We’ve Come a Long Way from the Basement in Hospital Supply Chain Management
I remember at my first three jobs a the hospitals I was employed as a materials manager my windowless office was located in the basement, ether next to the storeroom, or near the receiving dock or half-way between both of these locations. Come to think about it, my salary was pretty much matched my location in the pecking order at these hospitals too. Yet, I was happy, productive and enthusiastic about my job, but I still had to work two jobs for many years just to keep a roof over my family’s head and bread on the table for my wife and kids.
I’m sure many of you can relate to these musings since you have found yourself in the same circumstances as you have moved forward in your own supply chain career. But the times are changing FAST in supply chain management. Many of us have moved from the basement to the rarefied upper-level floors of our healthcare organizations where we too have a window to gaze out when we get a few minutes to do so. Better yet, our salaries are now competitive with any industry I can think of and the perks (incentives, bonuses, health club membership, flextime, etc.) being offered are getting better every year.
To prove my point, I was just reading the results of ARMM’s Compensation Survey for 2009 which found that the average salary for MMs in 2009 was $87,650. The report also noted that 33% of the MMs surveyed are receiving bonuses, 58% have formal incentive programs and 9% are receiving other incentive benefits such as tuition reimbursement, child care and parental leave. Not bad for a profession that was considered basement dwellers just a few decades ago.
We have come a long way from the basement as attested by the results of the AHRMM survey I just referred too. But here are a few statistics from this same report you might not be aware of that tips the scale in favor of high income producers: MMs that had the highest salaries and held the most prestigious jobs in our industry had the highest educational levels (MA or MS), were Fellows in AHRMM, and had 50 or more staff reporting to them. This isn’t a coincidence!
As this data suggests, if you want to have the highest salary, best perks and to permanently move out of the basement like these trailblazers have done, you will need to go back to school, get CPM certified, become an AHRMM Fellow and get hired by one of the largest healthcare organization in your region.
Don’t get me wrong! I’m not saying this should be the goal for everyone reading this blog, but if you have aspirations for a bigger and better salary, more perks and additional responsibility this is the roadmap you should be following to meet this objective. As Sherlock Holmes would say to his friend Dr. Watson, “It’s as elementary as 1, 2, 3”.
Building a Supply Chain Business Case for Change!
I have found that the best way to get your supply savings ideas (especially those big creative ones) approved by your senior management, customers and stakeholders is to make a formal written business case for change. Why? Because too much is left unsaid, misunderstood or lacking in logic when you try to verbalize your savings ideas on complicated issues that need to be internalized before they are put into practice.
I have followed this same advice in my own career where I have proposed big business changing savings ideas at every healthcare organization I have worked in my supply chain management employment. For instance, I have proposed (in writing) a new supply value analysis program at every healthcare organization that I have worked and NEVER once have my proposals been turned down by senior management, customers or stakeholders.
I once decentralized the centralized buying function that had been in place for 46 years at my multi-hospital system and then replaced it with a GPO model based on a written business case for change that saved my healthcare corporation millions of dollars — almost on day one.
I proposed in writing, and eventually received approval from my board of directors, to move forward with a group purchasing program for their 27 long-term care facilities where I was Vice President of Support Services. This reinvented the way they had done business for decades.
I’m sure you get the idea! Developing a written business case for change in order to introduce, test the waters and then to gain approval on your big and even little supply savings ideas is a powerful instrument for the changes you believe are mission critical to your healthcare organization.
Here’s how it works! This business changing and decision-making instrument begins with a written document that would give the background of the problem or opportunity and description of what you want to accomplish. It would describe how it benefits your organization, how it fits into your organization strategic plan, the risk and rewards, the resources required, the responsibilities and the timing and the operational and financial considerations.
Your business case for change doesn’t need to be elaborate, but it does need to be thorough, concise and well thought out. Most importantly, it needs to be your tool of choice that you employ when you want to “change the way we do things around here”.
Actionable Hospital Supply Metrics Will Make Change Happen!
We all deal with metrics everyday (statistics that measure or quantify our data), but is this information ACTIONABLE? For example, most hospitals use the metric supply cost/net revenues to compare their hospital’s supply chain performance to their peers to see how their hospital fits into a regional or national norm, but what does this information really mean?
Let’s say this exercise shows that your hospital is on the high side of this metric. Does this information allow you to make decisions or take action to reduce your supply cost? The answer is no! This metric is only directional. Meaning, it only shows if your hospital is going in the RIGHT or WRONG direction on your supply expenses. However, it doesn’t tell you why or how you can change the direction you are going if results are unfavorable.
That’s why you also need to have ACTIONABLE metrics that will help you make informed decisions and take immediate action to correct the defects in your supply chain. For instance, we just had a quarterly review with one of our Supply Dashboard clients where we talked about how his lab reagent metric (total reagent cost/Billable Lab Tests –CMI adjusted) has been going up. He then told us that he picked up this fact on his supply chain radar screen too. After some research, he found that he had a few reagents that he was buying that weren’t under contract that was causing this anomaly, which he said has now been fixed.
That’s what ACTIONABLE metrics can do for you (enable you to make informed decisions and take immediate action) vs. generic metrics that ONLY tell you that you are going off course. For this reason, if you want to make positive change happen at your healthcare organization you will need to establish ACTIONABLE metrics at the ground level to greatly enhance your supply chain decisions. Otherwise, you will be nibbling around the edges of your supply chain expense savings when a windfall of savings is just waiting for you to take action.
Why You Need Supply Project Charters to Save Even More!
A Supply Project Charter is a statement of the scope, objectives and participants in a project. It provides a preliminary delineation of roles and responsibilities, outlines the project objectives, identifies the main stakeholders, and defines the authority of the project manager. Source: Wikipedia.com
It took me some time to fully realize that a good project charter is one of the key success factors for any and all savings and quality projects (Six Sigma, LEAN Management, Value Analysis, etc.). The reason I now feel this way is that you need a beginning, middle and end to all projects. Therefore, if you don’t have a good project charter you don’t have a rock-solid foundation for the beginning of your projects, thus, risking going off track even before your project gets started!
At minimum you will need the following 13 essential elements to be included in your project charter: Project Title, Project Type, Focus Area, Department, Facility, Project Start Date, Project Number, Champion, Project Leader, Product or Process Owner, Statement of Problem or Opportunity, Project Completion Date, and Financial and Quality Goals & Objectives (e.g., savings, improved revenues, reduced defects, etc.).
Now that you have these essential elements listed in your project charters you can refer back to them to insure that your projects stays on track, on budget and on time. We have found that the timely on going (monthly) review of this data to be critical to the success of any project. In fact, to manage and control all of their projects, we encourage our clients to establish Balanced Scorecards based on the information in their project charters.
A recent survey by ISixSigma Magazine found that 81% of the most successful Master Black Belts ALWAYS utilize a project charter to get a fast running start on their projects. The survey stated further that project charters were the second most commonly used tool by Black Belts, next to process mapping as part of their improvement work.
How can you dispute these statistics? If you want to save even more money and improve your quality the answer is to start to employ PROJECT CHARTERS on all of your supply chain initiatives. You will then have a beginning, middle and end to all of your projects.
Toyota Has Got Value Analysis Right…Do you?
I just read an article in the December 23rd edition of the Wall Street Journal titled TOYOTA ACCELERATES ITS COST-CUTTING EFFORTS. The article proclaims that Toyota’s goal is to reduce its parts expenses by 30% within three years by employing the strategies, tactics and techniques of value analysis.
Specifically, the article states that “Hit by financial crisis, (Toyota) last year launched a “Value Analysis” program to cut the cost of producing existing models. I believe this is the same financial crisis that healthcare organizations are facing today: reduced reimbursement, lower census and increased bad debts? There is no doubt in my mind that Toyota has “got it right” when they decided to utilize the time-tested value analysis methodology as their tactic of choice to push to return to profit after a very bad year.
Do you see the similarity with healthcare? Our industry faces the same challenges as Toyota: slow growth, reduced profits and an uncertain future. That’s why value analysis is more important than ever before.
Our industries’ price savings are slowly disappearing, but there are still billions of dollars in value analysis savings still available in the healthcare industry. This could be uncovered if we as an industry focus on the wasteful and inefficient consumption, misuse, misapplication and value mismatches in our supply streams.
Bottom Line: If you aren’t vigorously applying the techniques of value analysis to discover your next big savings opportunities, then you are losing out on this gold mine of new and better savings for your healthcare organization. As I see it, if healthcare organizations are to be profitable, viable and thriving in 2010, they need to take a lesson from the Toyota playbook and accelerate cost-cutting efforts with value analysis.
Metrics Matter: Choosing the Right Ones
If you want to see beyond the clutter, fog and noise that saturates our day-to-day business decisions the best way I know to do so is with metrics. Specifically, a metric is a set of measurements that quantify results thereby telling us more about our supply chain operations. This insightful information will then enable you to make your big and little decisions with confidence, congruity and speed.
One caveat! The difficulty in using metrics is that you need to choose the RIGHT ones to get the RIGHT results. I find the ideal methodology to do so is Activity-Based Costing: Linking a product or service to an activity or cost driver to uncover significant actionable information.
For instance, if you wanted to have a meaningful metric to analyze your office supply total in-use cost you would use full-time equivalents (FTEs) divided by your office supply spend to arrive at this measurement. You can then benchmark this metric against your peers to determine whether your total in-use cost for office supplies is within acceptable limits. This is a much more scientific method than guessing!
Why FTEs? Because people drive the cost up or down on office supplies, consequently there is a direct relationship between your office supplies spend and the number of people your healthcare organization employs on a full or part time basis.
Get the idea? Anytime you want to measure something you need to first indentify your COST DRIVER for the product or service you are measuring. You then divide your cost driver by your supply spend or labor cost to arrive at your metric. This methodology can become much more complicated than my example of office supplies when a number of variables are involved, but this is the basics on how you would choose the RIGHT metric to keep you from going off track.
I know that this topic boarders on being academic, but it really has real world applications in supply chain management. If you master the basics of this concept, it can make your job easier, more productive and will allow you to become a saving machine. That’s why metrics matter!
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Why Does Value Analysis Fail at Some Hospitals, Systems or IDNs?
Value analysis is a best practice in 93% of hospitals, systems and IDNs in the country today, but why do so many VA programs fail to reach their full potential and reap the complete benefits of this supply chain discipline? To answer this question, I have prepared a FIVE point check list that you can use to measure your own VA program against to see if it is meets, exceeds or is missing the grade:
Steering Committee
If you don’t have a value analysis steering committee, chaired by the highest level of management you can recruit for this position, who will guide, monitor and arbitrate disputes in your VA program, then you are missing a key ingredient to your VA program’s success.
Balanced Scorecard
What is visualized and measured happens should be the mantra for your VA program. This is best achieved with a balanced scorecard that measures in real-time your savings vs. goals, milestones, meeting attendance, team and project status, etc.
Executive Champion
No real progress can be made with your VA Team(s) without an executive champion being assigned as an administrative representative to your VA team(s). This individual’s job is to represent senior management, guide VA process, arbitrate disputes, remove road blocks and smooth the road when political impasses arise.
Extensive Training
Team leaders and team members need extensive training in value analysis (it is a real discipline like LEAN Six Sigma that has a defined process, practices, tactics and techniques), or your VA team leaders and members will just WING IT, resulting in poor or unrealized savings and quality improvements.
Project Management
All team members need to be accountable for their results. This can only be accomplished by assigning VA studies to individual project managers who then are responsible for defining, planning, investigating and implementing VA savings opportunities.
As you can see by this checklist, value analysis isn’t a group of individuals meeting monthly to discuss new product introductions, GPO contracts, or product failures. It’s a formal and disciplined process that requires executive management leadership, continuous measurement, monitoring and control, extensive training and stringent project management to be successful.
If you are missing any of these ingredients, you are forfeiting the opportunity to be the “best” of the best in value analysis. Don’t leave these success elements to chance, but instead incorporate them into your current VA program so you can be assured of success – not failure!
5 Steps to Improve Your Hospital Value Analysis Studies with Focus Groups
There are a few key steps in every value analysis study that you conduct that should never be missed, ignored or be forgotten. One of the most important steps that is often overlooked in our rush to get our VA study done, is for us to listen to the VOICE OF YOUR CUSTOMERS so that you can clearly understand their wants, needs and desires prior to re-engineering any of their products, services or technologies.
This chore can best be accomplished with surveys, interviews and focus groups. However, I have found that the most efficient and least time consuming way to gather your customers’ critical-to-quality requirements is with FOCUS GROUPS. Louise Lee of SmallBiz Magazine tells us that there are 5 vital steps you need to know about when you are conducting focus groups. I have listed these steps below:
1. Do Your Homework
You need to develop a list of questions beforehand as conversation starters, but your questions should be broad enough to encourage discussion. A good way to start off is to ask your customers how they use the product, service or technology that you are studying. This will break the ice and get the dialog going!
2. Find the Right People
When you’re conducting a focus group not only invite customers, stakeholders and experts to participate in this exercise, but also ask a few non-customers to your session, this can help to give your focus group members some perspective and keep them grounded.
3. Choose a Location
If possible, have the location for your focus group as far away from their work centers as possible. In doing so, you will eliminate most distractions, interruptions which will shorten the length of your session.
4. Pick a Moderator
Most focus groups can last as long as two hours, and participants can be combative, blunt and critical of your efforts. Consequently, if you don’t feel comfortable in this environment have one of your hospital’s facilitator’s moderate your focus groups.
5. Discuss Results
Once you have completed your focus group, analyze your findings. Look for themes and ideas that stood out in the discussion, and see how you can use them to guide your value analysis study. And be prepared for negative feedback about your focus group, since most people in your hospital don’t like change.
As you can see, conducting a focus group takes time, planning, and analysis to truly comprehend the VOICE OF YOUR CUSTOMERS in any VA study that you conduct. From my experience, conducting focus groups as an integral step in your VA studies will improve the quality of your studies 10-fold. As an added benefit, it will clearly demonstrate to your customers that you really are interested in their opinions, comments and advice by your actions and subsequent results.
Incentivize Your Physicians to Save on the Cheap
There has been a lot written about “Pay for Performance” (PFP) programs to incentivize your physicians to save, but very little has been written about how successful it can be while spending very little money.
That’s what I’m hearing from the marketplace; it doesn’t take a lot of money to incentivize your doctors to save. All you need to do is to find out what products, equipment, training, technology, staff, etc., that they desire to do their work more effectively and productively, but don’t have these resources now. Then offer to purchase or obtain one or more of these “wish lists” items as an inducement for them to save money for your hospital, system or IDN on a particular initiative that you are proposing, such as, orthopedics, neurosurgery, cardiology, etc.
The operative words here are that these incentives must effectively and productively improve your hospitals operations. You don’t want to give away incentives that are just NICE to have but are not required. They must actually be beneficial to your hospital and your physicians to be a win-win scenario for all involved parties.
Naturally, these “Pay for Performance” programs can’t be arbitrary, ill-defined or unverifiable. To the contrary, they must be highly organized, truthfully measured and value-based. For example, you might find that your cardiologists have been requesting a new piece of equipment in their capital budget valued at $28,396, but it has been denied for years. Your task then is to have your cardiologist agree — in writing — that they will be required to save three times ($85,188) the value of this equipment by assisting you in the evaluation of your hospital’s pacemakers and difibrillator’s cost, product mix, and applicability for this new equipment to be approved for purchase.
Considering you would have a minimum return-on-investment for your hospital of 200% for this hypothetical project, I believe that this is what I would call “savings on the cheap” when you consider doing nothing is costing your hospital hundreds of thousands of dollars a year in lost opportunity costs.
So don’t be apprehensive about incentivizing your physicians to save (it’s a good business practice), since it is one of the best investments you can make with your hospital’s money. Keep in mind, your physicians have no incentive to save money today — unless you give them the incentive to do so!
Supply Savings Comic – Supply Benchmarking
NEW SUPPLY SAVINGS COMIC!
Stretch Goals Can Lead to Breakthrough Thinking!
A goal by definition is an objective we want to reach, but a “stretch goal” is quite different as defined by Jack welsh, the former CEO of General Electric. He says that stretch goals “are essentially stimulating the staff to create goals that, given the current situation and what is known today, appear beyond their reach or otherwise unattainable. This is getting the employees and or managers to conceive of things that are at a magnitude beyond their wildest expectations or beliefs”
As Jack Welsh suggests in his quote, it’s in our human nature to select safe, comfortable and reachable goals. Why should you or your team stick their necks out when management is only asking the bare minimum goals from you? I see this “small thinking” attitude all the time.
I recently asked a material manager at a 238-bed community hospital what his savings goal was for next year and he told me that his senior management had set a goal for him of $50,000. By my estimate this material manager should meet this goal in less than three months — not one year. That’s not a “stretch goal”; it’s a puny, undersized, and no brainer. If I was this material manager I would at least triple my senior management’s goal to $150,000, just to keep me from falling asleep at the wheel.
If you want to have BREAKTHROUGH savings, then you need to bring about breakthrough THINKING for yourself, your staff and your value analysis teams. The best way I know to do so is for you to set “stretch goals” for every level of your supply chain operations vs. letting your senior management set them for you. Then brainstorm with your supply chain team to discover how you will meet your oversized goals.
As an illustration, one of our supply chain clients established a “stretch goal” for their department of $11 million for this fiscal year, although they didn’t know how they would make these savings happen when they committed to this goal. That’s when their supply chain team honed in on their utilization misalignments with our assistance and found $15 million dollars in new potential savings. If they would have settled for a so-so savings goal instead of establishing a stretch goal, they wouldn’t have found these big savings opportunities! With breakthrough THINKING, they are now on target to achieve breakthrough SAVINGS – not meager results!
So remember, when you are setting your supply chain savings and operational goals for 2010, don’t take the road most travel by establishing safe, easy and undersized goals. Stretch yourself, your staff and value analysis team(s) by instituting oversized goals that will lead to breakthrough thinking and gigantic results.
Profitability is More Important Than Any Other Buying Factor
I’m’ hearing that more and more supply chain professionals are evaluating their new product, services and technology requests with a new, yet a very old buying criteria – profitability! Or, if it isn’t PROFITABILE why should we buy it? This is a significant emerging best practice you need to know about and then employ at your own hospital, system or IDN.
Hospitals have always been the “kings” as loss leaders, when it comes to buying anything. Their justification or logic in making these decisions has always been that we will make up for these losses on volume or on some other procedure(s) that a particular physician will be performing at our hospital –so what’s the BIG problem!
The problem is that your hospital NEVER really ever makes up for these losses (big and small); hospitals just eat them on the promise of future profitability in some other area of their operations. As an illustration, the average pacemaker total procedure reimbursement from Medicare (supplies, pacemaker, labor and overhead) is about $10,000, so if you are buying pacemakers that cost you $9,000 (or 90% of your reimbursable fee), I can guarantee you that you just lost money on every pacemaker procedure you perform. You will never make it up with volume – your losses will just get worse.
So what progressive supply chain professionals are doing to eliminate this extreme misadventure is to add the criteria of profitability to each and every one of there value analysis studies that they perform. This way, if your executive management wants to buy a product, service or technology that NEVER is going to make or save them money at least they know these undisputable facts from the get go. This is the only hope we have for our healthcare organization to self-correct this flagrant practice.
Never Underestimate the Power of Measurement
It’s relatively easy to identify that you have a hospital supply chain challenge (higher cost, lower quality or poor service levels), but it’s quite another thing to uncover the root cause of why this situation is happening.
Instead of pointing fingers, becoming defensive or accepting the uninformed opinions of others, a much better way is to trust a statistical methodology such as Supply Six Sigma® to identify and address the real source of the problem.
For example, I just read about a hospital that realized that their cardiothoracic unit (CTU) cost per discharge for supplies was $66.11, which they identified as too high. But they didn’t RUSH to judgment on why this was happening. They instead formed a team to define, measure, analyze and improve this situation with the goal of reducing these costs by 50%.
Once this cross-functional team was formed it developed a high-level process map of their CTU discharge process to understand the current system and then gathered baseline performance statistics for analysis. Based on their statistical studies the team found after counting the supplies that were discarded on 52 discharges that on average 67 unused items were discarded, ranging in price from pennies to more than $1.00 per unit.
They also found that medications that were stocked in the CTU’s lock box and which should never have been discarded unused were being discarded. It was estimated based on these statistics that were compiled by the team that this wasteful practice of discarding unused supplies and drugs was costing their hospital $55,185 annually.
The team’s observation and investigation found that there was no uniformity or consistency on how the CTU staff pulled and restocked supplies, confirming that this was the root cause of this excessive cost. The team and CTU staff decided to institute a supply cart system for all CTU patient supplies that would be restocked daily and any unused supplies discarded. It was calculated that after buying seven additional carts, that the ROI on this project was 163 percent!
This is what an organized, methodical and step-by-step statistical approach to your supply chain challenges is all about: No short cuts, no guessing, no opinion just accurate and precise measurements to uncover the root cause of the problem being addressed and then implementing the right solution for sustainable and measurable results.
Why are Hospitals Buying So Many Different Products?
We would all like to think we know all the answers to the supply chain puzzle, but I can tell you from experience that until we developed our Value Analytics™ methodology 10 years ago, I found that I didn’t know what I thought I knew… I was just guessing.
For instance, did you know that healthcare organizations hardly ever buy the same products even if they belong to the same GPO or are divisions of the same healthcare system? In fact, our Value Analytics™ studies have revealed that the highest product match we have ever found between comparable hospitals with like operating characteristics is 18%. To bring this point home, one of our clients who owns five hospitals is buying five different surgical clippers. Isn’t that any eye opener?
This “Aha” made me realize that hospitals aren’t buying their products mainly to provide a primary function (what it is supposed to do) for their customers, but most buying decisions are based on a product’s aesthetic functions or features. There is no other reason, in my opinions, for this phenomenon to be happening.
Here’s an illustration of what I’m talking about using a surgical clipper as an example: its primary function is to REMOVE HAIR and there are no secondary functions (meaning in addition to removing hair it does something else) that I can recognize.
All surgical clippers remove hair therefore what makes them different? The answer is aesthetic functions or features that are nice to have functions, but in many situations are not needed. The only aesthetic functions that I can identify with clippers are its size, shape, color, ease of use, closeness of shave, fixed head or pivotal head. So why isn’t everyone buying the same clipper that provides the ALL the right functions at the lowest total cost?
With few exceptions, EVERY hospital in the country can, in my estimation, can standardize on 80% of the lowest cost functionally reliable products in each category of purchase that they are buying today. The reason that hospitals aren’t doing so is that they are buying too many unnecessary, redundant and glitzy AESTHETIC functions that are holding back billions of dollars of savings for their healthcare organizations.
So the next time you are buying a new product make sure that the aesthetic functions or features that you are purchasing are absolutely, positively required, before you needlessly spend your limited dollars on nice to have characteristics, but attributes that are not needed in order to meet the primary function of the product. It’s just that simple!
