Executive summary

The 250 public hospitals in NSW spend over $1.3 billion annually on goods and services including medicine, food, asset maintenance and general purchases.

The 2002 audit

In 2002 we conducted an audit on buying hospital supplies, as part of our series of audits on e-government. We studied the health sector as a case study for a significant aspect of harnessing value from technology, namely electronic procurement.

NSW Health was already implementing a Supply Chain Reform Strategy (SCRS) at that time.  The strategy was to be completed by late 2003, and deliver between $60 million and $80 million in savings.

The 2002 audit found that with less than two years to meet the SCRS targets, the health sector had made only limited progress. Our report identified a range of issues and impediments, and made a considerable number of specific recommendations to assist NSW Health in its endeavours.

This report, three years later and two years after the SCRS target, provides an update on progress[1].  In particular we reviewed:

§         whether the accepted recommendations from the original audit were implemented

§         what changes have been made to buy hospital supplies more efficiently and economically

§         what benefits this has generated.

Audit Opinion

The health sector in NSW has made some progress in reforming its purchasing practices. Since it began its Supply Chain Reform Strategy in 2000, NSW Health estimates that it has saved $60 million with increased efficiency and economy.

To date, major improvements made to the way the NSW health sector purchases hospital supplies include:

§         increasing the proportion of purchases made with state contracts from 48% to 50%

§         reducing the number of warehouses from 74 to 26, and also reducing the inventory levels held in the warehouses by about one third

§         creating three groups of Area Health Services (Areas) that could act collectively to implement their own procurement initiatives.

Good as this is, the savings are at the lower end of the estimated savings range, and significantly short of the $80 million upper estimate. And it has taken considerably longer than the 2003 time target.

Encouragingly, there appears to be considerable potential for a great deal more to be achieved in this area. To that end, priority needs to be maintained on delivering results in this key area of reform.

In our view, issues that have impeded progress, or which require priority attention, include:

§         finding successful models and processes for IT governance and change-management across the breadth of the health sector

§         finalising an electronic catalogue, which has been a persistent issue of difficulty now spanning 15 years

§         achieving consistency in implementing procurement business processes and systems

§         implementing a viable electronic marketplace system

§         extracting vital performance information, including whether the timeliness of receiving goods and services has improved

§         routinely paying all suppliers on time. This is another persistent issue for most Areas, causing lost discounts, and reducing the reliability of supply and the ability to negotiate better deals.

Progressing the electronic procurement strategy is proving more complex than NSW Health originally anticipated. Most reforms of this type experience this. But at essence, this is not a technical issue. The key focus is procurement and governance reform.

The key requirements for success reside in achieving a consistent procurement business model, effective change‑management, and developing clarity of accountability and decision-making for progressing change. In the IT profession this is referred to as harmonising IT governance with business governance, and aligning IT strategy with the needs of the business. Our report highlights areas in which these key factors for success can be addressed.

2005 audit findings

Chapter 1 -
Has managing procurement change across the health sector been successful?

In mid-2004, NSW Health restructured the 17 Area Health Services into eight, which included plans to establish a shared corporate services group. In 2005 it disbanded the Health Peak Purchasing Council. The Areas are now directly accountable to the NSW Health Director‑General. However, this has not been fully implemented in practice, and the Areas still largely operate as 17 separate entities.

Performance indicators have only recently been developed, and Areas have been required to report on them quarterly since the start of 2005. However, Areas cannot always provide the needed information. Also, because the Areas still use different systems, the information provided is not always comparable.

Information is not currently available on whether the time to receive ordered goods and services, including those that are life critical, has improved with the changes made.

Health advises that it will implement a shared services group over the next six years. This group will take over all the corporate support functions of all Areas and hospitals. This will allow the hospitals and Areas to concentrate on their main business of delivering patient care.

Chapter 2 - What changes have been made to purchasing practices?

Since our 2002 audit, improvements have been made in a number of areas of Health’s supply chain process. Health estimates that to mid‑2005, approximately $60 million has been saved.

NSW Health has increased the amount bought on contracts to cover approximately 50% of its annual spend, and is trialling guaranteed large‑volume contracts. This is expected to result in significant savings.

A standard contract document template has been developed and there is a single contract database that allows all Areas to use already negotiated contracts.

The number of warehouses has reduced. Some Areas have suppliers send requested items direct to hospitals rather than store them in warehouses. Most hospitals and Areas now use barcoding to monitor supply levels.

There is still no standardised procurement process encompassing IT systems, guidelines, ordering and purchasing methods, prices, contracts, payment methods, KPIs and communication processes.

Health still cannot pay suppliers on time in all cases. This impacts on price, reliability of supply and its ability to negotiate better deals.

After 15 years, Health is still trying to develop an electronic catalogue that can be used by all Areas to make purchases and track items. Likewise, a single corporate services IT system has not been implemented across the state. This makes data collection, information sharing and performance management difficult.

Some Areas have worked together to establish a common payment method and system to deal with suppliers. Some have also established their own catalogues for commonly purchased and used items.

Response from NSW Health

Thank you for the copy of the follow-up Performance Audit Report, Buying Hospital Supplies.

The report highlights the breadth and complexity of procurement within the health system and the steps being taken to reduce costs and improve performance. Overall the report provides a sound assessment of our progress. The recommendations are consistent with our reform agenda with the issues already addressed, or in the process of being addressed through either the supply Chain Reform Strategy, or the e‑Marketplace initiative.

A number of issues have been encountered in the change process, particularly in relation to the implementation of electronic procurement. There was a need to restart the e-marketplace project due to the inability of Smartbuy to address the specific needs of Health. Regardless of the challenges encountered, Health has made substantial advances in reforming and improving the procurement outcomes.

It is worth noting that procurement savings of $65 million were achieved in the supply chain reform strategy, over three years to June 2005 and an additional $45.3 million in savings is targeted during the 2005/06 financial year through the procurement budget conversion strategy.

In summary, the report recognises the difficulties in reforming supply chains in the NSW Public Health system and makes a useful contribution to the process. It is a pity the report does not reflect that many of the progress delays have been caused by external factors, but I am pleased that it recognises the extent of the task being progressed by so many in the Health system to bring about these important reforms.

I appreciate the level of co-operation that existed between NSW Health and the Audit Office during the preparation of the report, and thank the staff of both agencies for their professionalism.

(signed)

Robyn Kruk

Director-General

Dated: 8 November 2005