12 question
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chapter_06.pptxChapter 6 – Operations of Acquiring
Learning Objectives
Outline and explain the concept and process of sourcing selection in the healthcare supply chain.
Discuss and give examples of the process 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 tools of source selection and legal components of agreements integrates with healthcare supply chain sourcing and purchasing.
Distinguish the operational areas of vendor management in the context of the request for proposal and/or quote, and negotiations.
Relate the sourcing of a medical/surgical item, such as cotton balls versus a cardiac pacemaker, to the categorization of suppliers/sourcing and why categorization is 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, incentives and healthcare organization capabilities.
Introduction
This chapter will focus on acquiring the ‘technologies of care’ for health organizations.
Included in this chapter are tools for analysis, categorization and legal considerations to establish a quality acquisition function or operation within the context of the healthcare supply chain.
The premise used in the operations section of this textbook is based on the principles of high performing organizations.
Introduction to Operations
Business operations are the process through which an organization gains value from assets controlled by the organization and in turn provide value to customers.
In a hospital setting, this includes all aspects of the business that provide care or support the care of patients with focus on the supply chain.
From day to day management of the supply chain to strategic integration of supply chain operations into the health organization, the essential knowledge of important functions of the supply chain will serve you well in your career.
The Basics of High Performing Organizations
High performing organizations are focused on achieving results and outcomes.
These organizations have a result-oriented organizational culture which fosters and reinforces their focus.
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Four General Themes of High Performing Organizations
High performing organizations have a clear, well-articulated, and compelling mission and vision.
Defining the mission and vision for an organization is important to the strategic planning process and, along with senior leadership, defines the culture of an organization.
High performing organizations also make strategic use of partnerships.
Partnerships allow organizations to more efficiently achieve results and also have important implication across a range of management functions.
They focus on the needs of clients and their customers.
At a minimum this customer focus includes a concerted effort to understand and respond to customer needs, tracking progress towards meeting the needs of their customers, and reporting out on that progress to increase accountability.
High performing organizations strategically manage people.
People are the key resource of high performing organizations. Without a high performing staff, the other objectives of high performing organizations cannot be met.
Keys to Better Supply Chain Performance
Senior Management Involvement;
Supply Chain Optimization is a Strategic Goal;
Integrated Financial and Clinical Decision Making;
Organization Cost Management Focus;
Tracking of Performance Measures;
End-user Accountability for Supply Cost Management;
Physicians are Involved in Supply Chain Activities;
Control of New Technology;
Business Skills, Information and Processes are in Place;
Supplier Involvement; and
Aligned Incentives.
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Strategic Supply Chain Factors in Order of Importance
Information System Usefulness, Electronic Purchasing & Integration
C-Staff Supply Chain Expertise
Supply Chain Expenditure
Physician & Surgeon Level of Collaboration
Nurse and Clinical Staff Level of Collaboration
Leadership Team’s Political and Social Capital
Capital Funds Availability
Sourcing and Purchasing
Operationalizing sourcing and purchasing requires the healthcare professional in supply chain operations to understand the needs and wants of the health organization.
Understanding needs and wants of clinical staff and administrative staff and what items the supply chain must provide to deliver healthcare are essential.
The power of electronic and computerized records allows the supply chain professional to analyze trends, needs, wants and cycles of various supply chain items.
Sourcing and purchasing are initial steps to fulfill wants and needs of the clinical and administrative professionals in the delivery of healthcare services.
Insource Versus Outsource
Most health organizations outsource sourcing and purchasing through GPOs and distributors and do not have internal functions (some may have small purchasing sections for special or non-routine supply items to order and purchase) to satisfy the large quantity and variety of health supply items utilized by health organizations.
Insourcing, some health organizations, mostly health systems of several hospitals and clinics, do have internal capability for sourcing and purchasing of health supply chain items.
Shared Services
The shared services model for organization and delivery operations was developed in the 1980s as a way to increase organizational efficiency.
This model came about due to concerns regarding productivity, globalization, and technological improvements which required companies to produce more at a lower cost to stay competitive.
GPOs are a form of shared services.
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Intermediaries
Intermediaries are organizations that act as a channel for products or services in the supply chain.
Typically, an intermediary will add some value to the supply chain that cannot be obtained if, for example, the manufacturer sold directly to the customer.
A common example of an intermediary in the healthcare supply chain is the GPO.
A GPO adds additional value for both supplier and consumer.
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Even More Sourcing Models
The health organization must consider its capabilities, resources and strategic plan, to include strategies, goals and objectives, to determine what specific sourcing and supply chain model to use to best fit their needs and capabilities.
Decisions are made through situational, strategic and operational analyses.
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Total Cost Analysis
Total cost analysis is a tool to identify all relevant costs over the entire life of a product or project.
The concept originated in logistics within the domain of Total Cost Economics, based on the idea that if all logistical options provide equal service, the option that minimizes the total cost is preferred.
In supply chain management, the total cost is the sum of all the associated costs within the supply chain.
This provides insights with regards to the hidden costs, in addition to the acquisition costs associated with insourcing part of the supply chain.
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Rebates
Rebates are price discounts offered by manufactures to attract customers.
Rebates are commonly offered for consumer products as well as supplies ordered by businesses and serve the same function.
Slippage is the proportion of customers who purchase a product as a result of a rebate but fail to request refund.
The greater the slippage, the more beneficial the rebate is to the manufacturer.
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Value Chain
The value chain is a series of activities that a business performs to provide their product.
The concept is based in manufacturing but it is applicable to all forms of business.
The value chain can be applied to a high performing healthcare supply chain through a focus on sustainability, which will add value from the perspective of the healthcare organization and the patient.
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Want Versus Need
Identifying want verses need within an organization is an important part of sourcing.
For many types of commodities it will be clear if the item is a want or a need; however, for some items this distinction may not be as clear as for others.
A tool that can be used for this purpose is Pareto analysis.
Wants and needs also bring fulfillment into the discussion.
Fulfillment is the availability and delivery of a supply chain item to a customer in the process of care delivery or support of care delivery.
Wants and Needs of Supply Items and Level of Availability
Knowing what level of fulfillment is expected for a supply item, or even essential, is an important aspect of understanding wants and needs.
In essence, at what level of availability does each supply item need to be acquired, stored and distributed (90%, 95%, 99% or all the time at 100%).
Figure 6-1
Wants and Needs of Supply Items and Level of Availability
The quantity acquired of any supply chain item has a cost associated with it.
The simple cost of the item multiplied by quantity is one issue but also the receiving, storing, loss rate or pilferage and shrinkage rate, and quality control have costs associated with it.
Knowing what availability or fulfillment rate is necessary, what is perceived to be necessary, and what is actually delivered are salient aspects of acquiring supply chain items.
Cost of Availability or Fulfillment Rates
Figure 6-2
Strategic Relationship With Vendors
The strategic relationship or even, partnership between your health organization and the supplier or vendor can create ‘win – win’ situations for both parties based on long term commitments and volume or high dollar purchases.
Gaining and ensuring contract compliance (physician, surgeon, nurse and clinical staff concordance) from your health organization will be paramount and critical for your organization to reap the benefits from such relationships.
To assist in this analyses, or demand forecasting, of supply chain items, there are various analytical methods and techniques that are important to making informed acquiring decisions and meeting stakeholder expectations.
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: Ft=Dt-1 + Dt-2 + …+ Dt-p
Weighted moving average would be:
Ft =.05*12 + .05*15 + .15*21 + .2*23 + .25*25 + .3*30
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.
EOQ = √2UO
hC
Pareto Analysis
Pareto Analysis is a decision making technique based on the Pareto Principal, otherwise known as the 80/20 rule.
Pareto Analysis allows for this by statistically separating the input factors that have the greatest impact on an outcome.
The thought behind this is that 80% of something can be traced to 20% of another.
An example of this principle in practice is that 20% of the items purchased by a health organization account for 80% of the sourcing costs.
Pareto Analysis
There are several situations when Pareto analysis should be used:
To analyze data regarding frequency.
If there are many potential causes and there is a need to focus in on the most significant cause.
To analyze a potential cause and see what components have the greatest effect.
To communicate data to others.
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Pareto Analysis
The steps to perform a Pareto chart analysis are:
Group items into categories.
Decide what measurement is appropriate; common measurements include frequency, time, cost, and quantity.
Determine the time period for analysis.
Collect data for each category.
Total the measurements in each category.
Determine the appropriate scale to use. The highest value on the scale is the largest total from step 5.
Create the bar chart, the largest value is on the left
Calculate percentages and cumulative sums
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Pareto Analysis Charts
Figure 6-3
Healthcare Supply Item Categorization Schema
Once you have conducted a Pareto Analysis of transactions in the supply chain to identify the top suppliers/sources of vital items, categorization of healthcare supply items is another important step.
This tool or model used by the Sisters of Mercy Healthcare System based in St. Louis, Missouri assists in this categorization process.
Figure 6-4
Healthcare Supply Item Categorization Schema
The basic notion is to categorize what types of supplies fall into each category.
The items with more clinical input from physicians, surgeons, nurses and technical professionals are most likely more costly and could pose problematic if the wrong item is purchased for use in patient care.
Seeking and gaining clinician input on High Preference and High Cost/High Preference items is crucial but it is in these areas where significant cost savings can be gained.
Healthcare Supply Item Categorization Schema
Through compression (selection of 1-2 sources/vendors/suppliers rather than 4 – 5 vendors can gain steep discounts if volume targets are reached in the contract with the selected 1-2 vendors), significant savings on supplies (cost avoidance) can be achieved.
Once these tools, techniques and models are utilized to categorize items, coupled with Pareto Analysis, selection of suppliers/vendors/sources of supply items can be achieved through one of two models, the Kraljic Model and the CAAVE Model.
Strategic Relationships
Strategic relationships are bi-directional.
This means both parties, in this case your health organization and the supplier or vendor, gain from the relationship over long time periods.
Two models are presented to assist you in determining which suppliers or vendors should be ‘strategic’ for your health organization.
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The Kraljic Model
According to Kraljic, supply strategy depends on two key factors: profit impact, and supply risk.
The Kraljic Model for managing a purchasing portfolio organizes items into four categories:
Routine: generally have a low impact on profit and have a low risk of supply shortage
Bottleneck: low impact on profit but have a high degree of difficulty of sourcing associated with them
Leverage: items that have a high potential to impact profit but a low risk of stock-out
Strategic: items that have a high difficulty in sourcing associated with them and also a high potential to impact profitability
The basic recommendations for products in each quadrant of the model are:
Form partnerships for products deemed strategic
Assure supply for bottleneck products
Use market power for leverage products
Ensuring the efficient processing of non-critical products.
The Kraljic Model
In addition to the generalized recommendations for each quadrant of the model, there are also several strategies within each quadrant.
These strategies can be broken into two broad categories: strategies to hold position within a quadrant and strategies to move to another position.
The situation in which each strategy would be used is specific to each situation and as such only general guidance can be given in this regard.
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The Kraljic Model
Products can be correctly placed within the Kraljic model using a four stage approach to develop supply strategies for one or more products.
Classify all purchased products by their impact on profit and the associated risk of a stock out.
The barging power of an organization is then compared to that of its competitors.
Next, the products identified as both strategic and high risk are placed in the matrix position corresponding to both high profit impact and high supply risk.
The final step is to develop an action plan and purchasing strategy for the strategic products.
The plan that an organization develops will be based on the particular market and the strength of the organization within that market.
Whatever the organization decides, their purchasing plan will fall into one of three categories: exploit, balance, or diversify.
This process is repeated for each category of product within the Kraljic matrix.
The CAAVE Model
Another, more contemporary model, tool to use in strategic relationship determination is called the CAAVE Model.
the CAAVE approach minimizes the concerns raised and incorporates contemporary constructs necessary for thorough evaluation of strategic relationships in a parsimonious framework.
The CAAVE Model rests on four quadrants while integrating market and relationship dynamics as well as firm compatibility based on assessment of each the set of axes’ constructs.
CAAVE Model versus the Kraljic Model
Utilizing the Kraljic or CAAVE models will assist the health organization to determine what suppliers/sources of supply can be strong strategic partners as vendors to the health organization.
These models also can be used for both insource and outsource sourcing models.
Figure 6-6
CAAVE Theoretical Model: Styles are Competitive, Avoidance, Adaptive, Vested and Empathetic
Figure 6-7
Group Purchasing Organizations (GPOs)
Group Purchasing Organizations or GPOs save the US healthcare industry more than $36 billion dollars a year.
This savings is accomplished through discounts offered for bulk purchases that GPOs make possible because they are purchasing for multiple facilities.
GPOs typically charge a small administrative fee to the vendors who provide services to hospitals; although some GPOs charge fees to the hospitals.
In addition to the leverage and bulk-buying power provided by GPOs they also allow healthcare organizations to save time and money that would normally be spent negotiating and executing, potentially, thousands of individual contracts.
Distributors
In industries where there products are made continuously or in large batches, shipments are also large in order to maximize profit.
These shipments are usually much larger than what the end user of the product can use or store.
Due to the need for large shipments from manufacturers and smaller shipments to the end user of the product, there is a need for an intermediary in the supply chain to receive large quantities and ship out many smaller loads of the product; the distributor fulfills this role.
Sales Tracing Fees
Sales tracing fees are fees paid by manufacturers to distributors for rectifying payment to the manufacturer’s sales force or sales representatives.
Knowing where the item was ‘bought’ and ‘sold’ allows a commission payment to be made to the sale representative.
Sales tracing fees can be a point in acquiring supply items during negotiations if the distributor or health organization can provide sales tracing reports to the manufacturer as part of a contract for supply item sourcing; this would be a service provided for payment.
Commodities
A commodity is a product or material that can be bought and sold.
Examples of commodities in healthcare include: all the equipment in the hospital, supplies used to treat patients, uniform items supplied by the hospital like scrubs and masks, and even the building materials used to build the hospital.
As discussed in a previous chapter, there are several subsets of commodities of particular interest to sourcing within a healthcare organization, these include: basic commodities, clinical commodity items, clinical preference items, and physician preference items.
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Comparative Trade-offs
Comparative trade-offs are a result of scarcity. Scarcity is an economic term referring to the unlimited wants of an individual or organization and the limited resources available to fulfill those wants.
Trade-offs are how the limited resources available are allocated to best satisfy those wants. In short, trade-offs occur because resources devoted to one task cannot be used for another task.
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The Production Possibility Frontier
The PPF is typically represented as a curved line to account for marginal opportunity costs associated with choosing one product over another.
This means that due to the nonlinear relationship between production choices, the production of one additional unit of item X reduces the number of units of product Y that can be produced.
Figure 6-8
Transacting the Purchase
With the demand forecasts and supplier/vendor relationships understood and hopefully, established with an agreement or contract, it is time to make the purchases necessary to fulfill demands of healthcare supply chain items.
This can be accomplished with ‘hardcopy’ purchase orders (called ‘PO’s’) or electronically.
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.
The Healthcare Supply Chain Information System
How does a healthcare organization add an item or modify an item into the item master so the item can be ordered/requisitioned by the patient care team?
How is a supplier/vendor contract loaded or modified?
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Item Master Additions
The requester identifies the need or want for a new item.
The need or want is analyzed and a demand forecast is developed.
The person or team responsible for the Item Master File is notified of the item addition(s) (usually this is done electronically in a specified load format).
The request is reviewed to validate the item’s status.
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Supplier/Vendor Addition or Modification
The next salient issue is establishing the supplier/ vendor in the system to link to the specific item master file supply chain item.
The following flow gives a description of that sequence of events in the information system and business processes associated with this action:
The person or team responsible for the Item Master is notified of a vendor addition via the accounts payable section;
That want or need is received and validated and then communicated to the Third Party Administrator (such as GHX) for supplier/vendor setup in the information system. The Third Party Administrator determines whether the supplier/vendor is capable of conducting EDI transactions. If the supplier/vendor is EDI capable, then the Third Party Administrator sends a pre-established standard format supplier/vendor specifications file with complete EDI data for loading into the information system to establish the setup. The system flags are set up to handle EDI transactions;
Supplier/Vendor Addition or Modification
If the supplier/vendor is determined to not be capable of EDI transactions, then the Item Master responsible person or team is notified. At that time the Item Master Team must create the supplier/vendor system setup file and the supplier/vendor flag is selected appropriately (fax, email, etc); and
The requestor is notified automatically of the supplier/vendor addition and availability. If a change to the vendor’s information, the item file team is notified of needed supplier/vendor table modifications. If the supplier/vendor is not handled via EDI, then the changes are validated and then updated within the information system. If the Vendor is handled via EDI, and the source of that communication is the EDI Third Party Administrator, then the changes are updated within the information system.
Contract Additions and Modifications
The last major event in this sequence of activities in the information system is a change to an existing supplier/vendor contract. The general flow of activities would be similar to those described below:
A new or modified contract is identified and communicated to the Contract Administration Section/Team electronically in a specified information format;
The request is validated against the Contract Agreement and approval for the contract changes are sought. If the contract change is rejected, the requestor is notified why and given further instructions as needed. If the request is approved, the contract is checked to see if it is new or existing. If the contract is existing, then the items are checked to see if they indeed exist in the system. If the contract is new, then the contract type is identified as either a product contract (GPO, Distributor, Manufacturer direct or local), a service contract (GPO or local) or a Capital Contract. Whatever the contract type, the finance section/team is contacted to obtain the appropriate account information for that contract and the request is forwarded on through the Patient Chargeability process;
Contract Additions and Modifications
At the same time the Items within the contract are checked to ensure they exist within the contract. If the items are in the system then the key systems information (Supplier/Vendor, Manufacturer, unit of measure, appropriate codes like the UNSPSC code, etc…) are validated. If the Items are not in the system, the Item is sent to be added in the item additions process (Item Master File addition);
Once all the items are in the system and are validated, the contract is entered into the system. Once the contract is in the system, all requestors and stakeholders are automatically notified of the items availability; and
The system must also set a ‘ship to’ location (where the supplier/vendor will ship/transport orders to the healthcare organization) in the system for the vendor. System Support is notified of Ship-to, Inventory Path or Location changes needed in the system. Those requested changes are validated in the system. The information is entered into the system and the requestor is automatically notified of the completion of the task.
Pharmaceutical Shortages
Pharmaceutical shortages are defined as a change in drug supply that could potentially compromise patient care.
Changes in supply can alter the way that a pharmacy needs to prepare medications, it may change the way medications are administered, and in extreme cases determine if the patient can even receive medication.
Figure 6-9
Reproduced from Law, P. (2014). Report to Congress: First Annual Report on Drug ... Retrieved from http://www.fda.gov/downloads/Drugs/DrugSafety/DrugShortages/UCM384892.pdf.
Pharmaceutical Shortages
The US Food and Drug Administration (FDA) takes several actions to help limit the effects of drug shortages by responding to potential shortages and addressing their underlying causes.
If it is not possible for manufacturers in the United States to immediately resolve a shortage and the drug is critically needed for patients in the US, the FDA may look towards foreign manufacturers of the drug.
There are several reasons why drug shortages occur some of the more common reasons are: regulatory non-compliance, voluntary recalls, raw material shortage, manufacturer rationing, restricted distribution, product discontinuation, and natural disasters.
Emergency Preparedness
Being prepared for the effects of disasters on the healthcare supply chain is of central importance given the complexity of the modern supply chain.
Alternate sources should be identified and emergency stock piles in place for key items.
Many of the safeguards related to emergency preparedness have federal guidelines as to the minimum standards that must be met, such as safety stock levels.
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Emergency Preparedness
Above and beyond the minimum standards set by the federal government, there are several best practices for supply chains:
Plan ahead
Set aside funds
Designate a crisis team
Know who should be called for specific situations
Line up suppliers
Diversify transportation modes
Have process documentation in place
Know what will be needed
Anticipate future demand
Be prepared to make changes to the plan
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Helferich and Cook Disaster Management Process Overview
The traditional approach to disaster management was created by the Federal Emergency Management Agency (FEMA).
The FEMA plan consisted of a series of guidelines designed to aid in disaster management and was divided into three categories: planning, response, and recovery.
Helferich and Cook extended the FEMA guidelines in 2002 by adding two additional stages in order to provide a better fit for increasing complexity within the supply chain.
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Contracting for the Healthcare Supply Chain
Contracts provide a central foundation for business relationships in healthcare.
Our healthcare system is built upon many different types of contracts between government agencies, insurers, physicians and other healthcare professionals, institutional providers, GPOs, distributors, and numerous types of suppliers of services.
For this reason, the business of healthcare has a strong connection with contract law.
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What is a Contract?
A contract is a legally binding agreement between two or more parties.
The primary purpose of a contract is to specify and define an agreement.
It provides one or more of the parties with a legal remedy if the other party does not carry out his or her obligation as outlined in the terms of the contract.
Various types of contracts are used in the healthcare industry. A short list of some of the more common types includes the following:
Employment and professional service agreements with physicians and other healthcare professionals,
Recruitment/relocation agreements,
Supervision agreements,
Management services arrangements,
What is a Contract?
Examples of contracts used for supply chain purposes include:
Distribution contracts
Service and maintenance contracts
Technology licensing
Equipment sales and leases
Purchased services agreements
Vendor contracts
Contracts for the purchase of pharmaceuticals
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Parties of Supply Chain Contracts
Of primary consideration are the parties involved in the agreement.
Three primary groups are involved as parties in the supply chain process:
producers and vendors
intermediaries
providers
Each of these three groups has a different role in the supply chain contracting process.
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Required Elements
Contracts must contain certain required elements to be legally enforceable.
For a contract to be legally valid, there must be an offer and acceptance.
Mutual assent, also called a meeting of the minds, refers to the parties’ mutual understanding and assent to the contents or expression of their agreement.
An acceptance must not change the terms of an original offer. The terms presented by both parties must be identical.
If the acceptance does not mirror the offer exactly, then it is not an acceptance, and the original offer will be considered rejected.
Required Elements
A valid contract must also be supported by consideration.
Consideration is the price paid (or something of value given) for the contract.
Referred to as legality of purpose, the objective of a contract must be legal.
For example, a contract involving an illegal distribution of drugs will not be binding because the underlying purpose is not legal.
The parties to a contract must have the capacity to enter into the contract.
They must comprehend and understand (be legally competent) to enter into the contract.
Does a Contract Have to be in Writing?
Contracts do not always have to be in writing; they may be oral (spoken) or written (a written document).
In fact, there are only a few situations when a contract must be in writing to be legally valid.
For example, state laws commonly require contracts lasting more than one year to be in writing.
Also, contracts involving the sale of real estate normally require written documentation to be legally enforceable.
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Terms and Conditions
In addition to the required elements that must be in existence for a contract to be legally valid, the other terms and conditions of a contract must be legally defined.
Contracts will usually contain numerous terms and conditions.
These are often called boilerplate or standard terms and conditions.
Supply chain contracts frequently contain terms and conditions specific to cost savings and efficiency.
Supply acquisition costs can constitute a significant portion of a healthcare organization’s operating budget.
Organizations can reduce these costs significantly by including clauses for rebates, discounts, or other competitive sourcing strategies.
Stages of the Contract Process
The process of contracting involves several different stages.
It includes:
Contract Planning: involves assessing provider needs and is an important stage for cost savings and reduction of ordering errors.
Negotiation: critical stage for providers to make connections with suppliers, vendors, and intermediaries.
Contract Preparation: requires the involvement of an expert such as a contract specialist or attorney performance of the agreed upon terms:
Contract Execution: one in which all terms and conditions of the contract have been met through the performance of all parties.
Performance
Performance is the act of performing the obligations as agreed to in the contract.
Once an agreement has been made, the parties are legally required and bound by its terms and conditions.
If one of the parties does not do what is promised in the contract, a breach has occurred.
As a result, the other party will have legal remedies available, including the right to bring a lawsuit and receive damages.
Contracts often include force majeure clauses.
Force majeure is a French word meaning irresistible power.
It is an event that results from the elements of nature, as opposed to one caused by human behavior.
Another method of discharging a claim of nonperformance is called accord and satisfaction.
This remedy is used when there is an actual controversy between the parties.
Contract Management
Contract management is an essential component of all provider operations.
Basic contract management has been defined “as the execution and monitoring of a contract for the purpose of maximizing financial and operational performance and minimizing risks.”
In the normal course of business, hospitals and other healthcare organizations will have many contracts that must be tracked and managed.
Contract Management
Contract management will ultimately save the organization funds, decrease waste, and create a more effective and efficient healthcare system.
Having a contract management system in place helps to achieve the following goals:
Management of on and off-contract purchases
Tracking of tiered-pricing contracts
Notification of contract renewals and expiration dates
Reductions of contractual nonperformance
Spending and performance analytics
Rebate management
Providing a central repository
Enhanced audit preparations
Follow the Cotton Ball
With an operational focus on acquiring, how would you source a cotton ball?
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?
Can you find an EDI 832 Catalog from more than one supplier or vendor of cotton balls?
How would you categorize the supplier or vendor 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?
What legal considerations are important if you contracted with a vendor for cotton balls?
Summary
This chapter has focused on acquiring the ‘technology of care’ within the healthcare supply chain with an operational and analytical focus.
Stakeholders play a significant role in this process to relative degrees determined by the type and cost of medical and surgical items, pharmaceuticals, medical devices, equipment and service contracts; preferences those stakeholders have in the overall system of patient care delivery are valuable for the efficient, effective and efficacious function of acquiring the ‘technology of care.’
In addition, the purchasing function is responsible for vendor management and monitoring. 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 selection in the healthcare supply chain. How are insource and outsource options different?
Discuss and give examples of the process of segmentation of supply chain items and the stakeholders involved with influence within each of those segments. What segments involve greater clinician (surgeon, physician, nurse, clinical technician) involvement?
Relate, discuss and provide an example where the tools of analyses of supply items integrate with healthcare supply chain sourcing and purchasing.
Distinguish the operational areas of law (legal contract principles) and vendor management in the context of the request for proposal and/or quote, and negotiations.
Relate the sourcing and stakeholder involvement of a medical/surgical item, such as cotton balls versus a cardiac pacemaker, to the categorization of suppliers/sourcing and why categorization is 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, incentives and healthcare organization capabilities.
Exercises
What methods would you use for determining a demand forecast for cotton balls (be careful about unit of measure and packaging string)?
Where would you start to search for a supplier for cotton balls? What is the UNSPSC Code for a cotton ball? Can you find an EDI 832 Catalog from more than one supplier or vendor of cotton balls?
How would you categorize the supplier or vendor 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 legal considerations are important if you contracted with a vendor for cotton balls? How would you ensure contract compliance with your health organization team members?
Journal Items
List the Tools, Models or Techniques of Demand Forecasting with a short summary that make the most sense to you.
Explain how the transaction history file is used to determine high volume, high dollar or clinician preference items and why is knowing this information important?
Explain how you would categorize or segment healthcare supply chain items and which segments need clinician interaction and communication.
Explain what can be done to limit the impact of drug shortages.
What contract principles are important in supplier or vendor legal agreements?
