Procurement Industries

The importance of Strategic Sourcing in Healthcare

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10 minute read

Posted by

Sarah Wilson

What is Strategic Sourcing?

Strategic Sourcing is a process that minimizes supply risk across the procurement process by improved supplier selection and better visibility into purchasing data and forecasting. Streamlining procurement allows an organization to consolidate its purchasing activity to align the supply chain activity with the business goals. Strategic Sourcing in Healthcare is essential, and in this article, we will talk about why strategic sourcing is important and the five steps to implement it within your organization. Before we get started, here is a quick snapshot of the process:

1.              Evaluate Current Status

2.              Decide on Engagement Model

3.              Research Suppliers

4.              Contract Award & Implementation

5.              Staff Training & Monitoring

 

Why Strategic Sourcing in Healthcare?

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Strategic Sourcing in healthcare helps to save up to $34 billion annually in procurement costs. About 98% of hospitals in the US are associated with Group Purchasing Organizations (GPOs). 

How to Implement Strategic Sourcing in Healthcare

The five steps of strategic sourcing is a complex but essential process that allows your business to fully evaluate your current procurement methods, research the best supplier partners, award the business accordingly and measure the result of your efforts. Strategic sourcing in healthcare aims to ensure that value is extracted from the process and that the procurement processes line up with overall business goals.

1. Evaluate Current Status

Evaluating current procurement processes is required to identify what needs to change. The first step is gathering data to analyze your business's different components.

Spend analysis – an analysis of your business spending will allow you to understand the areas where the most money is spent

Supply analysis – an analysis of your supply enables you to understand the current market for the goods you purchase. Reviewing supply stability, pricing fluctuation, and available alternative suppliers.

2. Decide on Engagement Model

There are several ways to engage suppliers to communicate that you intend to engage in business with them.

Invitation to Tender (ITT) – Invitations to Tender are detailed documents where you state all of the details of what you are trying to buy and all the expectations you have of your suppliers

Request for Purchase (RFP) – Request for Purchase are documents that outline the procurement needs in a less detailed fashion. They contain general conditions of the procurement requirements and rely on supplier expertise to help support the details.

Request for Quote (RFQ) – Request for Quote is used when the complexity in procurement is lower, and the price is the main driving factor of vendor selection.

3. Research Supplier

 Researching your supplier is key to securing a great business partner in your procurement process. Ask about how the supplier communicates, as you are looking for a high level of responsiveness.

Another thing to review is what is included in the cost of goods. Freight and shipping is a crucial cost within procurement, and it's essential to understand if it's included in the cost of goods you buy or if it gets charged as a separate line item.

The supply analysis you did as part of the initial business review in the first step of Strategic Sourcing will give you an excellent insight into the status of the Supply Chain of the products you are buying. Where your supplier is positioned in the marketplace will tell you how stable their supply will be and what you can expect in terms of the level of service.

The financial health of your supplier is a crucial signal of longevity. The better your supplier is doing financially, the less risk they would ever go out of business, leaving you with an interrupted supply chain. Publicly traded companies publish their financials online, whereas private companies are not required to disclose this. In the absence of actual financial statements, do some online research for estimates of economic health, 

Another critical area to review with potential suppliers is their infrastructure in sustaining your business volume. Understand how many warehouses they have and how your business would impact their operations. Be cautious of situations where your business is a large percentage of their existing processes, as they may run into challenges as they scale.

 4. Contract Award & Implementation

 Once the research has been completed, that process will provide a list of preferred vendors to award contracts.

Each vendor will have some form that enables you to get set up to buy from them, including a contract that outlines the terms of your agreement. A contract typically contains payment terms, pricing structure, and agreed-upon service levels. Anything related to the management and execution of your agreement.

Implementation of the supplier contract will also need to occur within your business. The supplier will need to get set up in your procurement system to commence the buying process. Some setup processes will also need to occur within your payables department so the vendor can get paid.

As part of the contract negotiation, you and the supplier would have discussed a successful procurement process. This information will drive what Key Performance Indicator (KPI) is most important. Some examples of KPIs within Strategic Sourcing:

  • Days from Ordering to Delivery
  • % of Late Delivery
  • Number of Stock-outs per order
  • Number of defects per batch

Setting up a function in your business to measure this KPI is necessary to understand if the contract, over time, performs as expected. It is critical to set this up at the start to develop a view of supplier performance over time.

5. Staff Training & Monitoring

When onboarding a new supplier, it is vital that the procurement team is fully aware of how to buy from the supplier. Each supplier will have specific parameters in place to do business with them. They may have particular order days or delivery schedules. They may have a specific format of how they receive orders or may even have an online portal or website for ordering. A great way to document procurement information on the process is through a procurement system.

Monitoring the success of your Strategic Sourcing indicative in your healthcare business is key to realizing the benefit of this process. Keeping track of the KPIs over time and measuring a supplier's performance will be the best way to ensure that value is being driven within the business through the strategic partnerships built in the procurement process.

Final Thoughts

Aligning your procurement processes with your business goals can be challenging but worthwhile. The most important part of this process is visibility and having a system that shows you real-time data and procurement insights is critical. Tradogram is a cloud-based procurement platform that does a fantastic job of giving you complete visibility of your procurement.

Strategic Sourcing in Healthcare

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