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Case Studies

Vendor management saves healthcare centre $12 million

January 8, 2024 | Operational Excellence

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At a Glance

When a client in the healthcare space engaged Renoir to identify opportunities for improvement, the following were identified and followed up for cost optimisation:

  • Reduced costs of $8.6 million driven by improved negotiations with vendors, pooling of inventory in like departments to enable enhanced volume pricing, reduction of waste; along with improved physician buy-in and alignment.
  • Inventory reduction of $2.3 million to limit on-hand quantities to better organise and streamline storeroom activities.

Key Results

Total annualized savings

$12,000,000

One-off inventory savings

$1,600,000

Background

The client is a top-rated academic healthcare facility in the United States. Its desire to better control its vendor and supply management more effectively and efficiently resulted in them engaging Renoir Consulting. Together, we collaborated with the client to assess opportunities and install cost savings measures across the facility.

The Challenge

Supply Costs and Inventory Management

Although there was an ambition within the organization to improve their current model, and the belief that improvements were possible, we found during our analysis that:

  • Departmental managers’ and directors’ desire to reduce costs and increase efficiencies in the supply chain lacked the structure to adequately address barriers and broken processes.
  • Trust issues between Supply Chain and other departments inhibited progress.
  • Transparency involving Supply Chain intent and direction was missing.
  • Staff were under the impression they were not allowed input.
  • Physician frustration with the Supply Chain department’s cost reduction approach.
  • New product introduction controls were ineffective.

There had been previous initiatives, however, the necessary channels of communication, forums, and key stakeholder involvement were absent.

Management Control & Information Systems

Forecasts and budgets were monitored regularly, and basic data systems were available. However:

  • The current Management Control System demonstrated that many reports existed but focus and follow-up on actions for improvement were not generated from the daily operational cycle.
  • Inventory levels were grossly overstated based on average daily usage
  • Stocking practices reflected rampant exceeding of maximum levels

Processes

The client’s basic processes were in place, but several issues regarding shared values and goals, data accuracy, standardised nomenclature, system compliance, and general lack of organisation presented major hurdles in day-to-day requisitioning, purchasing, and basic inventory management practices.

This negatively impacted their ability to proficiently drive and maintain effective cost savings strategies. Other barriers to effective processes included:

  • Failure to identify and access best available prices.
  • Key stakeholder involvement was weak
  • Lack of process consistency across departments lines
  • Poor on-site vendor management

What We Did  

Key initiatives, validated savings and concerns were reviewed by a biweekly steering committee, consisting of key leaders from the client’s executive team. The meetings were chaired by the CFO & CNO. To ensure buy-in and ownership, the teams spent the first 12 weeks identifying opportunities for improvement through cost analysis, process mapping & management control system mapping.   

Processes were critiqued to identify areas for improvement and management control systems were reviewed to identify what key elements of the system were missing or ineffective. New monthly budget variance reporting was implemented, along with key operational indicator reviews. Benchmarking was established so the client could effectively compare with their peer group and develop specific actions along with vendor management and negotiating skill training to move ahead. Key initiatives and savings included: 

Operating Rooms 

The key initiative was to reduce costs in spine procedures by moving 80%- 85% of purchases to a single vendor. With the critical involvement and engagement of the physicians to get on the same page, the physicians agreed to move 80% of the spine business to one vendor, ultimately resulting in approximately $10 million savings over 3 years for the client. 

Supply Chain 

Supply chain processes were reviewed which identified that contract management could be improved. The Renoir team developed a tool that enabled the purchasing contract staff to effectively track all departmental agreements and contracts, focusing mainly on expiration dates. More than $700,000 was realized in this area. 

Labs 

The vendor spend and management system were analysed and tests done outside of the medical centre were reviewed for opportunities to bring in-house. As a result, lab cost reductions exceeded $450k. 

Purchased services  

Maintenance and IT contracts were reviewed and newly acquired vendor management skills were applied to secure better pricing and better services for the same pricing, resulting in over $600K of annual savings. 

Pharmacy 

A key initiative was switching from branded to generic drugs where possible. Following identification of all generic equivalents and an analysis to quantify benefits, key stakeholders were consulted to gain consensus and almost $2 million was saved overall. 

“We surpassed our expense reduction goal by over 50%. The entire staff was engaged and participated in identifying new approaches to patient care.”

Registered Nurse Administrator, Surgical & Emergency Services

Maximise vendor utilisation for savings.

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