Are you Keeping Score with Actionable Key Performance Indicators?
We found, 10 years ago that it was impossible for us to keep our finger on the pulse of everything that was happening in our client’s supply chain expenses unless we changed how we were keeping score. It was like counting the windows on a train as it passed by at 80 miles an hour. It couldn’t be done…
That’s when we started keeping score of our client’s supply chain expenses with actionable key performance indicators (KPIs). We use a measure of their performance (benchmark, target or time frame) that signals to us a change in our client’s purchasing patterns, utilization or demand for all of the products, services and technologies that they were buying.
As an illustration, we now have set an upper limit KPI for all of the client’s products, services and technologies that they are buying in our Utilizer® Dashboard. So when our client’s total cost per KPI go above their upper limit on any of their commodities we and they can see that something has changed in their practices and needs to be immediately addressed.
We also employ single value benchmarks, a range of Activity-Based Costing statistics and literally thousands of demand KPIs to keep score of our client’s supply chain expenses in almost real-time to ensure that our client’s costs are always within acceptable limits.
What does this all mean to you? If you aren’t keeping score of your supply chain expenses utilizing the power of actionable KPIs, you are missing an opportunity to be absolutely and lastingly in control of your supply chain expenses.
We have found, through the school of hard knocks, that you can’t accomplish this feat of conjuring by mere intuition, legacy MMIS systems, spend managers or even the manipulating of your raw statistics.
There is only one way to do so! You will need to reinvent what you are doing now so that you can quantitatively measure with a number, statistics or metric (KPI) every aspect of your supply chain expense activities. Then and only then, will you be able to rest easy knowing that you are firmly in control of your supply chain expenses….going forward.
Looking Beyond Your Traditional Hospital Supply Chain Savings
We are finding that almost everyone in the supply chain business is on top of their game when it comes to their price and standardization savings. Yet, we have observed that these same healthcare organizations aren’t looking beyond these traditional cost cutting measures to shrink their total supply chain spend.
What am I talking about? What I’m referring to is looking beyond your traditional savings to start attacking your purchase service cost which represents as much as 9% of your revenues and up to 50% of your total supply spend. More importantly, we have found that these non-traditional expenses can yield you as much as 12% to 18% (or $2,866 to $4,217 per occupied bed) in additional savings that can go right to your bottom line in less than 12 to 18 months.
If you are a regular reader of my Savings Beyond Price™ e-newsletter and my blog, you know that I have been singing this tune for many years. This is because I still don’t see enough hospitals, systems and IDNs capturing these big savings opportunities that I just talked about.
Now that the healthcare reform bill has been signed into law and is beginning to be implemented in small, incremental and then eventually big doses over the next few years, we as an industry don’t have the luxury of waiting until these new regulations are fully implemented to reduce our total supply chain expenses. We need to reduce our total supply cost today, tomorrow and every year going forward so that we are ready when our reimbursement from all sources contracts, evaporates and eventually becomes a very small stream.
To quote one of my favorite sayings, “Noah didn’t wait until it was raining to build his ark”; don’t you wait any longer to cut all of your supply chain savings to the bone.
Not So Fast, Perfect or Ideal Solutions that Work!
Many of us like fast, perfect and ideal solutions to our supply chain challenges, but our customers, more likely than not, see their world from a different prism…slow, easy and hassle free! So in the interest of our customer’s buy-in do you compromise on your solution or do you force your solution on your customers?
This is a real world dilemma that supply chain professionals face everyday: When to push, when to pull, or when to find the middle ground to get half-a-loaf vs. nothing from our customers! No one likes change, many times, even when it is good for them.
I have three tactics to share with you that you might find useful in your own quest for mastering the art of change management:
- Trade, if you have leverage – Trading is a skill used for thousands of years by people who took full advantage of their leverage. You can do the same if you have something to trade that the other person wants. For example, we know of one supply chain professional that trades requests for new purchases from his customers (moves them up the queue for approval) for changes he wants to see in their buying practices, such as, testing a lower cost alternative product vs. what they are now buying. It’s a simple idea that works very effectively, if you have leverage of any kind.
- Nibble around the edges – Get as much as you can now, and then come back for more bites of the apple at a later date. I used this same tactic in my supply chain career thousand of times. I would obtain agreement from my customers to make a very small change in what they were doing (e.g. removing one or two items from their custom pack or kit that they weren’t using), then I would come back year after year taking more bites of the apple until it was all gone. It worked 98% of the time!
- Wait until the timing is right – When I hear a supply chain manager tell me that one of their physicians or clinicians won’t change his or her practices, even though he or she is costing their hospital thousands of dollars a year, I tell the manager to wait until the timing is right (the physician or clinician moves up, moves on or retires) to make their next move. As you know, timing is everything in the world we live in – even when you want to change something!
There is no easy formula to change people’s minds and hearts, but there are tactics to move the ball forward that aren’t fast, perfect or ideal, yet are much better solutions than doing nothing about the situation at hand. Your goal should be to never let a savings, quality or process improvement opportunity go by without making some positive change happen.
Finding Savings in What You Toss Out
We have been taking a hard look at what healthcare organizations toss out every day, week, month and year. This mounts to about 2.2 pounds per bed per day and is costing your hospital at least 61 cents per adjusted patient day to dispose of it.
However, what we call trash is a frequently overlook area for finding big savings for your hospital since the management of this refuse is so unbelievably fragmented at most healthcare organizations that it never gets properly managed. Here are five tips that I have swiped from industry experts on how to manage and control this prickly problem:
- Centralized Waste Management: I’m seeing more and more large hospitals hiring full-time waste management coordinators to manage their solid and medical waste from creation to disposal. If you are a small hospital, you need to appoint a part-time coordinator (they can have other duties too) to ensure that one person is responsible for this ever-expanding expense category.
- Recycle Everything Possible: This alternative to buying everything disposable is becoming much more important as healthcare organizations continue to increase their buying of disposables everyday, week and month. We can’t sustain these budget busting disposable costs much longer without paying a very high price for doing so.
- Segregate “Red Bag” Waste Correctly: Only about 10% to 15% of a hospital’s waste is biohazardous. Yet, hospitals continue to dispose of non-hazardous waste in their red bags at a cost of 10 to 20 times higher than municipal waste. It is therefore essential that this costly practice be stopped by giving extensive training to your hospital staff so that they can perform this task correctly.
- Review Multi-Vendor Costs: We are seeing hospitals employing three, four or even five waste management vendors to service all of their waste management requirements. It might make more sense to consolidate these vendors to minimize confusion, streamline your waste operations and reduce your overall cost.
- Remove Obsolete Equipment: There is time, money and resources expended in the storage of old computers, electronics, office furniture, etc. at most hospitals as opposed to having an annual or semi-annual sale to dispose of them.
These five tips, as I see it, are just the starting point for establishing a comprehensive waste management program at any hospital. And it makes sense to me that supply chain management should be in the forefront of this “green” movement since it should be your mission to manage everything that moves but isn’t alive from acquisition to disposition at your hospital. Isn’t that what supply chain management is all about — anyway!
Change Comes From “Emotions” not Facts!
This is a simple idea, but with big implications: Change comes from “emotions” not facts. It’s been scientifically proven that people make their decisions based on their emotions, and then base their justification for their decisions on the facts.
A good example of this truism is that Warren Buffett a few months ago bought the Burlington Northern Santa Fe Railroad for $26 billion dollars because he said that his decision was “ in tune with the future” of America”. But on a recent interview with Charlie Rose on a PBS station he told Charlie that he always had a LOVE AFFAIR with railroads. He even said that “He has a toy railroad set in his attic” at his home, since railroads have always has been a passion with him.
So do you really think that Buffett bought this railroad, which he admits was “not a bargain” just because he thinks “it was an opportunity to buy a business that will be around for 100 or 200 years”? Or, do you think he bought it because it really was an “emotional” decision because he just loves railroads and then justified it based on the facts?
It’s the same logic with any decision that you want your customers to make. If you want them to make a decision in your favor, you will need to “emotionalize” the decision making process, then justify it with facts. Your clinical staff does this to you every time they bring up their emotional arguments of how any decision that is being proposed will affect the quality of their “patient care”. They then justify their “emotional” decisions with facts. It has been a winning formula for clinicians for decades.
So if you want to win more decisions on your product, service and technology proposals, you will need to find an emotional link to your proposals, and then justify it with facts. For instance, more and more hospital CEOs are preaching to their clinical staff that if they can’t reduce their hospital’s their supply chain expenses, then he/she will have no alternative but to look to cutting their labor cost.
This reality check has sparked an emotional “hot button’ with most clinicians when they hear this unassailable fact from their CEOs and makes them more pliable in their dealings with supply chain management. You might call this tough love, but I call it “emotionalizing” your decisions, and then justifying them with facts.
It is not a theory, but an indisputable fact that all change comes from emotions, not facts. Don’t underestimate this powerful change management strategy to make positive, previously unattainable and once thought impossible transformations happen at your healthcare organization.
When the Going Get’s Tough — Don’t Fixate on Price
If you are a regular reader of my blog, then you know that I’m predicting a bumpy road ahead for healthcare organizations due to the unintended consequences of the new healthcare reform bill.
If you don’t believe my prediction then you only need to look at Massachusetts’ decision last week to place price controls on all but a few healthcare insurance companies operating in their state — after only three years — of enacting its own statewide healthcare reform legislation.
To me this decision means that these insurance companies will be cutting their reimbursement to their hospital customers almost overnight, because they have no other option if they want to stay in business. I see this same scenario in the other 49 states too in just a few years.
What can we do about this? First off, don’t fixate on price savings if you want to continue to have double-digit savings to counterbalance your hospital’s lost reimbursement that will be coming your way in a few years. This is because if you do fixate on price, it won’t generate enough savings to stem the tide of red ink on your hospital’s financial statements.
On the other hand, progressive healthcare organizations throughout the country are finding another answer to the conundrum. They are maintaining their price stability (i.e. holding their price increases to below the annual rate of inflation) with the help of their national and regional GPOs and their own custom contracts. But instead of stopping their expense management efforts here, they are now seriously focusing on eliminating their utilization misalignments (in use cost) of the millions of dollars of products, services and technologies they are buying annually.
We call this evolution the “Supply Expense Savings Triangle” or the price, standardization, utilization continuum. Once you have attacked your price and standardization savings, there is no where else for you to go but to focus on your utilization misalignments. In doing so, you can save an additional 7% to 15% (overall) in your supply chain expenses to build your cash reserves.
If you would like to read more about this new emerging best practice, I would suggest that you order our new “Healthcare Supply Utilization Revolution” book that we are providing to our “Savings Beyond Price™” blog subscribers at no cost.
In closing, while price savings are important to the competiveness of your healthcare organization, unfortunately they aren’t limitless. In fact, price savings are slowly disappearing at most healthcare organizations today. So if you want to keep your savings humming over the next few belt tightening years you will need new strategies, tactics and techniques beyond price just to stay in place. Utilization management is the answer to this challenge and will generate the next level of savings that you will be looking for when the going gets tough at your hospital, system or IDN. There is no where else to go…
Healthcare Expense Reduction: A Systematic Approach
The phrase “Healthcare Expense Reduction” can have many different interpretations. It could mean getting the best price, benchmarking to find the best practice, searching for the best value products, services or technologies or reducing your inventory levels to near zero. However, I would suggest that “Healthcare Expense Reduction” if done correctly needs to be all of these things and much more.
In point of fact, from our empirical experience it requires a systematic approach to reducing your healthcare organization’s supply chain expenses to get it right. This concept is analogous to what the insurance industry calls BLANKET COVERAGE, a single unifying policy that covers any and all of your risk or exposure to unforeseen calamities. This BLANKET COVERAGE idea holds true with “Healthcare Expense Reduction”; To get it right you need to cover all of your supply expense categories of purchase – all at one time.
To get you started on this journey, we have listed seven core elements of a successful “Healthcare Expense Reduction” unifying system. We advocate these core elements for you to obtain the highest return-on-your-investment of time, effort and resources in order to attack ALL of your supply expense savings simultaneously.
You will notice that these seven core elements described herein are actually interconnecting programs which you should have in place which cover the total spectrum of your “Healthcare Expense Reduction” efforts as follows:
1. Utilization Management Program
2. Value Analysis Program
3. Contracts Administration Program
4. PriceCheck™ Program
5. Inventory Management Program
6. Linen Management Program
7. Forms Management Program
As this list suggests for your “Healthcare Expense Reduction” to be effective you need to have complementary and synergistic expense reduction programs in each of your supply chain disciplines, not one-time events. This way you can be assured that you have “Plugged all of the leaks” in your supply expenses before they become mile-high gushers or raging rivers.
This isn’t just a theory, but the actual system that we have employed ourselves over the last 23 years to assist hundreds of healthcare organizations in reducing their supply expenses to absolute minimums, and then to keep their expenses under control — going foreword.
There’s More Than One Way to Shave Your Purchase Service Costs
I often talk about a healthcare organization’s purchase service savings opportunities being “equal to or greater than” their supply expense savings prospects, but too often this statement is interpreted to mean the price you are paying for your purchase services only. In fact, we have found that there is more than one way to shave your purchase service cost if you know where to look for them. Here are three additional ways you might want to use to discover them.
Utilization Misalignments
Just because you have the best price for your purchase service contracts doesn’t mean they are cost effective. You also need to eliminate all waste and inefficiencies in their value streams. Just like one of our clients found when they looked at their telecommunication invoices only to find they were being slammed with thousands of dollars of phone charges annually they hadn’t authorized. So don’t stop searching for additional purchase service savings because you think you have best price, when there literally is hundreds of thousands of dollars of new and better in-use savings that are just waiting for you to harvest.
Specification Overkill
When I read a purchase service contract that hasn’t had its specifications revised, improved or amended in a number of years, I can always find small or big savings opportunities because our customers don’t need everything that is included in the contract to perform the service that is described.
For example, how many times does your hospital’s windows need to be cleaned in any given year? Have many times a year does your high and low-tech equipment really need to have preventive maintenance? How many rent-a-guards do you need on each shift? Do you get the idea?
In-Sourcing Opportunities
For many years it becomes such an ingrained habit to outsource a particular service for many years that we overlook the possibility of in-sourcing these services again when the timing and conditions are right to do so. Food service or environmental service outsourcing are good examples of this happening. It’s been my experience that these departments generally aren’t outsourced for lower cost alone. It’s usually quality issues too, that drive the decision to outsource these departments in the first place. Therefore, it’s my suggestion that when any purchase service contract comes up for renewal it should always be considered a MAKE or BUY decision, not just a contract renewal decision. This way you never-ever leave any purchase savings dollars on the table – untouched!
As more and more supply chain managers take on the responsibility of sourcing, bidding and negotiating their healthcare organizations’ purchase service contracts, just remember that your purchase service contract price is just-the-tip of the iceberg! Your greatest purchase service savings are actually to be found below the waterline. This can represent as much as 26% in aggregate purchase service savings annually for your healthcare organization in the first round of value justifying your purchase service contracts. Don’t you think this is a much better way to shave your purchase services cost, than just attacking your price alone?
Do You Have a Reliable Saving Ideas Pipeline?
I know that most value analysis teams get off to a flying start with a lot of good ideas to save money, and then they “hit a wall” after a few months because they don’t have a pipeline of new saving ideas to fall back on to fuel their savings fire. To help you avoid this savings stumbling block to your VA program, here’s a pipeline of savings ideas from my new book, “The Healthcare Value Analysis Bible: Your Ultimate Saving Resource*” which is scheduled for publication in April 2010.
Large Dollar Expenditures - Products, Services or Technologies with an annual value of $25,000 or more.
Vendor Recommendations – Review brochures, catalogs, samples from vendors to cull new savings ideas.
Magazine Articles On Savings Opportunities - Call article authors to find out exactly how they did it. They will be happy to help you out without a fee.
New or Changes in Regulations - Most new or proposed changes in regulations costs can be reduced through Value Analysis.
New Clinical and Administrative Employees – Interview new employees for savings ideas they have been exposed to at other healthcare organizations.
Benchmarking – What are other healthcare organizations doing to save money?
Any Disposable Product – Can you return to a reusable product?
Any Type of Custom Kit or Tray – Contents of kits and trays should be fully investigated for their value!
New Technology – In addition to the cost of the new technology there is always add-on cost of labor and supplies that must be value justified.
High Utilization – Any Product, Service or Technology that has a high utilization cost is a candidate for study.
Product Recalls – Value Analysis Team(s) should be empowered to investigate why the product was recalled and the corrective action required to bring into conformity.
Bundled Products – Products like IV Starter Kits, Admission Kits, etc., need to be value justified.
Old Technology – Old technologies tend to be wasteful and costly and should be evaluated for appropriateness.
If you have any additional savings pipeline ideas, I would love to hear from you (bobpres@strategicva.com), since there is still time for me to add them to my new book. Naturally, if your idea is used in the book I would give you attribution for your idea. I’m looking forward to hearing from you.
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* “The Healthcare Value Analysis Bible: The Ultimate Savings Resource” will retail for $29.95, plus $5.98 for shipping and handling (pricing subject to change in the future). If you would like to pre-order this A-Z blueprint for establishing, refining or re-energized your supply value analysis program we are now offering a 10% discount on the retail price of the book, if you pre-order by February 26, 2010. You can e-mail your order (with your name, title, organization, phone number, e-mail address, and shipping and billing address) to bobpres@strategicva.com. You will then be the first to receive this important breakthrough must-read book no later than May 2010.
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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!
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.
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.
Supply Chain Benchmarking Is All About Ownership
“I just don’t trust the benchmark” is the first response we often get when we show a client for the first time that their utilization cost is much higher in a particular commodity group then their peers. Since we have heard this same tune before, we then proceed to show our client their OWN internal benchmarks (if they are a system or IDN) and their OWN historical metrics over the last eight quarters.
This process of sharing multiple data points with our client enables us to triangulate our benchmark with our client’s OWN known, reliable and defendable internal data to confirm our benchmark’s validity. This procedure usually affirms to our client that our benchmark is consistent with his or her OWN internal data and therefore makes good business sense for our client to investigate this savings opportunity.
The operative word in this benchmarking validation process is OWNERSHIP. When your customers see with their OWN eyes that your benchmark is consistent with their OWN internal data you can then make a believer of them. Without their OWNERSHIP (or believability of your data) you will never ever get your customers to judge that your benchmark is reliable, dependable or trustworthy. It’s just that simple!
New Activity-Based Costing Model Makes Huge Supply Utilization Savings Happen!
Activity-Based Utilization Costing is a new utilization savings model that assigns the cost to natural classifications in supply chain expenses to identify their actual consumption by each category of purchase. By doing so, a healthcare organization can establish the true cost of the utilization of all of their products, services and technologies so they can eliminate any and all wasteful, inefficient, unneeded or unnecessary supply chain practices.
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I have just given you the definition (above) of a new and emerging best practice called Activity-Based Utilization Costing that can revolutionize the way you save money. I’ve done so because now that price savings are slowly disappearing this new methodology will help you dig even deeper and broader for new and even better savings.
Here’s what it is all about
Activity-Based Costing (ABC) was developed in manufacturing in the 1970s. It was introduced by cost accountants that were seeking to identify the cause-and-effect relationship of their organization’s products and services to more objectively and accurately assign cost to each of their operations. Prior to this point in time, most operating cost were assigned by accountants as broad percentage for direct and indirect cost.
Where products, services and technology costs are shared, such as we do in healthcare organizations, the ABC methodology requires some sort a weight factor to allocate cost accurately. This weight factor is based on what is called a COST DRIVER or activity that directly relates to your products, services or technologies actual cost. For example, the number of custom packs that you use in any given year would be assigned based on the number of case mix adjusted procedures (cost driver) you utilize. In this way you now have identified a cause-and-effect relationship between your custom packs and case mix adjusted procedures that can be precisely calculated.
Here’s how it can help you
We have found by employing the ABC methodology to measure utilization performance for our clients, once we have assigned a weight factor (or cost driver) to all of our client’s natural classifications (IV sets, Oxisensors, elevator contracts, dressing, trays, pacemakers, orthopedic implants, etc.), we can then quickly and easily identify any and all of our client’s utilization misalignments. This means in real terms a saving in the range of 7% to 15% based our client’s total supply chain spend annually.
There are no shortcuts
You might say after reading this blog article, “Bob you are giving me a headache with all these calculations, isn’t there a simpler way to get the same results?” I’m sorry to disappoint you but there isn’t an easy way to make these huge utilization savings happen. Believe me when I tell you that I’m always looking for an easier way to save money, but sometimes there are no SHORTCUTS to making savings happen.
Where are your next savings coming from?
I would like to restate the fact that your easy price savings are slowly disappearing therefore, new and better savings strategies, tactics and techniques must be employed for you to keep your savings machine humming. Activity-Based Utilization Costing is one of the proven best practices that can assist you in improving on any savings strategy that you are now pursuing to save money.
Lastly, don’t be overwhelmed by the intricacies of ABC methods that I just talked about because if I can learn, master and then apply these ABC techniques of this new science of savings — YOU CAN TOO!
