Strategic Value Analysis: Savings Beyond Price
The #1 Smart Strategy for Taking Out Cost in a Healthcare Organization’s Supply Chain
Most healthcare organizations’ non-salary expense initiatives are focused on lowering the price of the products, services and technologies that they are purchasing, as if this is the only weapon they have in their arsenal to combat the negative effects of the balanced budget amendment of 1997. In reality, this is the least potent strategy that can be employed to dramatically lower their non-salary expenses. Why?
Over the next three to five years the savings from group purchasing, standardization and prime vendor contracts will be almost invisible. In fact, supply costs are beginning to rise because the excess costs are now and will continue to be squeezed out of your healthcare suppliers’ supply chain. Vendors are screaming that they have no more price concessions to offer to their healthcare customers! “WE CALL THIS THE LAW OF DIMINISHING RETURNS”. Now, what can we do about it?
Let’s think of your supply costs in terms of an iceberg. Today healthcare organizations can save 2% to 3% annually with their group purchasing offerings, standardization and prime vendor contracts on the piece of the iceberg that is showing above the waterline; however, the real savings are below the waterline and can only be reached with Strategic Value Analysis™ concepts, tools and techniques. In fact, it’s been our clients experience to save 30% to 50% on individual purchases – through functional analysis – by focusing their cost control efforts on streamlining and reinventing their products, services and technologies’ value chain, rather than spinning their wheels on purchase price.
Big Savings Doesn't Have to Be Difficult to Achieve When You have the Utilizer Dashboard
By embracing the Strategic Value Analysis ™ methodology, healthcare organizations can eliminate their fixation on purchase price, and refocus their non-salary expense management efforts on determining their exact customer requirements — by building specifications from a blank piece of paper. By doing this, BIG savings can be obtained for their healthcare organizations; thereby eliminating waste and inefficiency in their products, services and technologies’ value chain through scientific value studies to determine non-conforming feature rich products, services and technologies, wasteful methods and practices being employed, and maintaining conformance to requirements.
Is Your Healthcare Organization
Most healthcare organizations are “WINGING IT” when it comes to value analysis (VA), which does have high name recognition. Very few healthcare organizations, however, are practicing its classic tenets. Value analysis, in its classic form, is the most misunderstood and underutilized savings and quality improvement tool. VA is the most powerful savings technique in healthcare today if the concept is applied consistently and artfully. To clear up many misunderstandings about VA, we would like to clarify what value analysis is and what it is not…
STRATEGIC VALUE ANALYSIS™:
What it is!
Strategic Value Analysis™ is a function-oriented, systematic team approach for providing, designing or investigating the right functions (primary, secondary and aesthetic) for the millions of dollars of products, services and technologies that are required to operate your healthcare organization. VA studies do focus on cost, improvements in quality and performance, they are also paramount in the value equation. The Value methodology can be applied to any product, process, procedure, system or service in your healthcare organization. Its goal is to ascertain through value studies, those characteristics deemed most important by your customers (internal and external).
STRATEGIC VALUE ANALYSIS™: What it isn’t!
Strategic Value Analysis™ isn’t:
- A committee of 20+ member reviewing and approving group purchasing contracts
- Negotiating, bidding or doing something else to reduce supply cost
- Standardization, new product, service, technology conversions or introductions
- Approving new products, service or technology requests
- Any of these things that most healthcare organizations call VALUE ANALYSIS
Our surveys show that only 1 in 10 healthcare organizations are really practicing or applying the classic tenets of Value Analysis, thereby missing the opportunity to slash 5% to 15% off of their non-salary expenses annually. This is because they think they are performing Value Analysis studies, but they are really doing something else, such as, bidding, comparison-shopping, group purchasing or negotiations.
It's our observation that most healthcare organizations have now picked "the ripe fruit" in their healthcare organizations through group purchasing, re-negotiations of contracts, standardization and prime vendor contracts, thereby obtaining the lowest price for the commodities that they purchase. With little savings left in this vineyard, now is the time to drive out all of the hidden costs in your products, services and technologies.
As an example, a current client of ours (500 bed teaching hospital in Philadelphia, PA) saved $86,000 (or a 35% savings) by performing a Value study to determine the reason they were using over six million glucose tests in their hospital annually. After discussing this with customers to determine their TRUE requirements, benchmarking other hospital’s best practices, and defining the function or purpose of glucose testing, it was determined, that the hospital was performing 40 times the tests that were medically required for this purpose. How did this happen? No one ever asked the question: WHAT WAS THE FUNCTION (primary, secondary and aesthetic) OR PURPOSE OF USING THIS TEST ROUTINELY ON DIABETIC PATIENTS? All the hospital ever did before this Value study was negotiate a better price every year for the diabetes test strips.
Value Analysis is a powerful savings tool, but if it is not practiced correctly or NOT PRACTICED AT ALL, then you will generate only meager savings. On the other hand, if the right people have the right tools, training and a proven VA process and Value Practitioners are deployed by a healthcare organization to look at the right things, then millions of dollars can be saved for your healthcare organization annually.
A Strategic Approach To Non-Salary Cost Management
As mentioned previously, most healthcare organizations’ non-salary initiatives wrongly focus on price and standardization; whereas, by employing a strategic and functional approach to non-salary expense management huge savings can be obtained. It all starts with a Strategic Value Analysis™ Plan.
The term “ strategic planning” is not a new term in management’s lexicon. It is derived from military usage and the need for on-going assessment and self-appraisal of an organization’s strengths and weaknesses. It is a systematic and defined planning process leading ultimately to the appropriate strategy or strategies necessary to enable an organization to adapt to change in an ever-changing marketplace. The end result of such a planning process is a clear vision for management of where an organization should focus its energies and resources in the short, intermediate and long term to meet their stated mission and objectives. By updating an organization’s strategic plan on an annual basis, it will enable an organization to react quickly to changes in their environment, thereby making mid-course corrections as required.
A “Strategic Value Analysis™ plan” has many similarities to the strategic long-range planning process, in that it is a systematic and defined planning process. This process, enables a healthcare organization to appraise the strengths, weaknesses or GAPS in its non-labor cost containment and cost management strategies, then devise new strategies for reducing and controlling non-labor costs by employing the techniques and tools of value analysis. It begins with defining the vision, mission and objectives for your value analysis program in terms of what your goals are for one, two and five years out. We also need to define the savings and quality goals that are real and achievable, the policies and procedures that are required to align them with your new or reinvented value analysis program, and the steps that are needed to develop value teams that will be creative enough to meet the challenges of this new or refined program. We need to consider the problems or hurdles we can anticipate that would threaten the success of our value analysis program and where we get started. This type of planning positions your value analysis program to be successful, rather than just letting it happen in an unplanned and disorganized manner. If developed properly, it will provide you with a road map for your value analysis program and give you a defined direction to follow, thereby, increasing your probability of success.
“Value Analysis is a powerful savings tool, but, if it is not practiced correctly or NOT PRACTICED AT ALL, then you will generate only meager savings.”
Strategic Value Analysis™: A New Management System
Most healthcare organization’s approach to managing and controlling their non-salary expenses are episodic, event oriented and reactionary in nature. Organizations react to requests or complaints on or about products, services or technologies when an internal customer or external supplier gets on their radar screen. A better way to manage is to have a management system with a unifying philosophy, based on value, which continuously evaluates the worth and relevance of products, services and technologies in a strategic manner, and recognizes how a product, service or technology fits into the hierarchy of healthcare organizations overall product, service or technology mix. It also considers their functionality and short and long term cost and quality strategies.
Most healthcare organizations only focus their energies on new clinical products, services and technologies, while millions of dollars of non-clinical products, services and technologies are purchased without vigorous value justifications at all. At the same time, little or no emphasis is placed on value justifying the millions of dollars of existing products, services and technologies that are purchased annually by the healthcare organization. THOUSANDS OF PRODUCTS, SERVICES AND TECHNOLOGIES (and millions of dollars $$$) NEVER SHOW UP ON ANY ONES RADAR SCREEN!
A more strategic approach in your search for savings and quality gains is to continuously place every product, service and technology you purchase annually over $25,000 (and their value chains) under a microscope. This would determine if these commodities are in conformance or in non-conformance as related to the functional requirements of your internal and external customers. The five most prominent reasons for non-conforming products, services and technologies and wasteful and inefficient value chains are as follows:
Tradition (or “we have always done it that way”)
Webster’s definition of tradition is, “a long –established way of thinking or acting,” but is this the best practice for a health care organization when it is deciding on the best product, service or technology. I DON’T THINK SO! Since things change and people change continuously in a healthcare organization, we must always be testing the products, services and technologies we are purchasing to insure their relevancy and conformity to requirements.
Poor or Inaccurate Performance Specifications
Most products, services and technologies that are now in use at healthcare organization around the world were purchased from the data supplied from manufacturer’s catalogs or sales representatives. They were not based on the actual performance specifications required for the product, service or technology. This universal practice has given birth to thousands of over-performing and under-performing products, services and technologies utilized throughout a healthcare organization that are wasteful and inefficient.
Wasteful and Inefficient Methods and Practices
There are four reasons that we have uncovered for waste and inefficiencies in a healthcare organization’s value chain that are causing 80% of the waste and inefficiency:
1. Old and New Technologies
Old technologies such as printers, imprinters, alarm system, lab equipment, computers, OR equipment, etc., are prone to spit out too much paper, rip and mutilate forms, and require a huge amount of maintenance to keep operational; therefore, a targeted effort should be made to evaluate all technologies that have gone beyond their useful life to insure that they are still meeting their performance requirements.
New technologies such as point of service glucose tests, re-useable, disposable products and automated supply cabinets are purported to be faster, better, cheaper and glitzier, but all too often they are in reality less reliable, supply intense and costlier than the technology that they are replacing.
2. Too Many Hand-offs
A simple product like plastic trash bag liners could have six or more hand-offs (different people handling the product) before it reaches your trash can on any given day. Just think how much more complex the value chain is for drugs, food, forms, linens, instruments and tests, then you can realize why waste and inefficiency creeps into value chains without you even realizing it.
3. No One Sees The Big Picture!
Products, services and technologies are purchased, stored, distributed, consumed by numerous customers, and then disposed of after their useful life without having an owner of their value chains. By necessity and practicality there is shared ownership of a product, service and technology’s value chains. This is why waste and inefficiency naturally creeps into value chains, because NO ONE EVER SEES THE BIG PICTURE.
Customers Are Left Out of The Loop!
Although we would all like to think that we, as customers, are always consulted about changes in our products, services and technology’s value chains, we rarely, if ever, bring our customers into the loop. Because of this fact, frequently, inappropriate changes are made every day in our products, services and technologies' value chains (new storage area, new shelving, new personnel, new policy and procedure, new maintenance schedule, new disposal method, new contract, etc.) that if we had been brought into the loop we would have seen the flawed thinking in the proposed change and would have taken corrective action to prevent this non-conforming change from affecting our value chain.
Feature Rich Products, Services and Technologies
Our world is too feature rich, especially when it relates to healthcare organizations’ products, services and technology purchases. Pacemaker features alone exceed 100 available choices, while only 10% to15% are really medically indicated; yet healthcare organizations continue to purchase hundreds of unnecessary pacemaker features that increase the price of a pacemaker by as much as 50%. The reason for these value mismatches is that healthcare providers accept most product, service and technology features as being absolutely necessary as a functional requirement, when in most purchases the opposite is true.
Standardization Vs Customization
In purchasing circles, it has been the conventional wisdom that to obtain the lowest cost for a product, service or technology they must be standardized (or one size fits all) to conform to the same specification organization-wide, when in fact, this theorem is a myth! Empirical data now makes it crystal clear that for a healthcare organization to truly have the lowest cost products, services or technologies, a customized solution is required to meet the unique functional requirements of all customers.
By way of example, most healthcare organizations have standardized on disposable underpads to meet its primary functional requirement of protecting linens, thus meeting 80% of the healthcare organization’s customer’s needs, while other customers (20%) find the standardized underpad to be a functional mismatch for their needs. This practice then creates many outliers, such as, the pharmacy buying a higher quality underpad off-contract for chemotherapy drug preparation, OB wasting the value of the underpad by using it to line shelves. The Emergency Room utilizing underpads as drawer liners, because no other product is available to meet this secondary function. As this example demonstrates, it is a rare occurrence, if ever, that one product, service or technology can satisfy all of the functional requirements of all customers, without incurring waste, inefficiency and higher cost than necessary in a product, service or technology’s value chain. Once healthcare organizations understand and internalize this reality, then they can embrace the concept of customization with enthusiasm, thereby, increasing your probability of success.
Customization by definition means, “to build according to individual specifications,” which in most circumstances these specifications will only meet the requirements of 80% of your customers. For the remaining 20% of our customers, the products, services and technologies they require will need to have either higher or lower end specifications to fit their exact requirements. Or it could even mean purchasing different products, services and technologies for the use of many customers to have an exact fit for their individual needs. Relating this new paradigm or system thinking to our example of the disposable underpads, this would mean that 80% of our customers could and would standardize on one underpad for their exact requirements, while the pharmacy would be permitted to purchased a higher grade underpad for chemotherapy drug preparation. The OB department and the Emergency Room would be provided with a lower cost shelf and drawer liners to meet their precise functional requirements.
The bottom line being, once the total costs are calculated for a standardized Vs customized approach to purchasing of your products, services and technologies, the customization strategy will reduce a healthcare organizations' value chain waste and inefficiency by more than 10% to 15%.
TEAM-BASED PROJECT MANAGEMENT™
Teaming Up to Save
Strategic Value Analysis™ is a management system to investigate the total cost from acquisition to disposition (or value chain) of the products, services and technologies that you are purchasing in a scientific, systematic manner. From our experience, Value Teams can best achieve this search for savings and quality gains that you have been looking for, and which we call Team-Based Project Management™ Model.
Teams are now coming into their own right as a maturing force to be reckoned with by modern management. “In a world that is becoming ever more chaotic and dependent on brainpower, teams make more sense than trailblazing superstars,” as John Byrne of Business Week Magazine, sees it, “than lone rangers in getting the job done faster, better and by people who understand the business better than one person does.”
This teaming of America in the late 20th Century and now in the 21stCentury, becomes even more important as it relates to the evaluation and purchase of products, services and technologies. No one person ever sees the negative or positive effects of how a product, service or technology is impacting its internal and external customers. Yet, billions of dollars of products, services and technologies are purchased by health-care organizations annually that are controlled by one person, many times, with a narrow vision. A better management system to manage and control the purchasing process — from acquisition to disposition – is for executive management to appoint a Value Team(s) for this purpose. In doing so, these Value Teams involve all internal and external customers in the buying decision and subject all purchases to rigorous value tests to determine the most appropriate products, services or technology based on functional requirements to meet customers wants and desires at the lowest possible cost.
TBPM Enables Goal Alignment
Value Teams have unique characteristics, roles and organizational structure to enable them to be effective in their sphere of influence. They must be in alignment with a health care organization’s compensation policies, and its culture and they will need to develop creative strategies to align themselves with their organization’s goals and objectives. Our approach to this challenge is the creation of Team-Based Project Management™ Model.
There are many different types of teams (parallel, process, time-based and hybrid) functioning in the marketplace today, according to Steven Gross, Principal, with William M. Mercer consultants. All of these teams are formed for different purposes within a corporation.
- A parallel team is a part-time team whose members have two jobs and two bosses. The first job they were hired for and get paid for, reporting to a supervisor. The second is a cross-functional team position, which they were appointed to, where they report to a team leader. These teams are temporary in nature and are established to solve specific problems that have arisen in their work environment in a matter of weeks or months, such as a quality control issues, lost sales, etc.
- A process team is a full-time team that performs many functions across many boundaries to maximize productivity and customer satisfaction, such as, an insurance claim processing team, customer service team or a sales team. In some cases a process team is a self-managed team given the authority to hire, fire, promote, change and implement new policies and procedures in their team environment.
- A time-based team is a team that is established with a specific purpose and time frame in mind to accomplish a specific task, such as designing a new computer system, accounting system, a new product line, or re-engineering a process or system. It can be either a full-time or part-time team position depending on the time requirements and urgency of the project. The emphasis is on speed to gain competitive advantage.
- A hybrid team is a combination of the characteristics of a parallel, process and time-based team.
- A Team-Based Project Management ™ Team is a hybrid team having many of the characteristics of a parallel, process and time-based team, but some of its own unique attributes. The TBPM team is designed specifically for use as the vehicle to plan, organize, support, control, investigate, study and implement Value Analysis savings and quality improvement opportunities in an healthcare organization.
Characteristics of Value Analysis Team-Based Project Management™ Model
The following are a list of the characteristics of a Value Analysis Team-Based Project Management™ Team (TBPM) that differentiates it or in some cases shows similarity to a parallel, process or time-based team:
- Value Analysis Team membership is cross-functional by design
- Value Analysis Team positions are part-time, not full-time
- Value Analysis Team members have two reporting responsibilities (direct and indirect reports)
- Value Analysis Teams are self-managing by its structure
- Value Analysis Team members are also project managers
- Value Analysis Decisions are made by consensus
- Value Analysis Projects are process and time-based in nature
Value Analysis Team Membership is Cross-Functional by Design
The 10 members of the cross-functional Value Analysis Team-based Project Management™ Team or Value Team(s) are selected from a pool of company-wide employees, supervisors and managers to represent their organization’s internal and external customer’s interest. By design, collectively they are able to intelligently consider and agree to the best solutions that are offered by and which Value Analysis Project Managers (individual team members) have identified to reduce costs or improve the quality on product, service, or technology purchases for their organization.
Value Analysis Team Positions are Part-Time – Not Full Time
As with a parallel team, Value Analysis Team membership is a part-time position requiring about one to two hours a week (including two bi-weekly Value Team meetings) to complete a value study within a 90-day time frame. The term of membership is for 18 months. New value analysis team members will be appointed 45 days prior to expiration of each member’s term, so that there is enough time to orient and train the new members in the value methodology. Replacement will be staggered so that current value studies can be completed prior to current members leaving the team to insure continuity of team projects. If a value analysis team member requests to be relieved of team duties or a leave of absence during their term, this request must be submitted in writing and approved by the Team Leader, Administrative Representative and the Chairperson of the Hospital Value Analysis Steering Committee. All new value analysis members must be selected and approved by the value team membership. Value Analysis Team Leaders' terms of office are for five years, unless they decide to renew the team membership for another five years.
Value Analysis Team Members Have Two Bosses (Direct and Indirect)
Team members have dual reporting relationships. The first is their front line supervisor or direct report. The second is their Value Team – Team Leader or indirect report. This reporting relationship can become conflicted at times, when the team members direct report or full time boss places demands on the team members that conflict or are at cross purposes with Value Team business. These conflicts can be avoided by evaluating the team member’s performance holistically; thus, if a team member fails the team, that performance is reflected on the evaluations of his or her overall job performance. If there is a conflict with team duties and job duties, management (Hospital or System Value Analysis Steering Committee or team administrative representative) must resolve it for lower-level employees, higher-level employees must resolve it themselves by following a defined procedure set out by the Value Analysis Steering Committee.
Value Analysis Teams Are Self-Managed by Its Structure
Products, services and technology value studies, whether new or existing, must be carried out in an expeditious manner or customers and stakeholders will become disillusioned with the VA process. With this fact in mind, it is critical that each Value Team has an administrative representative assigned to it in order to:
- Guide the team through the political and administrative mine fields that will be entered into with new and existing value studies:
- Inform the team when its needs CEO approval for any change that it is contemplating.
- Act as liaison between other standing committees or teams that the Value Analysis Team should gain approval from on its actions.
- Keep Executive Management Team and Value Analysis Steering Committee fully informed on the activities of the Value Team.
- Facilitate and problem solve, when the need arises, on any value study or investigation with customers to move the projects along to a successful conclusion.
- Become a champion of the VA process throughout the organization, at the same time, actively looking for opportunities to give the Value Team(s) positive exposure to the board of directors, executive management team, department heads/managers, media and the public at large.
By employing the administrative strategy of having an administrative representative on every Value Analysis Team, the Value Team(s) becomes self-managing, more productive and somewhat politically insulated.
Value Analysis Team Members Are Project Managers Too!
Traditionally, teams consist of team members who work collaboratively and are selected because of their specific skills and knowledge, or are process owners that work together on an assigned project. Historically project managers are assigned, from conception to completion, to manage projects as sole practitioners. A blending of a team and project management model is the foundation of the Team-Based Project Management ™ Model (TBPM). Team members’ progress into project managers as their Team Leader assigns them value studies, which they are responsible for conceiving and defining, planning, implementing, tracking and evaluating, while at the same time, they are also team members responsible for adding value to projects by reviewing all project managers’ reports and findings for reasonableness and completeness. They are also responsible for giving final approval, prior to implementation, of all value studies. The advantage of the Team-Based Project Management™ model over other team models is that the TBPM model is greatly enhanced by combining the synergism of team member skills and knowledge with the disciplined approach of value analysis, thereby, insuring accountability, customer focus, and a scientific approach to lower cost alternatives and quality improvements that get it right the first time.
Decisions are made by Consensus
One of the strengths of TBPM teams are that they make decisions by consensus, which enables the best ideas of project managers and team members to be filtered in so that ill-conceived value solutions can be eliminated before they are proposed to a customer. This decision-making or filtering process insures that the right product, service or technology is recommended to customers with a high reliability factor that the lower cost solution will work the first time.
Projects are Process and Time Based in Nature
TBPM teams are in many respects a process team, since they meet as much as twice a month and conduct value studies on a part-time basis. They are also a time-based team in that they are established with a specific purpose (management and control of non-salary expenses) and have a time frame of 90-days to complete their value analysis studies.
All of these characteristics make the Team-Based Project Management™ Model unique, yet similar to many of the teams that you have been members of in your working career. The big difference is that the TBPM model is specifically designed as a continuous process to manage and control non-salary expenses in an organization. This sets the team apart from other parallel, process or time-based teams that have other charges and goals in forming and performing there given tasks and responsibilities.
STRATEGIC VALUE ANALYSIS:
A Proven and Scientific Approach To Supply Cost Management
By employing the Strategic Value Analysis™ methodology for all non-salary expenses you will have a proven scientific approach to evaluate your non-salary expenses on a continuous basis, not by event.
Your organization can begin to focus on the functions of your products, services and technologies where 30% to 50% savings on a commodity group are achievable. The alternative to applying this value strategy is to continue to utilize your current product, services and technology evaluation model, thereby, continuing to achieve the same meager results you always have!