3 Supply Chain Red Flags That CFOs Should Know

3 Supply Chain Red Flags That CFOs Should Know

One look at the top headlines in healthcare is enough to frighten any CFO. Facilities are going bankrupt across the country as reimbursement rates and revenue margins dwindle. You probably rely on supply chain managers to handle the day-to-day operations of keeping the sourcing and procurement functions of your business as efficient as possible. But if you notice any of these red flags, there likely exists a larger strategy issue that will require your involvement:

Long, drawn-out contracting cycles

The largest opportunity cost is directly correlated to the length of time involved in a contracting cycle. The typical response of any supply chain member usually involves an eye roll and “that’s just the way it is”. The reality though is that this is time-consuming because of the manual work involved in sourcing (pulling data, cross-referencing, research, vendor communication, and meetings). For example, manual sourcing methods for total joint projects can take eighteen to twenty weeks to quantify an opportunity, develop a plan, structure the RFP, and analyze offers. Another twelve to twenty weeks can also be anticipated for evaluation. You’ll need to determine how much precious resources (time, money) you can devote to contracting cycles and be prepared to step in if parameters are being pushed too far.

Unknown and unaddressed savings potential

Not only is the sourcing process time consuming, but resources are limited which is normally what drives executing on the 80 / 20 rule. It makes sense to focus attention on total joints, spine, CRM, and other major physician preference item categories. This comes with a tradeoff and sometimes large savings get missed. Opportunity costs from unknown savings cannot be quantified until they have been identified but those numbers usually do not find their way into the equation.

As an example, it is not uncommon for at least $60,000 of savings to be present in every smaller category today. Often times, those categories will go months without being reviewed. If ten months pass the health system will have overpaid $50,000 per category. While you’re scouring for dollars to make the budget, the capital you’re looking for is being left on the negotiating table.

Not enough time or people

Twentieth-century processes lead to twentieth-century problems. Supply chains are experiencing gaps of epic portions between developing an effective people strategy and an effective information strategy. As a result, supply chain becomes reactive to the contract calendar and only a few sourcing initiatives can be tackled outside this cycle. This market represents $179 billion in revenue annually and includes eleven thousand separate businesses.

New competitors are entering and prices are changing frequently throughout the year. To some, it may appear that the market is volatile, but in reality, it is ripe for those empowered with the right data elements to engage and refuse to accept million dollar losses from slow and reactive strategies as being “par for the course”. This will involve tackling an additional 35 – 40 savings projects this year. Twentieth-century problems lead to twenty-first-century solutions for those willing to step out of the prescribed course of action.

How do you fix it?

Supply chains of the future use technology to push savings to the forefront so opportunities are always being worked with the highest return, not just the highest volume. The game changers in supply chain will go to market, engage, and evaluate vendors all the time with technology. 

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