Monthly Archives: November 2006

The Dismal State of US Health Care

One of the things that I learned at both the Fourth Annual International Symposium on Supply Chain Management and the 2006 Informs Annual Meeting is that the current state of US Health Care is dismal. I’ve been tempted to avoid the topic since most of the problems, and solutions, are plain ol’ Operations Research (OR) problems, and not sourcing (or even supply chain) problems per se, but I think it’s one’s duty as a good citizen to point out potential solutions if ever given the opportunity, and with the significant OR skills we need to succeed as Supply Chain Professionals, I feel that we could make significant contributions just by pointing out the basics of non-discipline dependent processes and best practices we use everyday and opening up medical practitioner’s and administrator’s minds to new possibilities.

Many of you are probably thinking US healthcare is probably better than the rest of the world – after all, as one of the most prosperous countries in the world you attract all the best doctors, right? Moreover, it should be.  But it is not. What really drove the point home for me were the following statistics:

  • approx. 16,500 Americans die each year from AIDS
  • approx. 42,200 Americans die each hear from Breast Cancer
  • approx. 43,500 Americans die each year in motor vehicle accidents
  • approx. 44,000 Americans die each year as a result of medical errors

In other words, your chances of dying from a medical error are almost three times worse than dying from AIDS. And if you think that’s bad, you’re only three times more likely to die from an overdose as a heroin addict than you are to die from a central line infection you develop in ICU. (On average, over 2% of patients in an ICU will get a central line infection and over 1% will die. Your chances of overdosing as a heroine addict are roughly 3%.) In other words, your chances of dying from medical error are worse than dying from an epidemic and almost as bad as dying from an overdose as a drug addict.

The worst part about it is that there is absolutely no reason (well there is, but it’s not a good reason*) why American healthcare cannot be the best in the world. For example, Paul H. O’Neill, in his INFORMS plenary, described a study where an ICU that served 1750 patients a year, of which 37 contracted central line infections and 19 died, took a page from an OR handbook and adopted standardized best practices and trained everyone involved on those best practices. (In medicine, every school trains their medical professionals differently, which often means that different doctors and nurses will perform different procedures differently. One example is that some schools tell you to scrub while others swab. Although scrubbing is good at removing macro level particles and loosening them, it tends to spread certain micro level virii and bacteria around. Thus, sometimes you should swab, possibly in addition to scrubbing.) After adopting standardized procedures and optimizing the treatment rooms and contents for those processes, in the second year, there were only 6 infections and 1 death, and 4 infections were identified as the result of a breach in standard process. In the third year, there were only 3 infections and 0 deaths. (And each year added about a hundred patients). In other words, although medicine is not a perfect science, and sometimes a patient will develop infections or die for reasons beyond your control, it can be a lot better than it is. Six sigma may not be possible, but with good six sigma processes, five sigma should be attainable. And since that would be ten times better than it is on average today, I could live with that.

And medical care in the US is bad across the board. One in fourteen individuals who visit a health care facility contract an illness they did not have. Prescription errors injure 1.5 M people and cost billions of dollars (at least three or four by some calculations) annually (and that’s just what we know about). And some estimates state that almost half of the approximately two trillion dollars spent annually on healthcare is wasted. Paul H. O’Neill believes that the proper implementation of good operations research best practices could cut the annual spend almost in half with better outcomes. If you add good supply chain and sourcing best practices on top of that – that’s probably not too far off! I don’t know about 50%, but I’m willing to guess costs could be trimmed by at least a third with center led procurement and simple best practices.

What do you think?

* The implementation of new systems and processes costs money up front, and most hospitals and insurers don’t want to spend money today unless they see an immediate return tomorrow. No long term thinking.

Innovation and Opportunity: What’s Ahead in Supply Management

The ISM just released the seventh edition of the Supply Management Handbook (J. L. Cavinato, A. E. Flynn, and R. G. Kauffman) and my copy arrived late last week.

Chapter three (of the forty-two chapter book) is entitled Innovation and Opportunity: What’s Ahead in Supply Management. The chapter discusses four promising trends in supply chain technology and three other trends that are taking or expected to take the supply management world by storm.

Supply Chain Technology Trends

  • Maturing and Scaling of Procurement Technology
  • More Sophisticated Business Intelligence
  • Integration of Technology Functions with Other Parts of the Business
  • Stronger Influence of Web Services on Supply Management

The maturing and scaling of procurement technology is happening every day, business intelligence technology is also improving at a brisk pace, we’re starting to see new technologies aimed at integrating procurement with the rest of the business, and some of the best solutions out there are on-demand solutions built on or as web-services.

Other Trends

  • Global Sourcing and Supply Management
  • Procurement Outsourcing
  • Supply Management in Government and Financial Services

Global Sourcing is hot and Procurement Outsourcing is on the rise. Even financial services are hearing the call of the supply chain. (After all, Macquarie Bank scooped up one of our best bloggers earlier this year.) And, finally, some governments are starting to latch onto good supply chain management principles. Hopefully their good example will convince those that aren’t to hear the call of the spend management party.

14 Purchasing Best Practices, A Review Part II

To hit home my point that I believe the online course 14 Purchasing Best Practices from Next Level Purchasing is worth the time and investment for an average purchasing agent, with kind permission, I am going to dive into a few topics covered in the course that I believe hit home on the importance of best practices and a well-designed course to convey them.

The course starts off by noting that the three main functions of a purchasing department are:

  • managing spend
  • supporting operations
  • risk management

and that the three main benefits of a dedicated purchasing organization are:

  • efficiency
  • effectiveness
  • organizational objective alignment

This conveys the message that purchasing is about more than cutting orders and that good procurement is more than just beating suppliers up for cost concessions (despite what some industries still believe). To this end, the best practices are designed to address the functions and goals, improving your performance and that of your organization overall.

This leads into the first best practice defined in the report, “utilize an annual buying plan”. The course defines in detail, and with examples, what a buying plan actually is and why it is key to success. A buying plan is more than just “I’m going to use competitive bidding through an auction in an attempt to reduce costs” – it’s also why you are employing the tactic, what results you expect to get, and how you quantify those expectations. The course prescribes a step-by-step methodology for the creation of a good buying plan that will assist you in the most effective allocation of your purchasing efforts and offers easy to understand methods and formulas to calculate savings and future spend, which is also important since organizations run on cash flow – a key fact that many resources on savings and buying plans ignore. Executives often assume that “savings” will decrease overall spend, but if demand is increasing rapidly, spend will still go up. But that’s okay, because as long as spend is going down relative to each unit, you are saving money – which means that a future spending increase can be a really good thing – more savings and more profit.

The fifth best practice in the course is “utilize long term contracts”. You’re probably saying “that’s obvious – everyone knows that long term contracts can lock in great volume rates and save you money”, but what’s not always obvious is that a good long-term contract can address many of the six types of risk – supply, price, financial, legal, safety, and PR – that your organization faces on a daily basis, since things can go wrong at any time.

The twelfth best-practice, which might not be as obvious, is “measuring purchasing performance”. Everyone supposedly knows that you can’t manage, and thus improve, what you don’t measure, but I’m sure not everybody knows how important measurement is or how to do it properly in a purchasing organization. The course not only provides you with a straight-forward six-step methodology to properly implement purchasing performance measurement in your organization, but also advises you on what should be measured and what shouldn’t be. The reality is that key metrics will improve performance, but trivial metrics will not.

I hope this gives you some more insight into the importance of continued education and appropriate courses for your development and why I believe 14 Purchasing Best Practices from Next Level Purchasing is most likely worth your time and investment as a procurement professional.

Noteworthy (Developments in the e-Sourcing Space)

Rearden Commerce announces a new relationship with American Express Business Travel that will resell the Rearden Commerce platform under the name American Express Intelligent Online Marketplace or AXIOM.

Emptoris launches a new version of its new integrated suite this week with enhanced spend analytics and spend management capability. Check back here on Sourcing Innovation later this week. I’d also keep an eye on Spend Matters which has had some great coverage of Emptoris in the past. In the meantime, here’s the official press release.

Iasta just launched it’s brand new website in preparation for its forthcoming SmartSource 7.0 release which will integrate with their new and improved SmartAnalytics and be supported by their new Spend Velocity programs. Also, hidden betwixt the pages is their announcement of their new annual Iasta reSource user group conference next May. With the Indy 500 only two weeks after the conference, there are sure to be some great lead up events going on in town at that time. I’ll be covering the new Iasta release here on Sourcing Innovation in a week or two, so keep an eye out.

14 Purchasing Best Practices, A Review Part I

This weekend I audited the online course 14 Purchasing Best Practices from Next Level Purchasing, a course designed to introduce you to the basic purchasing best practices that you can easily implement to jump-start your purchasing career and the organization you work for.

According to NLP‘s website, this course is designed to help you learn:

  • How to strategically measure purchasing performance
  • How to improve your spend management by implementing a buying plan
  • How to select the best suppliers by using cross-functional commodity teams, scorecards, and total cost of ownership analysis
  • How to improve vendor performance through a supplier performance management program
  • How to optimize supplier relationships
  • How to improve risk management
  • How to map and improve processes
  • How to leverage technology such as eProcurement and Internet Reverse Auctions
  • How to conduct benchmarking
  • How to achieve efficiency through the systemization of purchasing operations
  • How to utilize a strategic plan

And the course lived up to its promises, but that’s not what I liked about it. What I liked about it is that it:

  • contained detailed exercises and supporting materials on the creation of a strategic plan – the first step you need to undertake in your transition from an old-school purchaser to a new-school strategic sourcer(or)
  • contained detailed exercises and materials on the creation of category and commodity buying plans – the mandatory first step of any buying activity if you want to ensure success
  • emphasized the importance of using commodity teams and how they are necessary for the implementation of successful scorecards, a key tool in understanding the total cost of working with a supplier and/or the total value a supplier offers to you
  • discussed the importance of ethics in a purchasing organization and how to develop a simple, but effective, ethics policy
  • discusses key clauses you should have in every contract and provides you with a sample contract template to focus your thinking appropriately
  • indicates that sometimes legal has to be involved from the beginning (as I outlined in my post Key Concepts for Major Procurements)
  • provides concrete directions for conducting a market analysis, which is key to successful negotiations (approximately what should I be expecting to pay?)
  • provides a template for the creation of a simple, but effective, supplier rating program and identifies the key questions you need to ask
  • dives into process mapping as a method for operational improvement
  • holds to the promise of not being vague, voluminous, or unrealistic, like much of the literature you will encounter

Of course, what you want to know, is it worth it? The answer is a definite yes! It’s a steal at $200. Why? Just trying to amalgamate all of the content on your own through web searches, articles, and (expensive) books would probably take you a couple of days – then you would have to absorb, understand, and extract the material relevant to you – which would probably take you a couple of weeks since most of your searches will result in voluminous, but vague, articles. On the other hand, this course gives you the foundations in a couple of days (depending on how fast you are able to work through the course). And when you consider that it’s designed to be an eight hour (equivalent) course, that most professional day seminars cost closer to $800, you really can not go wrong. (Moreover, it is a first step to completing the certification program that is very likely to result in a salary bump that is multiples of what you invest.)