Hospitals Redefine Their Procure-to-Pay Goals

No industry was hit harder by supply chain disruptions from the COVID-19 pandemic than the healthcare space. The consequences of volatility were dire, often life-threatening, and have forced healthcare providers to reconsider their procure-to-pay strategies.

Yet healthcare equipment and supplies procurement is not a burden that rests solely on the shoulders of a hospital or other provider. Procure-to-pay involves not just many moving parts but many stakeholders, and as such, it’s a workflow not easily adjusted or optimized.

In discussing this challenge, David Gillan, senior vice president of  Emerging Solutions and Supplier Engagement, and Bejan Shamsy, senior vice president of Procure-to-Pay Solutions, of Vizient explored how the healthcare supplies industry is defining supply chain resiliency through procurement and B2B payment practices that support the needs of all parties involved.

A Resiliency Checkup

Much of the conversation about medical supplies procurement is framed in two viewpoints: pre-COVID-19, and mid-to-post-COVID-19.

Gillan emphasized that pre-COVID-19, hospitals widely took an approach to procurement that focused on cost savings and spend management.

“This lent itself to lean processes, just-in-time inventory and, to many healthcare providers, standardizing to a single manufacturer of a given product,” Gillan explained, noting that by relying on a single supplier, healthcare providers could be assured of fewer errors and greater consistency. “And then we find ourselves in a never-before-seen global pandemic.”

As became painfully and tragically evident in the initial weeks and months of the pandemic, healthcare providers could no longer rely on the national stockpile to ensure access to products. And with an emphasis on lean inventory, there was little in the way of backups and fallback plans.

While the obvious remedy to avoiding this scenario in case of a future event — whether that be another pandemic, a natural disaster, warehouse fires or something else — is to procure more products and bulk up inventory.

See also: Vizient Debuts Healthcare Supply Chain Help

Yet the spend management needs of hospitals have not changed.

As Gillan noted, today, the largest shift in procurement strategy is the result of having to balance that expense optimization with the ability to dramatically ramp up inventory during such events.

“I’ve thought a lot recently [about] the definition of resiliency, and at the end of the day, all it means is ‘Do you have supply assurance? Are you able to get the products you need when you need them?’” he said.

But this resiliency isn’t just about the ability to procure high volumes of items when it’s necessary. Indeed, resiliency must also consider how suppliers are impacted by such disruptive events and even how suppliers’ suppliers are affected. Gillan offered an example of sharps containers — those red bins used to dispose of sharp items like needles.

“We worked with two very large manufacturers, and they covered almost all of the markets here, but we found out that they both sourced from the same raw material manufacturer,” he said. When that manufacturing location suffered a fire, it became evident that there was “no resiliency” within that supply chain.

Boosting Financial Health

As healthcare providers explore how to build the resiliency of their supply chains through supplier diversification and other strategies, Shamsy said there are also challenges pertaining to the financial resiliency of these supply chains.

Medical product procurement is unique, he explained, in that the workflow involves four key players: the group purchasing organization, which negotiates pricing with manufacturers; the manufacturer; the distributor; and the hospital buyer.

“You’ve got four different parties, four different back-office systems, none of which are connected to share what the right price is,” he said. “That complexity creates a lot of disputes between the hospital and the manufacturer.”

Those disputes were discovered to be the number one complaint among prospective customers of Vizient and a friction point that ultimately caused payment delays. For manufacturers and distributors, that can mean cash flow bottlenecks, while for the hospital, that can result in lost early payment discounts, not to mention delays in order fulfillment.

This workflow has been made even more complex by the rise in the need for hospitals to source supplies from entities other than their key distributors. It’s opened up the door for B2B eCommerce and eMarketplace platforms to step in, introducing some much-needed digitization and transparency in the market. Yet these third-party portals aren’t always able to address the complex requirements of the hospital supply chain.

At the same time, the pandemic also opened avenues for new players to step into the market. Organizations that had not previously manufactured healthcare products were suddenly changing their business models to produce healthcare items in an attempt to fill inventory needs. While the effort was valiant, it created new concerns over trust, transparency, quality and risk.

The evolution of procure-to-pay in this industry is accelerating and a work-in-progress. As industry players reframe what it means to have a resilient supply chain and redefine their goals for success, Gillan said there is a tried-and-true priority that the healthcare market will always keep in mind.

“The reality is [that] hospitals want confidence when going through an exchange,” he said. “There is a long-term need for resiliency [and] a long-term need for transparency.”

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