Posted on January 18, 2023.

When the COVID-19 pandemic began, many health systems, despite their efforts to quickly adapt, soon began running out of essential supplies such as gloves, gowns, and N95 masks. This shortage—combined with unpredictable patient volumes and, more recently, rising inflation—has highlighted the importance of a well-performing, strategic supply chain.

Taking the pandemic into account, health system executives’ views of the supply chain function have evolved. In a McKinsey survey of US health system executives and supply chain executives, about two-thirds of respondents indicated that the pandemic has improved their perception of the supply chain function’s impact within their health system.1 In the words of one executive, “supply chain is now viewed as less transactional and more strategic; we recognize just how essential it is to the day-to-day functioning of the health system.” Notwithstanding, nearly three-quarters of survey respondents say that the supply chain stands to assume an even more strategic role.

In light of continued financial challenges wrought by the pandemic, the incomplete return of patient volumes, and a potential economic slowdown—among other stressors—health systems are pursuing opportunities to improve fiscal responsibility and drive bottom-line savings. Because the supply chain function oversees most of a health system’s external spend,2 which accounts for up to 40 percent of total costs, it is a clear choice for investment aimed at optimizing performance. In our experience, a high-performing supply chain function can boost resilience, enhance care, increase satisfaction among physicians, reduce supply spend by up to 10 percent, and better position health systems to achieve their growth ambitions.

Targeted actions support supply chain improvement

As survey respondents determined the elements they viewed as critical to a high-performing supply chain function, three themes emerged: clinical engagement, goal setting, and data and analytics

Create a clinician-directed supply chain function

Our survey found that respondents who reported that their supply chain organizations performed well consistently identified strong engagement with executives and frontline clinicians during and between contracting cycles as imperative. In high-performing organizations, clinicians play an integral role in supply chain initiatives: They provide input on supplier selection and contracting strategies, including their financial impact; they support compliance with contract terms (for example, by committing to give a supplier a negotiated share of business); they manage the use of supplies; and they otherwise contribute to achieving financial, quality, or other goals.

In the same survey, health system executives identified that a lack of clinician engagement in supply decisions and an unwillingness to adjust supply preferences are the biggest barriers to better supply chain performance. Typical shortfalls include the following:

Engaging clinicians informally rather than convening a formal committee with clear roles and responsibilities and thoughtful representation across facilities and specialties
Accepting decisions made by clinicians without question rather than collaborating as partners—including engaging in productive debate—to identify and pursue best practices
Taking an initiative-based approach focused only on contracting rather than a holistic category-based approach inclusive of the full set of contracting and utilization opportunities
Underinvesting in personnel on the ground in hospitals who can develop relationships to support implementation of performance improvements, identify new savings opportunities, and provide a formal feedback loop to the supply chain function

Our experience suggests that health systems should explore three specific actions to materially improve clinical engagement:

Ensure sponsorship from senior clinical leaders. Engage the chief medical officer (CMO), chief clinical officer (CCO), chief nursing officer, and service line chairs as visible and active sponsors of clinical supply chain efforts. Leaders can accelerate progress and enable best-in-class performance by offering clinical guidance, building clinician confidence in supply chain efforts, making tough decisions, and holding other clinicians accountable for changes in behavior.

Formalize cross-functional, specialty-focused teams to evaluate strategies for each category. Formal committees comprising clinicians and supply chain leaders should be responsible for all contracting and utilization initiatives. Optimally, one accountable and influential physician—for example, a service line chair or high-volume surgeon—will chair each committee. The absence of such leadership can result in extended delays, fewer savings, or stalled initiatives. Although many health systems have a clinical engagement structure, they may lack critical elements, including clear decision rights, accountable physician champions, sufficient representation from across the system, and engagement throughout the full life cycle of the supply initiative (from opportunity indentification and sourcing to implementation and compliance).

Invest in an on-the-ground supply chain team. Supply chain initiatives cannot be driven solely from corporate or market headquarters. It is often most effective to have in-person discussions between supply chain colleagues and clinicians about product choices, procedure costs, and compliance with contracts. Supply organizations may consider filling this role with supply chain professionals who have clinical backgrounds and a threefold mission: support supply chain initiative implementation, identify local opportunities for improvement, and develop relationships with physician and facility leadership to better understand and meet their needs over time.

Almost all major health system supply chains have a yearly savings target to improve efficiency; however, this target is rarely set with input from other functional and clinical areas.

Jointly set goals across facilities and functions

Almost all major health system supply chains have a yearly savings target to improve efficiency; however, this target is rarely set with input from other functional and clinical areas. This lack of goal sharing can lead to misaligned incentives between the supply chain function and other stakeholders, siloed decision making, resistance to supply chain initiatives, and the perception that the supply chain function is focused solely on cost savings rather than broader organizational goals. Health system executives may consider three actions to help improve alignment, foster collaboration, and promote a culture of fiscal responsibility:

Institute joint savings targets. Shared savings targets between the supply chain function and its partners—specific functions, service lines, and facilities—help ensure that the organization is unified in its mission to find and implement savings opportunities. Such targets also reinforce the notion that all stakeholders are accountable for doing so. Based on our experience, savings targets can be effectively shared by supply chain, the CMO or CCO, service-line leaders, and regional or facility operations leaders.

Provide incentives for reaching targets. Supply chain initiatives may require meaningful changes in behavior by some clinicians, including shifting away from their suppliers of choice to clinically similar suppliers used by their peers. To assist this change, systems may consider providing incentives for reaching targets. These incentives can be financial or nonfinancial and may include a commitment to reinvest a percentage of savings in things prioritized by physicians, such as equipment, conference attendance, or publications.

Ensure frequent and transparent reporting. In our experience, once targets are established, tracking performance and ensuring that stakeholders have access to up-to-date information on their progress is critical to fostering a sense of accountability. Ensure that dashboards display the high-level metrics that matter most (for example, savings and contract compliance for medical implants). Then, provide additional details—down to the facility, surgeon, or supply level—to inform the actions leaders can take.

Invest in accurate, actionable data and analytics

Analytics is the backbone of supply chain excellence, yet it remains a critical gap for many health systems. Although a quarter of health system executives and supply chain leaders selected data and analytics capabilities as their number-one investment opportunity (Exhibit 2), organizations outside the hospital’s walls—such as those that supply medical devices, pharmaceuticals, and services—often have better visibility into a health system’s spending and utilization than the system itself does. As a result, the health system may be unable to effectively negotiate or identify savings. One health system COO noted that his organization “still operate[s] primarily on spreadsheets” and that it has “not been transparent at all about costs or the benefits to clinicians or the system overall of various supply chain initiatives.” Based on our experience, this story is all too common.

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