Clockspeed's concept offers boon to health care

How efficiently hospitals keep track of health-care supplies can make the difference not only in cost but also the quality of patient care. There's plenty at stake: the Health Industry Group Purchasing Association reports that "goods and purchased services" is the second-largest expense — after labor costs — in hospital settings. Eugene Schneller and the late Lawrence Smeltzer of the W. P. Carey School of Business spent the last few years studying procurement processes employed in U.S. hospitals. They discovered that a key to streamlining health-care delivery may lie in the industrial supply chain concept of "clockspeed."

Herbert Hoover wanted a chicken in every pot; Eugene Schneller wants a supply-chain executive in every hospital.

Not just a manager, but a senior decision maker on par with the chief financial officer or chief operations officer. Someone to redesign and manage the way hospitals — the most expensive component of the American health-care system — select, buy, store and re-order everything from saline to sheets.

Schneller's tactical purchasing gurus shop through Internet-based "reverse auctions" that cloak identities of both buyer and seller; match buying methods to department "clockspeeds" and leverage group purchasing organizations to shave dollars off purchases of everything from cases of gauze to clinical preference items such as pacemakers. Implemented properly, his creative recommendations could turn into enormous savings at a time when hospital margins are shrinking.

Schneller, an expert in health-care supply chain management, is director of Health Sector Supply Chain Initiatives, a research unit at the School of Health Administration and Policy at the W. P. Carey School of Business. He and the late Professor Lawrence Smeltzer spent the last few years burrowing into how hospitals purchase the tens of thousands of items necessary to provide care to patients.

There's plenty at stake: the Health Industry Group Purchasing Association reports that goods and "purchased services" is the second-largest expense — after labor costs — in hospital settings. Estimates for the hospital group-purchasing market range from $148 billion to $165 billion currently, and are forecast at $257 billion to $287 billion by 2009.

"We wanted to understand how different systems work, and why one becomes dominant — which led us to the notion of associations. Through allying with other facilities, a little hospital in North Dakota can escape the size disadvantage; by allying into group purchasing organizations, participants do well while being able to drive the market much more strongly," Schneller explains.

They found a surprising array of purchasing strategies ranging from altruistic to cut-throat. For instance, Catholic Healthcare West, a 40-hospital network based in San Francisco, Calif., is what Schneller calls "a moral exchange."

"CHW, when possible, buys green," Schneller said. "If a product is biodegradable, they buy it rather than the non-biodegradable choice, even if it costs more." Farther along the purchasing spectrum is HCA (Hospital Corporation of America), with 190 locally managed hospitals and 91 outpatient surgery centers in 23 states, Great Britain and Switzerland.

"HCA is a community exchange, in which members are forced to buy the same things" as part of corporate cost-cutting strategy," he adds. Overall, though, group purchasing arrangements are less effective than a decade ago when it comes to controlling costs and boosting efficiency, Schneller found.

Applying the 'clockspeed' concept

He poses a provocative question: What if health-care leaders borrow an industrial supply chain concept pioneered by Charles Fine, a professor at MIT's Sloan School of Management and author of "Clockspeed: Winning Industry Control in the Age of Temporary Advantage." Fine says that different industries run at different speeds.

The pharmaceutical industry has slow clockspeed, with drugs in development for years. The film industry is faster, with just 18 months or so between theater premier, DVD and the discount shelf at Blockbuster. Clockspeed is affected by two major influences: technology and competition. Both can hasten an industry's clock.

Fast-food restaurants are a prime example of competition fueling galloping clockspeed, says Michael Hugos, chief information officer at Network Services Co., a $7 billion co-op owned by member companies and author of "Building the Real-Time Enterprise: An Executive Briefing."

"We're working with one major [restaurant] client to re-engineer everything from the layout to inventory management in the back room. They want to double same-store sales over the next three to four years, so we need to double our deliveries to them." Hugos says. Central to the redesign is an electronic point-of-sale inventory tracking system based on bar-coding.

The system reports daily consumption to Network Services, which uses the data to coordinate size and frequency of trucked-in deliveries. Companies that don't implement clockspeed are more likely to see supply chain problems ranging from product hoarding to over-ordering, he adds.

Clockspeed is especially intriguing as a health-care remedy, Schneller says, because rapid technological advances are driving medical-practice changes in organizations with departments consuming products and services at varying rates. Take a blood test, for example, drawn in the hospital, processed in the lab and reported hours later — maybe even overnight.

New hand-held blood analyzers give virtually instantaneous results — and a chain reaction takes place. The hospital buys fewer blood vials and stoppers, lab jobs are cut and less square footage is required in the lab.

"Clockspeed change has occurred," Schneller says.

The change requires an adjustment in supply chain arrangements — more frequent or larger shipments of some products, less of others routinely ordered in the past. A new vendor may be hired, or an existing distribution contract renegotiated. Perhaps of most importance, the patient can be treated without having to wait many days for test results. When this occurs, the materials for the procedure, if it is indicated, need to be available "just in time."

Another example: Instead of splitting open a cardiac patient's chest to perform bypass surgery, the surgeon inserts a medicated stent (via a catheter inserted through an artery in the groin) to keep the artery open. The personnel, equipment and supplies required for cardiology have morphed. Meanwhile, with the exception of neonatal services, the labor and delivery unit operates pretty much the way it did five years ago, with stable supply-chain needs.

Ditto for the psychiatric floor. "When you take the idea of clockspeed into the hospital, it's no longer a homogenous organization, but one that takes different supply chains. Faster surgeries mean supplies must arrive more frequently," he adds.

Eliminating the need for warehousing

The typical hospital must stock literally hundreds of thousands of products ranging from chemotherapy drugs to infant catheters. At the Mayo Clinic in Scottsdale, Ariz., materials management director Marilyn Viarengo has more than 1,000 stock-unit codes for sutures; over 300 for stents, 10,000 or so orthopedic products including artificial joints, cement and screws and 1,000 catheters of various types and sizes. Another tertiary-care hospital campus would likely include an enormous warehouse with refrigerated sections, etc., to house it all.

But Viarengo is an example of the enlightened, empowered executive Schneller wants to see in every hospital. She does without a warehouse completely, instead relying on a precise "just in time" supply methodology. Products are stored in small supply rooms. Each time a nurse takes a wound-care pack or other product, he or she hits a button installed for just that purpose.

A computer system tracks inventory, and when a product reaches a pre-set "replenishment level," the system automatically notifies procurement — again, electronically, without a human's prompt — which triggers a purchase order transmitted to the chosen e-vendor. Other medical and surgical supplies are restocked daily, at 3 a.m., by a national health-care distributor. Supply rooms are fully stocked every day by 8 a.m., Viarengo says.

"We don't have any inventory," she said. "Other hospitals this size need a warehouse building to hold inventory, which costs a couple million dollars and takes three to four staff people. We eliminated that."

By re-engineering supply chain strategy in hospitals, we'll save more than time and money, Schneller points out. "The clinical environment improves when clinicians have the appropriate tools to do their jobs when needed. Patient safety improves."

And that, of course, is the most important goal of all.