Measuring Supply Chain Performance- The Perfect Order

When I was a young boy, my grandfather had several wise sayings that he would apply as needed. One of those sayings was, “If you have time to do it over, why not take time to do it right the first time?” His point was this: It takes time and effort to correct something that you did incorrectly. Why not take the time and make the effort to get it right from the start?

How does that apply to your supply chain? The truth is, much of the savings that can be attained by constantly striving for excellence are those that (1) streamline process and (2) eliminate re-work.

Over the course of the next few articles, we will take a look at some of the metrics that chronicle performance within your supply chain’s operation. We will show why they are important and where their optimization can help you control operational costs. During the course of our focus, we will try to explain the metrics as they are seen in the non-healthcare environment and try to “translate” them into the healthcare setting.

Let’s start with the concept of “The Perfect Order.” When I first heard the term several years ago, my initial response was, “Huh?” Does the “Perfect Order” mean that I spelled all the words correctly, stayed between the lines and didn’t smudge the paper up when I filled it out?

Hardly.

Simply stated, the term is a supplier fulfillment metric. It refers to getting:

• The Right Product to
• The Right Customer
• In the Right Amount
• At the Right Place
• At the Right Time
• In the Right Condition
• With the Right Documentation

Sounds simple, doesn’t it? Well, if you are a supplier and fail on your end at fulfilling a customer’s order, failure to meet the tenets of the metric could lead to a loss of business with the customer. If you are a healthcare provider supply chain, you, in essence, become the chief supplier to your “customers”- the user departments within your organization. When a supplier fails you, there is a good chance that you will fail your customers.

In the Warehouse Education and Research Council’s (WERC) metric definitions, the following four pertain to the Perfect Order:

• Percent of Orders with On-time Delivery: The percentage of orders that arrive at their final destination at the agreed upon time. Number of orders delivered on-time / Total number of orders shipped.
• Shipped Complete per Customer Order: Measures the percentage of orders which shipped completely, meaning that all line/units ship with the order per agreement between the customer and shipper. Number of orders shipped with all lines and units / Total number of orders shipped.
• Shipped Damage Free (Outbound): This measures the percentage of customer orders shipped in good and usable condition. Number of orders shipped damage free / Number of total orders shipped.
• Correct Documentation: The percent of total orders for which the customers received an accurate invoice and other required documents including ASNs, etc. Number of orders with correct documentation / Number of total orders.

In a general sense, each of the Perfect Order metrics relates to the elimination of re-work as well as the very real possibility of cancellation of a service. Let’s look at each element a little closer, along with the ramifications of failure:

• On Time Delivery: The ramifications of failure to deliver vary by product type. Healthcare organizations have two categories of products- Inventory Items and Direct Purchase Items. The typical healthcare warehouse handles 2,000-5,000 SKUs, whereas that same healthcare organization issues Purchase Orders for well over 50,000 SKUs. Unless inventory levels are calculated with an extreme closeness, there is most often enough on-hand supply to cover lack of perfect fulfillment for those items. The other items, however, are not backed up by redundant caches of supplies and rely entirely on timely and correct fulfillment. It is incumbent on the HCO to process those orders in a timely fashion in order to meet suppliers’ requirements and lead times. It is very easy to measure supplier compliance. Did the supplier get the right thing to the right place at the right time in the right amount with the correct documentation? Hence the mathematical formula: Number of orders delivered on-time / Total number of orders shipped. That formula, however, only grades half of the equation- the action of the supplier to the HCO’s dock. The second half of the process is where the rubber meets the road- the point of use. Performance from the supplier to the dock is easy to measure and produces a hard number. One hundred items ordered, ninety-seven delivered on time, the on-time delivery percentage is 97%. The impact of the three percent outstanding varies by criticality of the item ordered and criticality of its presence for a given procedure. That number is produced by the number and loudness of phone calls and emails from the point of use. The supplier has to answer to the first half of the effect; the supply chain and its leadership answers to the second half, often to stern consequences from senior leadership.
• Shipped Complete: Much of these criteria are self-explanatory. As this relates to inventory, this is often a statistic that distributors try to manipulate. In the strictest sense, if one item on a PO is absent, the entire order is incomplete by definition. Many distributors like to try to measure by individual line items, And if 97 out of 100 line items on a single PO are filled correctly, that distributor will report a 97% fulfillment rate. As stated previously, inventory items, unless there is a national shortage of a particular item, are less critically impacted than are items directly ordered for specific procedures. This ratio- Number of orders shipped with all lines and units / Total number of orders shipped– is easily measured. It becomes extremely relevant if 98 out of 99 items are correct, but the lack of the 99^th causes the procedure to be cancelled, and, regrettably even more so if that cancellation led to the loss of the patient. As with the On-Time criterion, this ratio has two affects- one for the supplier and one for the HCO and its supply chain, and they both are similar to those documented above. Failure to ship complete causes re-work for the HCO supply chain with the supplier, but it can have a much more serious impact with the internal customer at the point of service.
• Damage Free: This ratio is extremely straightforward, as is its importance- Number of orders shipped damage free / Number of total orders shipped. The implications of failure here are the same as the other three. They affect the HCO’s perception of the supplier and the HCO’s internal customers’ perception of the performance of the HCO’s supply chain.
• Correct Documentation: This metric (Number of orders with correct documentation / Number of total orders) impacts the matching process- invoice matches PO, PO matches receiving report, PO matches requisition, Pricing matches contracted pricing , terms and conditions. Mistakes here cause delays in payment and often frequent re-work in Purchasing and Accounts Payable.

The Perfect Order Metrics measure the performance of the HCO in ordering and the Supplier in fulfilling. The impact of shortcomings here reflect on both entities, but they have the greatest impact at the point of service. Their “supplier” is the organization’s Purchasing Department, not the actual manufacturer or distributor.

What does the “Perfect Order” mean in the healthcare setting, and why is it important to measure?

Plainly speaking, at the point of use, the “Perfect Order” is a meaningless term. At the point of use-where care is rendered- the only thing that matters is- Right thing(s), right place, right time, right quantity, right condition. The users measure the Perfect Order by asking one question: Did I get the stuff I need? If the answer is, “yes”, then it was a perfect order. If the answer is, “no”, then it wasn’t. And, depending on the criticality of the item(s) ordered, the blowback can be disastrous for the credibility of the supply chain, as well as the reputation of the healthcare organization (if failure to fulfill causes a cancellation or worse yet, a patient care incident). The scoring of the supply chain’s performance is always 100% or 0%; it’s that simple.

So the impetus for measuring the efficiency and effectiveness of both the ordering process (the responsibility of the HCO) and the fulfillment process (the responsibility of the supplier) falls squarely on the Supply Chain leadership team of the healthcare organization.

Both processes are complex. On a regular basis, the performance of key suppliers is measured. Most HCOs order commodity items through a distributor. They measure the performance of the distributors using metrics common to the WERC Perfect Order metrics. Distributors grade themselves- ostensibly using metrics similar to the WERC ones. However, it is not uncommon for the reporting results to vary wildly. One IDN that St. Onge is working with recently claimed that their primary distributor was performing at an 80% fulfillment rate, while that same distributor was claiming a 97% rate.

Most of the products coming to a healthcare organization via a distributor are commodity or inventory products, so generally, unless there is a stock out, a backup supply is on hand. However, an increasing number of HCOs across the country have chosen to eliminate their storeroom and have chosen a Low Unit of Measure (LUM) strategy in which the distributor will process orders sent directly from the point of use, place them in totes labelled with the ordering unit’s name, drop them off at the dock and allow the HCO’s staff to deliver them and put them away. In these situations, measurement of supplier performance is absolutely essential.

What makes performance measurement in healthcare so difficult is the process itself. When Ford, for example, builds a Mustang, it uses a standard bill of materials to do so. Brakes are standard. They come from individual sub-contractors. They arrive at the same time in the process every time the car is being built. For Ford the Perfect Order has an impact when failure to fulfill interrupts the process. Ford knows who makes the individual parts and carefully manages the performance of its suppliers.

Healthcare is a different animal. Its finished product (the patient) is not as standardly built and equipped as a Ford Mustang. It does not have the same brakes supplied from the same vendor at the same time in the process. No, the healthcare “finished product” (a recovered and healthy human being) is not the product of an automated assembly line. Rather, each “product” is produced independently, using vastly different component “parts” from vastly different sources. Doctors “practice” medicine. They don’t manufacture cars. They choose the products they want to use- generally referred to as Physician Preference Items (PPI), and it is incumbent on the supply chain to fulfill the doctors’ needs. To add to the complexity- even with commodity items- “where” toe items come to the hospital from is not the same place, or by the same company that manufactured them. Hospitals don’t use Original Equipment Manufacturers (OEMs) for a significant number of their SKUs. They use distributors. It is the distributors who deal with the OEMs for many of an HCO’s products.

So in healthcare, unlike the auto manufacturing industry, products most often go from Customer to supplier to customer to finished product. Instead, the orders go from the HCO to the distributor, to the HCO to the point of use. Often, when back orders occur, it is impossible to clearly identify where the failure to fulfill happened.

Except for one thing: to the end customer, the HCO’s supply chain is always responsible.

Add to this the other costs of failure to fulfill noted throughout this article, it becomes increasingly clear that the Perfect Order Metrics are ones essential to the effective operation of the supply chain.

How St. Onge can help.

Using the WERC metrics, St. Onge can assess where your organization stands, measure both the financial and quality of care impact and help you develop a financial measure of that impact, along with an estimated financial improvement should you develop and implement an improvement strategy.

Through our design process, we perform an intensive level of due diligence to learn our clients’ needs. Site tours, detailed interviews and data drive the models and simulations we use to develop a thorough understanding of our client’s day-to-day activity from an efficiency perspective. This process validates our understanding of the client’s issues and provides the foundation for developing the relationships required to create innovative solutions.

St. Onge Company has grown steadily and developed a client list that includes many Fortune 500 companies and several world-renowned institutions. We have completed approximately 5,000 assignments for over 1,000 clients located through- out the United States, Canada, Mexico, the United Kingdom, Europe, the Middle East, the Far East, China and South America.

Our past projects cover a wide variety of Institutional, Commercial and Industrial applications for clients such as Johns Hopkins Hospital, Dana Farber Cancer Institute, MD Anderson Cancer Center, Rush University Medical Center, Duke University Medical Center, St. Jude Children’s Research Hospital and King Saud Abdul Aziz Hospital, as well as with their architecture firms. For these clients, we have developed a strong familiarity with the challenging logistics and related real-time issues associated with hospital operations, including campus supply chain strategies, materials management master plans, departmental optimization, facility designs and information systems to plan, direct and coordinate the movement of materials. Some of these solutions are highly automated; all are highly effective.

If you find yourself interested in finding hidden savings, please contact St. Onge. Our experts stand ready to take a look at your operation and find the opportunities you may have overlooked. You can reach me at fcrans@stonge.com or call me at 563-503-1847.

Next up: A look at inbound metrics.

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