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!
