Outline and explain the concept and process of sourcing
Chapter 2: Acquiring
Learning Objectives
Outline and explain the concept and process of sourcing in the healthcare supply chain.
Discuss and give examples of segmentation of supply chain items and the stakeholders involved with influence within each of those segments.
Relate, discuss and provide an example where the Value Chain integrates with healthcare supply chain sourcing and purchasing.
Distinguish the functional areas of vendor management in the context of the request for proposal and/or quote, and shipping terms.
Relate the sourcing of a medical/surgical item, such as cotton balls, to the identification codes and electronic data interchange catalogs and why those codes and catalogs are important.
Evaluate the benefits of improved sourcing with regard to outsourcing as compared to in-sourcing for healthcare supply chain operations and management in terms of stakeholders’ perceptions and incentives and healthcare organization capabilities.
Introduction
Procurement is the planning and purchasing of components required to perform a service or create a product; this is sometimes referred to as ‘sourcing’ in other industries.
Procurement starts with determining a need for an item, forecasting demand and then sourcing that item.
Procurement
Procurement is a business activity which includes all the activities and processes to acquire goods and services.
Healthcare Supply Chain Professional Associations and Professional Groups
Four of the largest associations:
AHRMM- The Association for Healthcare Resource & Materials Management
HSCA- The Healthcare Supply Chain Association
CSCMP- The Council of Supply Chain Management Professionals
WERC- The Warehouse Education and Research Council
Traditional Methods in Procurement
The traditional methods healthcare organizations have used to conduct business transactions are economically unsustainable due to tighter reimbursement, focused on Value Based Purchasing, for healthcare services and increased costs of labor, equipment and supplies.
Value Base Scoring Index
The Value-Based Purchasing performance score will be calculated based on four domain scores;
1.Clinical Process of Care (20% weight),
2. Patient Experience of Care – HCAHPS (30% weight)
3.Patient Outcomes (30% weight)
4. Efficiency domain (20% weight)
Healthcare Value Chain
Figure 2-1
Healthcare Value Chain
Figure 2-2
Procurement Formula
Acquiring/ Procurement =
Sourcing (Need and Vendor Assessment + Value Analysis)
+
Purchasing (Value Analysis + Business Transactions + Vendor Management)
Stakeholders in Procurement
Manufacturers of medical equipment, devices, pharmaceuticals, and supply items;
Distributors of healthcare supply chain materials;
Group Purchasing Organizations – for an administrative fee and transaction fees charged to the healthcare organization, GPOs usually offer both contracting functions (negotiating volume based agreements with discounts) and use two or more distributors for supply items;
Distribution/Transportation/Logistics; and
Health System/Hospital Operations (Providers of Care).
Segmenting Items
Knowing what type of item needs to be procured is an essential step in the procurement cycle.
Segmenting the items that need to be purchased according to cost, preference, and clinical preference and utilization, are a common practice.
Healthcare Segmentation of Purchases
Basic Commodity Items (BCI)-Interchangeable with equivalent products with no measurable decrease in value to the end user (E.g.- Printer Paper)
Clinical Commodity Items (CCI)- Interchangeable with equivalent products that justify clinical evaluation due to intended use; most evaluation by nursing and clinical technician staff (E.g.- needles, syringes)
Clinical Preference Items (CPI)- Specialty products requiring clinical / physician/nurse input and a significant degree of evaluation. (E.g.-custom packs, balloon catheters, wound closure)
Physician Preference Items (PPI)- Highly specialized products selected as a result of a physician preference. These items are of high value. (E.g- implants, cardiac interventional items, orthopedic implants)
Basic Definitions and Information to the Files
A) The supply item master file- a list (hardcopy or electronic) of all items used in the delivery of care for an health organization that can be requested by healthcare services providers and managers.
B) The charge description master file- a list of all prices for services
C) The vendor master file- a list of all manufacturers or distributors (vendors) who provide the materials needed for the healthcare organization and contain the associated contract terms and prices for specific items.
D) The transaction history file-a running log of all supply chain material transactions of the healthcare organization
Sample Item Master File
All items should be evaluated from the transaction history and item master files, then cross referenced by vendor master files (for contracts).
Figure 2-3
Typical Item Master on a Healthcare Supply Chain Information System
Figure 2-4
The Procurement Cycle
The 11 steps
Need
Specify
Order or requisition
Financial authority
Research suppliers
Choosing the supplier
Establishing the terms and price to be paid
Placing the order with the supplier
Inspecting the shipment and receiving the order
Approval and payment
Updating records
Figure 2-5
Sourcing and Purchasing
Sourcing is the process of finding suppliers for goods and services. “How much does it cost?” is the primary question sourcing professionals ask themselves.
Purchasing is actually transacting business with a vendor.
Purchasing involves four basic steps:
Requisitioning;
Sourcing;
Negotiating; and
Ordering.
Costs Associated with Procurement
Total cost is an economic term referring to the sum of fixed and variable cost of an item.
Total cost can be represented mathematically as
In sourcing, the fixed cost is the price paid for a product and the variable cost consists of all the other costs associated with an item. Examples of variable cost include shipping, associated taxes, storage, and spoilage or waste.
Sourcing Models
Healthcare organizations need to purchase goods from suppliers but must also distribute products internally.
While it is possible to perform these two functions independently, hospitals typically use “co-sourcing” for both their internal and external sourcing, generally focused around the use of a GPO and other suppliers.
Traditional (Outsourced) Model
This model uses group purchasing organizations for contracting of manufactured items, distribution organizations and transportation organizations that are out-sourced.
Data from McCurry, Michael & Moore, Vance (2005). Sisters of Mercy Supply Chain Summit 2005, Resource Optimization and Innovation, a subsidiary of Sisters of Mercy Health System of Saint Louis, Missouri, Branson, Missouri, October 20–21.
Figure 2-6
Non-Integrated/Non-Intermediated (In-Sourced) Model
The vertically integrated model uses in-sourcing to a much greater extent than the traditional model.
The vertically integrated model maintains an internal group purchasing, distribution, transportation and hospital supply chain organization where the goals and work are coordinated to derive the greatest value for the organization.
Figure 2-7
Differences in the Vertically Integrated model, compared to the Traditional Model
Eliminating external non-essential supply chain entities (Group Purchasing Organizations & Distributors);
“In-sourcing” traditional model to speed transition and capture traditional revenue streams;
Increasing control and accountability for service, pricing and quality; and
Establishing closer links to Manufacturers.
Outsourcing Models
Single Sourcing
Single sourcing models involve the outsourcing of purchasing to a single company.
Multisourcing
As organizations become more complex, outsourcing procurement to a single source can become increasingly difficult.
As such, it becomes more common to receive materials from multiple sources, this referred to as multi-sourcing.
Group Purchasing Organizations (GPOs)
The majority of hospitals are members of group purchasing organizations.
GPOs are cooperative organizations through which hospitals combine their buying power to obtain better prices by purchasing in bulk.
Table 2-2
Reproduced from Schneller, E. (2012). The Value of Group Purchasing in the Health Care Supply Chain, Table 3, p. 7. Arizona State University, School of Health Administration and Policy. Retrieved from https://www.novationco.com/media/industryinfo/GroupPurchasing.pdf., from Value of Group Purchasing Case Studies
Sourcing for Patient Care
Sourcing for patient care refers to sourcing items that will be used in direct patient care such as medical supplies and surgical equipment.
Sourcing for patient care is different than sourcing other materials because of the consequences of making a mistake in direct patient care.
Depending on the healthcare supply chain item, different information sources should be utilized when considering pharmaceuticals, medical/surgical supplies, devices and equipment. Such as The Food and Drug Administration (FDA).
Medicine Guides
Figure 2-8
Reproduced from http://www.fda.gov/Drugs/DrugSafety/ucm085729.htm?source=govdelivery&utm_medium=email&utm_source=govdelivery, Retreived September 24, 2014.
National Drug Code Directory
Figure 2-9
Reproduced from National Drug Code Directory http://www.fda.gov/Drugs/InformationOnDrugs/ucm142438.htm?source=govdelivery&utm_medium=email&utm_source=govdelivery, Retrieved September 24, 2014.
Medical Devices
Figure 2-10
Reproduced from http://www.fda.gov/MedicalDevices/default.htm, Retrieved September 24, 2014.00
Demand Forecasting
Demand forecasting is simply determining how much of an item you need for future use.
Demand Forecasting variables:
Supply: the amount of product available;
Demand: Overall Market demand for product;
Product Characteristics: Product features that influence demand; and
Competitive Environment: Actions of product suppliers in the market.
Forecasting Models
Qualitative: Relies on a person’s intuition of opinion;
Causal: Assumes that demand is strongly related to certain factors;
Time Series: Based on historical demand patterns [including cyclic patterns]; and
Simulation: Combines causal and time series methods.
From these variables, the appropriate methods are applied.
Methods to Forecast
Many organizations utilize averaging (mean of several inputs) to estimate or forecast.
Simple Moving Average:
Weighted moving average would be:
Another well-known and utilized method is called Economic Order Quantity or EOQ. This method calculates the most cost-effective amount to purchase at a time.
Purchasing
Purchasing refers to the process of orders and receiving goods and services. It is the final step in sourcing.
There several functions that purchasing traditionally controls or participates in, some include: Budgeting; Inventory Replenishment; Capital Evaluation and Selection; and Negotiating.
How these functions are performed in purchasing are decisions of the healthcare organization leadership and management.
Methods to Purchasing
Supplier Optimization
Total Quality Methods
Risk Management
Global Sourcing
Vendor Development
Green Purchasing
Vendor Selection and Management
When selecting a vendor, the capabilities of that vendor must be understood and evaluated; this evaluation includes the value of the vendor’s product or service with regard to quality, service levels, delivery terms and methods and technical support.
There are various types of approaches to vendor control and management
Vendor Control
Monitoring vendor visitations
Coordinating with the compliance office
Ensuring vendors are credentialed for the departments they are to visit
Completed and have up to date Business Associate Agreements, and are properly identified, especially in patient care and clinical areas
Process Management
Monitoring
Conducting value analyses/assessments
Developing and maintaining financial controls on costs associated with ordering supplies, pharmaceuticals, capital equipment and services
Strategic Process: purchasing is moving from a clerical function towards a strategic process
Purchase Orders
A purchase order is a contractual, legally binding document that details the buyer’s terms for acquiring products, services, or equipment
There are 3 types of purchase orders:
1. Standard Order
2. Blanket Order
3. Open Order
Procurement or Purchasing Card: is a credit card linked to the departmental general ledger and allows purchases of goods and services without a requisition or purchase order.
Purchasing and Payments
Purchasing Terms and Conditions
Negotiations, contract negotiations many times, must be conducted with individual vendors to determine the specific items, prices, service levels and delivery terms and conditions.
Payment Terms and Conditions
There are a myriad of payment terms; the basic methods are:
1. Percent (%), Days, Net
2. COD: or Collect on Delivery
3. Pre-Pay
4. Capital Terms
FOB (Free on Board)
FOB (free on board) refers to the point of delivery for goods, products, and equipment from the supplier to the buyer.
FOB also determines the point at which title is passed from the supplier to the delivery site.
Determining when ‘ownership’ occurs is important when considering damage or theft
When damages occur before the FOB point, the supplier is responsible. When damages occur after the FOB point, the ordering party is responsible.
Purchasing Requests to Make Buying Decisions
In many instances where new purchases are needed or existing purchases need more favorable conditions, price, shipping terms, fulfillment, etc..
The following are tools utilized in the purchasing process to bring data from suppliers to the buyer/purchaser to make purchase decisions.
requests for information (RFI)
requests for proposals (RFP)
requests for tender (RFT)
requests for quotation (RFQ)
Value Analysis
Value analysis is a process that determines the best and most economical procedures, products, equipment, or services that will reliably and technologically meet the needs of the user while reducing overall costs.
A value analysis is specific to the health organization as terms, conditions, strategies and business objectives will be different between health organizations.
This also includes physician, nurse, clinical staff and support staff, typically in that order of priority, preferences for supplies, pharmaceuticals, equipment and furnishings.
Value Analysis Steps
Step 1: Assess current product use and variations [establish current state]
Step 2: Establish quality specifications or best practice
Step 3: Analyze costs [all costs of ownership] and establish cost of use
Step 4: Develop recommendations and communicate action plan with rationale
Step 5: Implement action plan
Step 6: Communicate value analysis and success stories
Step 7: Re-evaluate progress regularly
Global Health Exchange (GHX)
In healthcare over 50% of medical and surgical items, such as cotton balls, are processed and transacted electronically between healthcare organizations and vendors by GHX (Global Health Exchange)
Transacting the Purchase
For a best practice when the supply item(s) will be ordered in large quantities, over a long period of time or when the cost of transactions with this vendor will be moderate to high, a contract should be established with this vendor to achieve the best pricing and service terms for ordering, receiving, returning, utilizing and maintaining our supply items.
Electronic Data Interchange (EDI)
EDI is a set of standards that collectively provide a common protocol or syntax for transacting business documents electronically.
In essence, EDI is to electronic commerce as grammar is to verbal communication – it is a set of rules and guidelines that are applied when developing and implementing software and services designed to transmit business documents electronically.
EDI provides a common “language” that enables businesses with dissimilar computer-based business systems to communicate with each other
Commonly used EDI Transaction Sets
Table 2-4
Reproduced from: TrueCommerce EDI Solutions, “EDI Overview: A Practical Guide to EDI and the TrueCommerce EDI Platform,” White Paper, Seven Fields, Pennsylvania, Retrieved from http://www.highjump.com/sites/default/files/Resources/WP-US-EDI.pdf, p. 4
The United Nations Standard Products and Services Code® (UNSPSC®)
An open, global, multi-sector standard for efficient, accurate classification of products and services.
The UNSPSC system is an efficient, accurate and flexible classification system for achieving company-wide visibility of spend analysis, as well as, enabling procurement to deliver on cost-effectiveness demands and allowing full exploitation of electronic commerce capabilities.
UNSPSC Code Set: Follow the Cotton Ball
Table 2-3
Data from http://www.gs1.se/globalassets/unspsc/unv151101.xlsx.
Barcoding
GS1 uses a system of standards to promote efficiency amongst organizations supply chain. GS1 has various systems of standards which include the GS1 identification keys, GS1 barcodes, GS1 EPCglobal, GTIN, GDSN, and eCOM.
The GS1 barcodes are made
up of subscript text with
numerical, symbols,
and alphabet data.
Figure 2-11
Most Up-to-Date Barcode
The GTIN, which stands for Global Trade Item Number, places barcodes on mainly pharmaceutical and medical devices and uses a barcode that is up to fourteen digits long.
Figure 2-12
Conclusion
This chapter has focused on acquiring the ‘technology of care’ within the healthcare supply chain.
Acquiring healthcare supply chain items includes the function of procurement that is made up of sourcing and purchasing.
Stakeholders play a significant role in this process.
In order to acquire supply chain items, healthcare organizations have an array of options that are available based on their mission, strategies, capabilities and partnerships.
Discussion Questions
Outline and explain the concept and process of sourcing in the healthcare supply chain.
Discuss and give examples of segmentation of supply chain items and the stakeholders involved with influence within each segmentation.
Relate, discuss and provide an example where the Value Chain integrates with healthcare supply chain sourcing and purchasing.
Distinguish the functional areas of vendor management in the context of the request for proposal and/or quote, and shipping terms.
Relate the sourcing of a medical/surgical item, such as cotton balls, to the identification codes and electronic data interchange catalogs.
Evaluate the benefits of improved sourcing with regard to outsourcing as compared to in-sourcing for healthcare supply chain operations and management in terms of stakeholders’ perceptions and incentives.
Exercises
What methods would you use for determining a demand forecast for cotton balls?
Where would you start to search for a supplier for cotton balls? What is the UNSPSC Code for a cotton ball?
How would you categorize supplies based on your health organization’s situation?
What would be the difference if you outsourced through a GPO and distributor versus insourcing through a manufacturer?
What considerations (such as volume needed, delivery terms, quality, cost, etc…) are important and why?
What considerations are important if you contracted with a vendor for cotton balls?
Journal
Define:
Intermediated Supply Chain:
Dis-intermediated Supply Chain:
Distributor:
Strategic Sourcing:
Supply Chain Management:
810 Transaction:
32 Electronic Catalog:
Medical/Surgical Supplies:
Pharmaceutical Supplies and Equipment:
Manufacturer:
Distributor:
Group Purchasing Organization (GPO):
Journal Continued
Answer the following questions with one (1) to three (3) sentences
What are the differences between an Intermediated and Dis-intermediated Supply Chain and give examples?
What do manufacturers, distributors and providers of care such as hospitals, health systems, physician offices want from a supply chain transaction and why?
Why are long term strategic sourcing relationships important to the health organization (consider the need for the ‘technology of care’)?
Search: Search items may give you great assistance in understanding the healthcare supply chain, provide the website/URL and provide a one paragraph summary of what you found.
GHX: http://www.ghx.com/
ANSI: http://www.ansi.org/about_ansi/overview/overview.aspx?menuid=1
