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!
New No Cost Webinar – Value Analytics The New Science of Savings
Value Analytics
The New Science of Savings
Learn the advanced methods and strategies to analyze your utilization trends, patterns and variations in your supply spend categories so you can move to the next level of savings performance beyond price.
Webinar Overview
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Are You Flying Blind?
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Why Value Analytics?
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What is Value Analytics?
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A Road Map for Success
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5 Key Elements for Precision
Thursday,
November 12th – 1:00pm Eastern
All
Registered Attendee’s Will Receive a Copy of the Webinar Slides and
Audio Replay at No Cost to You!
Strategic Supply Chain Webinar Series Leader – Robert T. Yokl,
President/Chief Value Strategist
and Robert W. Yokl, VP of Operations, Strategic Value Analysis in Healthcare
Webinar May Be FREE But The Information is Priceless
Creating the Future of Supply Chain Management
The biggest risk today, as I see it for supply chain professionals, is running out of savings. Yes, I know that some hospitals, systems and IDNs are still finding some low hanging fruit to keep their savings rolling, but those days are numbered. It’s not a growth strategy!
A good way to look at this emerging trend is check out what other industries are doing when they HIT the wall on savings. Over the last 5 years or so manufacturing, energy, financial, airline industries, etc., have been attacking the in-use cost of their products, services and technologies. Why? Because their price savings have disappear!
The tactic industry uses to drive out all of their waste and inefficiency in their value streams is called demand management or as we like to call it in healthcare — utilization management. This approach has saved billions of dollars without hurting their customer’s quality.
In brief, the demand management (i.e. utilization) methodology focuses its efforts not primary on suppliers or price, but on how products, services and technologies are deployed in an organization. Are there wasteful and inefficient practices, are they being misused or misapplied and are there lower cost alternatives to meet these stated functions at a lower cost? Its not uncommon for companies to cut 7 to 15 percent off their expense budgets and the savings can begin in as little as three months.
Extensive Industry research confirms the future of supply chain management isn’t about suppliers or price, it’s about your CONSUMPTION, where 79% of all of your new savings reside. Since most healthcare supply chain best practices (e.g. spend managers, just-in-time, ERP systems, etc.) are adopted from other industries, this is one trend that you don’t want to overlook, ignore or disregard because … it’s the future of supply chain management! This isn’t a prediction, but a fact!
So if you want to start creating the future of supply chain management at your own healthcare organization you need to start today by focusing on your own products, services and technology consumption. That’s where other industries are finding a GOLD MINE of savings, not just by bidding, negotiation or joining a new GPO to obtain a better price.
