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.

My first reaction to this eye-opener was that this must be a typo, but then I realized that this number was consistent with AHRMM’s 2007 (30.7%) and 2008 (36.5%) survey results, so it must be right. I also know that many hospitals, systems and IDNs don’t have active value analysis teams, so that’s one reason why this number is so low. Another reason it’s low is that not all supply value analysis programs report to material management. I have often seen this vital function reporting to nursing service, not materials management.

My thinking is that even if this number is a little off, it still shows a dangerous trend in healthcare: Material management isn’t 100% in charge of their healthcare organization’s supply value analysis programs or there is no VA program is place to do so! 

As I see it, VA is a mission-critical function of materials management.  Every hospital, system and IDN should have a supply value analysis program and it absolutely should report to materials management.  This is because price is the smallest factor in the total cost equations (about 21%), while 79% of your product, service and technology cost is attributed to the in-use cost of the commodities you are buying. Based on our empirical experience, only VA teams can drive out these unnecessary and unwanted utilization costs…period!

In brief, if your hospital, system or IDN is to get ahead of the wave in the new healthcare economy that is upon us, you will need to embrace the value of value analysis in controlling your total supply expenses. This means, in practice that you will need to take charge of your VA program if it reports to another department or establish VA teams to get this hard work done. 

The alternative is to either ignore this proven cost-cutting methodology or leave it to someone else in your hospital, system or IDN to get this important work done. This doesn’t seem like a plan to ensure your job security to me, so I would suggest that you take charge of your VA program today or get your VA program started to protect your turf and to keep your paychecks rolling in for the foreseeable future.  It doesn’t take a whiz kid to see this as the road you should travel.

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.

On the opposite side of the coin, I have seen vendors that have bloated a hospital’s inventory with their highest priced feature-rich products just so they could make a few extra dollars on their accounts. Or, though benign neglect, one of my client’s vendors was costing his customer $196,239 annually because he didn’t perform any value analysis studies on the forms he was inventorying and ordering for this client.

Can it be a win-win? This is where your operating philosophy enters into the picture.  We have talked to one for-profit healthcare system that won’t let their vendors do anything that their staff can do even if there is a savings by doing so. Then again, other hospitals, systems and IDNs we have talked to believe that if a vendor can demonstrate significant savings by managing their inventories, this then is a win-win for them.  It’s your call…

One word of caution! I have always liked President Ronald Reagan’s philosophy of “TRUST, BUT VERIFY” if you want the results you expect, require, and are paying for from your vendor.  I would recommend a quarterly audit of your vendor’s inventory process to ensure you are hitting the targets they promised, or else, you could be spending even more money than you ever anticipated with the wrong vendor.

Summing up, there is no right answer to the question, “Should you have your vendors manage your inventories?” As I said previously, “Maybe yes – Maybe no”. It comes down to this, “can a vendor do it faster, better and less expensively than your hospital can?  Only you can be the judge of the answer to this question, but make absolutely sure that you can’t do it yourself.

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…

The reason for this PPI inflationary spiral every year, even though most hospitals have slowed their PPI price increases, is two fold as I see it. The first cause of this PPI cost proliferation is that new technology is being introduced into our healthcare organizations faster than we can measure their efficacy.  The second reason is that we aren’t doing a good enough job of “value justifying” what our surgeons are implanting.

What can you do about this? The first solution is very straight forward, every hospital, system or IDN needs to have a technology value analysis committee, with broad and deep physician representation, to evaluate and then select the most effective new technology that makes economic sense. Healthcare organizations that have followed this path have greatly reduced costly mistakes that are made when one or two individuals make — behind closed doors –these decisions on their high-cost/high-impact technology purchases for their healthcare organization.

The second answer to this challenge, and the most important in my opinion, is for you to CUSTOMIZE all of your PPI implants to the exact medical indications of all your patients. I can say this with full authority, since we have observed over the last 10 years that most hospitals are losing millions of dollars a year because their surgeons are selecting the highest cost implants without any regard to what is “medically indicated” for their patients.  It’s like buying a thorough bread race horse that you only ride for weekend recreation. What a waste of money!

We can only assume that surgeons who insist on implanting these value mismatches are ignoring their patient’s medical indications by selecting their implants either out of habit, due to a sales rep influences or a lack of knowledge. This situation, we have found, can easily be remedied if a hospital employs a “PPI Medical Indication Checklist” to select the right implant for their patients.

To recap, our PPIs are the fastest growing and largest expense category in our supply spend and need to be controlled in an organized, systematic and scientific manner.  Just ratcheting down your price at the pump won’t get the job done efficiently or effectively.

On the other hand, if you employ a filter (value analysis technology committee) to hold back your unnecessary and/or unproven technology expenditures and then customize your PPIs to their exact medically indications you will be going a long way to finally bending the curve on these considered necessary, but ultra expensive medical devices.

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.

Read this book and in a few weeks save more money than you have in years. Sounds unbelievable? Robert T. Yokl and Robert W. Yokl, healthcare’s leading authorities in Supply Utilization Management, have helped hundreds of hospitals, healthcare systems and integrated delivery networks to saved close to a half billion dollars by employing the same utilization management strategies, tactics and techniques that they will teach you in this book.

Get Your FREE Copy Here

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?

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.

___________

* “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.

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”.

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”.

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.

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.

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!