Tips For Developing A Lean Procurement Function
Procurement cost accounts for more than 30 percent of a hospitals’ expenditure, in fact it’s the largest financial outlay second only to staffing, and yet many healthcare institutions relegate its management to the back office. Healthcare Global spoke to hospital procurement expert Richard Macintosh, Managing Director at Inverto about ways hospital executives can manage their procurement function to yield tremendous financial savings.
Richard outlined five key points that will help any hospital lean and improve its procurement function >>>
- Make the move from transactional to strategic sourcing
- Employ people with a commercial background
- Address procurement at an executive level
- Focus on clinical engagement
- Don’t compromise on patient care
Commonly, the first thing hospital executives will look at when they are losing money is staffing levels, however that method of leaning your institution is limited and often leads of compromised patient care. What hospital executives should be addressing first and foremost is the procurement function.
Transactional Versus Strategic Sourcing
“Typically we find is this is an area that’s not been particularly well managed. The typical procurement function is very transactional; the department is placing purchase orders, monitoring arrivals, and distributing goods, but they are not actually doing any proactive sourcing, they are not driving out cost savings. We find that many procurement departments are transactional rather than strategic,” says Macintosh.
If you took a snapshot of a typical hospital procurement function you would label it ‘back office’. You would probably find the department in a porter-cabin at the back of the hospital, titled, ‘Supplies’ rather than ‘Procurement’ and furthermore a team of people who are not very senior or indeed commercial would most likely run it.
“We find the key to success when it comes to hospital procurement is clinical engagement,” says Macintosh. “The procurement function doesn’t interact with the front line staff; they don’t interact with the clinicians, the nurses or head of estates - they are in the back office managing transactions. To this end it is essential to have very good commercial people heading up the department, who work closely with clinicians. If you can achieve this, you can make some extremely impressive savings.”
“Take an orthopedics department as an example, it requires a very specialised segment of spend. It is the surgeons and clinicians who have the specialised knowledge about technology and products so in order to make cost savings you have got to work very closely with those people. You have got to understand their exact requirements and then it’s the procurement function’s role to fully understand the market. If you merge both expertise and work very closely with one another you can source the best value suppliers and arrangements for the department,” says Macintosh.
It is vital for the procurement function to work alongside the clinical arm of the hospital. The only way to make significant cost savings is to work out all the possible commercial options and to teach clinicians to understand the commercial implications of their decisions.
“What we often find is that the clinical staff are making decisions regarding procurement, and they are making those decisions without any cost knowledge or commercial understanding. The procurement function should be doing this for them; it should be the conduit for innovation, they should be working with the supply base, to bring innovative products and solutions to the hospital. Instead the suppliers go straight to the clinicians, and it’s a bit like a kid going into a toy shop – of course they want the best, newest products, however it should be the role of procurement to educate and negotiate on behalf of the clinical staff to ensure they get the products they need, while also managing cost base.”
Procurement strategies should be on the boardroom agenda
Focus On Patient Outcome
Not compromising patient outcome is very simple, procurement should be getting best value for the hospital, and it’s not only about cost. It has to take into consideration all factors including quality and outcome, as well as safety. Before you undertake any work on the category of business spend you must understand the business requirements so again it comes back to clinical engagement, you must spend lots of time with the stakeholder understanding what they need now and in the future. If you understand that you can then procure against it - you will select suppliers against what is required by the hospital and you will search for the best commercial option. It is simply no good to source the lowest cost product, because it may not tick all the boxes for the department. This haphazard approach to procurement could in fact end up costing you more money in the long term.
“Within the hospital industry there are lots of collaborative procurement hubs - regional focused buying organisations – however there is a fairly big questions mark over how effective these are,” says Macintosh. “Collaboration is great and there is a theory that says the more you can bundle together in terms of volume, the more attractive it is to a supplier, and the lower cost you get, however, it is hard enough to get surgeons within one hospital to agree on what they want, let alone surgeons across many hospitals.”
When it comes to cost saving, commitment is key. “What we have found is that many hospitals can get better prices, by being able to commit to the buyers that they have selected. It’s a mix, logic says collaboration and volume should trump anything else but in practice it’s not necessarily true,” says Macintosh.
Employing The Right People
It may be cliché to say, but employing the right team of people within the procurement function is probably the most important factor when it comes to efficiency and cost saving. “You have got to have good people. Strategic sourcing, proactively driving savings requires good people, it requires commercial people and people who are able to manage the supply market, internal stakeholders and business requirements. They must be able to work peer to peer with the CEO or the Head of Orthopedics or the Chief Nurse,” says Macintosh.
There has not been enough emphasis put on the procurement department as a key function, it has been neglected. The procurement function is seen as a low-level function that reports into finance, so it has no executive visibility. Procurement is generally not on the executive agenda and it should be. As Macintosh concludes, “It’s fundamental, procurement should be on the c-suite agenda, without doubt, and you need good people to do that. The procurement function should have a very high profile within the hospital, it should be one of the backbones of the organisation, its just so important.”
By following the steps outlined by Macintosh, hospitals can make vast savings from a procurement perspective. On average, Inverto helps organisations save a huge 9.6 percent of the spend that they address, certainly not an insignificant figure.