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Savings through smarter procurement
The appointment of Lord Carter as procurement champion for the NHS has put procurement firmly back in the media spotlight. And perhaps rightly so: benchmarking research shows that hospitals are paying significantly different prices for the same products, in some cases by as much as up to 200 per cent. Surprisingly, there is limited correlation between hospital size and the price paid; larger hospitals are not always leveraging the buying power they have, and may not be actively pursuing the most cost effective products.
As a project we have undertaken at Mid Essex Hospital Services Trust has proved, there are opportunities for many organisations in the NHS to improve in this area. For Mid Essex, this work has helped us achieve £4 million in savings from non-pay expenditure. We hope other NHS Trusts can learn some of the lessons from our experience with this, and consider how some of the innovative approaches we have undertaken to achieve this better than expected savings goal could be used in their own organisation.
A little about us, for context. Mid Essex Hospital Services NHS Trust provides a comprehensive range of acute and community based services, for a local population of 370,000 people. It also hosts regional plastics, head and neck and upper gastrointestinal (upper GI) surgical services and a supra-regional burns service to 9.8 million people. The Trust enjoys a strong clinical reputation and provides a wide range of services including A&E, emergency medicine and surgery, elective surgery in most specialties, and maternity and paediatric services.
Like other NHS Trusts, Mid Essex has been under increasing pressure to meet challenging performance targets in the face of diminishing budgets and greater demand on patient services. Tasked with achieving much more for less cost in a very short timescale, we had to define and evaluate opportunities for making rapid and significant financial savings in order to balance the budget. A challenge that procurement clearly had a role to play in.
In response, we undertook an ambitious savings initiative named Project Spotlight in partnership with an external supplier, procurement and supply chain specialist Inverto. Originally tasked with achieving £3 million of savings from our non-pay expenditure it has done better than we had hoped; achieving closer to a £4 million reduction in 24 months, starting in January 2012. It is hoped that some of the lessons on this journey may be of use to other NHS Trusts.
Project Spotlight had a series of four clear but challenging goals: achieving financial savings without compromising quality and safety; providing access to professional procurement resources; ensuring the power of procurement is effectively represented at Board level; and the strategic management of (and challenge to) the supply base.
The initiative began with a detailed examination of the Trust’s non-pay expenditure. Alongside this, we reviewed the current approach to procurement in every category of spend. The results of this process were then benchmarked to identify savings potential and also prioritise the sourcing projects that could contribute most to the overall goal of the project. By taking a category-by-category approach, the Trust was able to target areas where savings could be achieved and develop individual product procurement strategies to deliver better products at better prices.
The first phase of work was a 15-month cost reduction process that ran until March 2013, and delivered total savings of £3.3 million. Following the success of this, the scope of the initiative was expanded to include areas of expenditure such as IT, which had previously had responsibility for its own procurement processes, and where over £300,000 of savings were achieved. A dedicated Product Change Programme within the medical and surgical areas was also included within the revised scope, together with decision-making involvement in a number of large capital purchase projects.
This second phase spanned a nine-month period to December 2013, generating savings of over £400,000 through additional sourcing projects, a product change programme, and a lean supply chain programme that contributed a £478,000 reduction in stock.
Over the whole 24 months, Project Spotlight addressed over £55m of non-pay expenditure in a structured approach that involved more than a hundred individual sourcing projects across 25 categories of spend.
A wide variety of innovative sourcing and procurement strategies were employed to reduce costs; from using national frameworks and mini-competitions within regional frameworks, to large-scale OJEU tenders. For examination gloves, for example, a combination of OJEU tender and medical product evaluation within the Trust was used to create a short-list of suppliers who then competed on price in an e-Auction. This resulted in a 27 per cent cost saving.
Further examples are illustrative of the variety of options available. A 22 per cent cost reduction was achieved in orthopaedics without changing any suppliers. A detailed spend analysis by procedure was completed, and a cross-functional strategy created to create competition. A supplier presentation meeting was followed by clarification meetings where required, and then a final negotiation process involved the COO and CFO.
Consumable equipment was another area of focus that demonstrates the variety of solutions adopted. A switch from using tympanic thermometers to infrared thermometers, incurring a one-off investment of circa £16,000, has reduced overall spend on consumables by £67,000. Factored into this has been the time needed for staff training and the evaluation of focus groups: clinical evaluation found that 77 per cent reported the new thermometers as better than the previous ones.
Critical to the success of this process has been the high level of stakeholder engagement. Cross-functional teams were created, and the knowledge, opinions and direct involvement of clinicians operating in each one of the individual procurement categories played a vital role in its success. In the orthopaedics example above, the team included a consultant, lead nurse, theatre ordering technician and procurement staff who reported at weekly meetings to the Clinical Director, CFO and COO.
With the procurement team’s market knowledge, and accurate modelling of cost scenarios, all supplier offers could be compared and assessed at a procedural level. The results were presented to the clinical team for review, followed by a board paper recommendation that lead to the award of supplier contracts. Clinicians’ detailed understanding of precise departmental requirements, combined with a thorough supply market analysis and supplier knowledge from the procurement team, ensured the best solutions were identified and implemented
Another key factor in the success of the overall initiative has been the high profile it had, and visible support from the senior executive. This has enabled the integration of procurement teams into the Trust’s existing decision-making structures, providing the opportunity for them to lead weekly programme meetings in theatres, as well as participate in heads of nursing meetings and the Trust Investment Group to ensure involvement in key decisions on capital expenditure.
In addition, it was important that all procurement decisions were fact-based and fully transparent. The role of the procurement team in this was to explore and quantify the commercial options available for review and assessment by stakeholders.
As well as saving over £4 million, Project Spotlight has created a fresh perspective on the role of procurement within the Trust. Consequently, the role of procurement has been transformed from an administrative, compliance-focused, back-office unit, to the driving force behind an efficient operation, involved in all non-pay and capital expenditure decisions. This new brand of procurement has become essential in identifying annual cost improvement opportunities and delivering on-going financial savings, as well as contributing to improved patient care and enhanced levels of service.
With continued scrutiny around public spending, we all have to challenge ourselves to do better with the budget we have available. Procurement is a fundamental lever to impact surplus, and the healthcare sector as a whole has an opportunity to increase the sophistication of its procurement practices compared to other industries. To move to the next level we must be cost conscious and strive towards excellence through added value. McKinsey research has highlighted that organisations that employ leading edge purchasing practices achieve almost double the margins of companies with below average purchasing departments. This is a lesson we can ill afford to ignore.