutureSutures
Total Joint(blank)
Total# Products
24110
19137
91121
2
44
49
33
54
83
291155
1598
661
246
157
412
37
1126
70
1527
5616

contract utilization with one particular manufacturer is not
maximized. When contract prices with a manufacturer are basedon tier participation, maximizing utilization is the key to gaining
entry to the best possible tier for which the hospital is eligible.
The categorized data can be used to identify similar commodity
items; however, UNSPSC does not provide enough information
to determine exact functional equivalency between products.
Enriched product attributes can be used to establish functional
equivalency.
With this type of enriched data, the hospital can focus thesupply analysis to gain maximum savings. In the previous example,
a report on top spend by category reveals that hospital A spent
the $50,000 in the past 12 months on the UNSPSC commodity
medical exam or nonsurgical procedure gloves. With enrichmentof the data, supply chain personnel can limit their view within thiscommodity to a specific attribute. For example, one attribute forgloves that enrichment provides is latex. Latex would include
latex and latex-free gloves. It is essential that hospitals provide
personnel with latex allergies a latex-free alternative. However, all
too often departments order just the latex-free variety for generaluse to avoid stocking/ordering two types. Unfortunately, the latex-

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12%
4%
3%
7%
1%
0%
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27%
100%

“Plates/Screws/Wires” aremixed together crypticallyk-WIRES STYLE/6 0.045 3/64
k-WIRE 0.062 9”
PLATE AMBI CHS 3
TREADED GUIDE PINSCREW CORTICAL 3.5X25MMSCREW CANCELLOUS 5X35
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PLATE DOC .22MM
SCREW 14MM
SCREW LOCKINGSCREW 4.0X14MM

free gloves are usually significantly more expensive. Supply
chain personnel could now use the latex attribute and drill
down deeper to identify that 75 percent of the gloves procuredin the medical exam or nonsurgical gloves category are latex
free, significantly driving up the costs in the gloves category. Thisinformation could be used to launch an education effort
aimed at minimizing the use of latex free only to those personnel
who are allergic to latex. Thus, a combined use of UNSPSC category and additional attributes allows supply chain personnel toidentify some quick wins that can be easily implemented acrossthe organization.
Product attributes can also be applied in the contract
maximization arena. The hospital supply chain executive can takea contract opportunity report provided by his or her data cleansing
partner and have a supply chain employee separate products
on contracts that have been activated from those that have not.
The supply chain employee can then take the list of supplies being
purchased off contract and use product attributes to findfunctionally equivalent products that are on contract. Doing so will
enable the hospital to either maximize existing contracts oractivate new contracts to drive higher levels of contract utilization

Vision | ASCET

and maximize associated savings. It
is also important for the data
cleansing partner to work collaboratively with the hospital’s grouppurchasing organization (GPO)
and suppliers.

Locking in Savings

Figure 3 UNSPSC Hierarchy

42 Segment: Medical equipment and accessories and supplies
Logical aggregation of families for analytical purposes.

31 Family: Wound care products
A commonly recognized group of interrelated classes.

Once a hospital’s item and vendor
22 Class: Suture and related products
files are cleansed, categorized, andA commonly recognized group of interrelated commodity groups.
enriched, it is essential that hospi01 Commodity: Suture
tal supply chain executives takeA group of common function products and services.
concrete action to prevent degradation of the data. First, the hospital needs to institute policies andprocedures that limit access by hospital personnel who can add,
• Is the product database sourced from suppliers that offer thedelete, or modify vendor, product, and contract information withhighest quality data?
in the ERP system. This step will minimize the number of inaccura• Is there a mechanism to track the age of the data in the procies that are introduced into the system. In addition, suppliers
duct database?
frequently change product information or discontinue products on• Does the company have a separate reference database fora routine basis; mergers and acquisitions are common, with resultvendor information?
ing changes in supplier hierarchy, and the UNSPSC classification• Does the company support accepted industry standards, such assystem is continually being improved and updated. To keep up withthe UNSPSC?
these changes, hospital supply chain executives should invest in a
• Does the company play a leadership role in driving adoption ofdata maintenance program with a trusted data cleansing partner
standards through board or committee membership?
that has made the necessary investments in resources, technology,• What is the financial strength and viability of the company?
and supplier relationships to deliver this service.
and• Does the company provide references that can speak to the timeChoosing a Partnerliness and quality of the data cleansing work?
It is critical to select the right data cleansing and maintenance partConclusion
ner. The three most important criteria to consider when selecting aHospital supply chain executives have an opportunity to strengthpartner are its technology, service delivery experience, and quality
en the financial position of their institution through judiciousof reference information. In addition, hospitals should consider
cost savings initiatives and strategic technology investments.
thought leadership, promotion, support of industry standards, andThe foundation, framework, and ultimate success in delivering
financial stability. Hospitals should consider the following whenthese savings is based on accurate, categorized, enrichedselecting a partner:
data driving the systems and the processes. With limited resources• Does the company’s technology support automated data
to manage the data themselves, hospitals should leverage acleansing and maintenance?
trusted third party for data cleansing and maintenance. The most• Can the hospital receive a demonstration of the technology tools
desirable partner has the right combination of technology, inforand results?
mation, and services to deliver on-time, reliable, and accurate data
• Does the company support the cleansing and maintenance ofcleansing projects. ■large health care organizations, such as GPOs?
• Does the company’s staff have strong clinical or materials
experience?
Endnote• Does the company work collaboratively with your GPO and sup1 “The Value of eCommerce in the Healthcare Supply Chain,” R. Lacy, p. 6,
plier partners to insure you receive the maximum benefit from
June 2001.
the data work?

5www.neoforma.com
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Phone 408.468.4000
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