Your Best Savings are Below the Waterline
Most healthcare organizations have attacked their cost (above the water line) with their GPO, capitation, standardization and custom contracts strategies, which is only yielding them 1%, 2% or 3% savings annually — at most. But did you know, as one of our clients astutely observed, “That it isn’t about price any longer (that is slowly disappearing), it’s about utilization”. Especially since the inflation rate this year could be as high as 3.4%. All of your savings gains are being washed away.
On the other hand, if you attack your utilization savings (below the water line) I can almost guarantee you that you can achieve 7% to 15% savings that aren’t affected by inflation. Value analysis is the key to doing so!
This is due to the fact that your hospital’s staff are generally so swamped that they don’t have time to stop and analyze whether this is the best use of this product, service or technology, is it being wasted or is there a lower cost alternative that could meet this function.
Here’s an example of what I’m talking about. At one hospital we worked with, the staff was using only a primary IV set. No secondary set had been purchased (yes, you heard right). The staff used these primary sets for every patient for a year without anyone questioning it, until we pointed it out, and this wasn’t a cheap oversight. The hospital spent close to a million dollars it didn’t need to spend until this utilization misalignment was resolved.
No that you know the facts, where do you think you should be focusing your savings efforts: Price or Utilization?
LEAN Six Sigma: The Future is Now!
I had an electronic interview last week with Rick Dana Barlow Senior Editor of Hospital Purchasing News, for a future article on LEAN Six Sigma. This HPN interview got me thinking about how important it is for supply chain professionals to get on the LEAN Six Sigma train to meet their huge challenges over the next decade. Here are some of the ideas I spoke about in my HPN interview that I think you will find of interest.
First of all, Lean Management and Six Sigma are two different, but complementary methodologies, linked together into a unifying process called LEAN Six Sigma. LEAN Six Sigma has helped thousands of companies and hundreds of healthcare organizations dramatically improve their quality and increase their bottom line. What makes Lean management and Six Sigma different from TQM/CQI is their highly disciplined approach, their focus on waste and inefficiencies in the supply chain, speed and reducing the wide variances in products, services and processes employed and then controlling them – forevermore!
The healthcare supply chains are an ideal application for the Lean management or Six Sigma principles because they are transaction-based functions. For example, one big lesson we have learned from Toyota, the creators of Lean Management, is that purchasing departments can have as much as 50% non-value-added activities (i.e. activities customers wouldn’t pay for if they knew about them) that can be reduced by as much as a third by employing the Lean Management methodology. In this age of doing more with less we in supply chain management need to embrace these proven concepts so that we can optimize our resources just to keep pace with the changing healthcare marketplace.
Just as important, Lean Management and Six Sigma offers supply chain managers a disciplined, standardized, repeatable, and measurable system to reduce their cost and improve their quality. Its tenets can be applied to any initiative that a supply chain manager is asked to undertake (inventory management, PPIs, standardization, utilization, etc.) These concepts are really a magic bullet for supply chain managers to have even faster, better and more consistent supply chain operations.
I believe that the reason that more supply chain managers haven’t adopted these concepts is their belief that it will take too much of their time for them to learn, manage and sustain these new ways of doing things. In reality these concepts will actually save thousands of hours of year in reduced time, effort and expenses for supply chain managers. Education is the answer to moving material managers from a passive to an active role in adopting these new ways to managing their complex multi-million dollar supply chains.
That’s it for the short excerpt from my HPN interview, but it shouldn’t be the end of our dialog on this important topic. I would like to hear your ideas on this subject matter as well so we can get all supply chain professionals on the LEAN Six Sigma train.
Is Standardization Working Against You?
I have preached for years that “standardization is a self-defeating paradigm” for healthcare organizations that want to achieve the lowest total cost for the products, services and technologies they are buying. Now, we are documenting even more proof that the overused standardization model is producing even more unintended consequences than I first thought.
The truth is no one size fits all products, services and technology purchases. If you try to standardize on everything you buy you will limit your customers’ choices, and thereby, compel them to use over-specified or under-specified supplies and equipment which don’t meet their exact specifications. Believe it or not some of the blame for this observable fact can be laid at the feet of your GPO because you are rewarded for over-standardization by the terms of their offerings.
As an illustration, we just completed a 360 Degree Supply Savings Analysis for a client where we found that they had standardized on a $7.10 I.V. set for ALL of their patients. This practice was costing this hospital $54,334 annually in unnecessary and unwanted IV set cost since this was the only IV set that was available for their clinicians to use.
A much better way to decide on what I.V. sets this client should have been buying was for them to develop customized specifications for each of their value groups (segmentation of the customers by their critical to quality requirements) that use this product. With the result, that this client would have ended up with five or six IV sets vs. one only and this would have met each of their value groups’ exact CTQ requirements thus saving $54,334 annually on their IV set purchases.
The lesson of this story is that this client did have the best price on the IV set they were buying, however their standardization policy was working against them when it came to having the lowest total cost in this commodity group. Is you standardization policy working against you as well?
er In Savings Beyond Price™
Your Partner In Savings Beyond Price™
Robert T. Yokl
Robert T Yokl
Chief Value Strategist
Strategic Value Analysis® In Healthcare
P.S. One of the new power tools that are available to you and your c-suite to give them and you a window into your supply chain operations is our Utilizer™ Dashboard. This new tool will show you and your c-suite members all their supply chain costs in one database along with actionable targets for savings. Why not make it easier on yourself by having this tool at your disposable to effortlessly cost justify your initiatives vs. fighting your c-suite for every dollar you request to improve your supply chain operations. Check out our “test drive” to see how we do it!
