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An earlier column addressed operational performance measures (HPN, September 2006 Back Talk). Tracking your department’s performance and the value it contributes to the organization is important. However, effectiveness of the supply chain cannot be gauged just by those internal measures. The true effectiveness of the supply chain can only be measured by the organization’s performance in managing, controlling and reducing expenses: Predominantly supply expenses. Best practice supply chain executives take the lead in compiling and tracking indices that reflect these.

There are four major supply-related measures that most CEOs and CFOs will recognize. These are "supply cost as a percentage of net revenue," "supply cost as a percent of total expenses," "supply cost per adjusted1 admission (or discharge)" and "supply cost per adjusted (or CMI – case mix adjusted) patient days." Each of these measures has pros and cons.

The first measure, supply cost/net revenue, is probably the worst measure of supply chain effectiveness. Unfortunately, it is also the one most readily identified by senior management. The problem with this measure is that it is or can be more affected by revenue issues than supply cost issues. The rationale often cited for reliance on the measure is that the organization may have little control over their reimbursement. If reimbursement is not favorable in your state or area, the organization must control costs even more to assure a healthy bottom line.

The second measure, supply cost/total cost, also can paint an unrealistic picture. Like the previous measure, this one can reflect the second variable more than supply cost effectiveness. One could get a false sense of well-being if salaries are out of control as the ratio will appear positive. On the other hand, a poor ratio might reflect a very tightly controlled salary budget rather than a problem with supply expenses. Further, the ratio can be skewed if agency costs are put into services instead of salaries.

The two "per" measures are better absolute indicators for the effectiveness of supply cost management. Supply cost per adjusted admission is probably the best single indicator. Supply usage is normally case sensitive rather than time sensitive. The biggest exception to this rule happens with complications, especially a nosocomial infection or decubitus that can increase both length of stay (LOS) and supply costs. Supply costs per adjusted patient day can be affected by changing LOS. In fact, this measure can show a negative trend in an organization that is reducing LOS despite good supply cost management practices.

Ultimately, the best option is to measure and track all four of these indicators. Individually, each may give some information. But taken as a group they provide a valuable representation of trends in supply cost management. Further, the data needed to calculate the indicators are readily available from the organization’s standard financial information and can be presented graphically for easy comprehension.

In addition to these global organization-level indicators, the best materials management departments track various departmental supply cost indicators. The ones selected are usually based on what is important within that particular organization and what data is easy to collect. Some of the more popular are:

• OR supply cost per case or CMI adjusted case

• Cath Lab supply cost per case

• Maternity supply cost (including L&D) per delivery

• Lab supply cost per test result

• ER supply cost per visit

• ICU supply cost per patient day

• Nursing unit (individual or total) supply cost per patient day

In almost any of these indicators, the more detail you can gather, the more valuable the information will be. For instance, OR supply cost per service or major procedure gives more value than overall cost per case. But the information can be very difficult to gather. Sometimes showing a ratio or creating an adjustment factor for type of procedure can be helpful. The ratio of vaginal to C-section deliveries will have an effect on supply costs. You can determine an adjustment factor to apply to total deliveries in order to compensate for fluctuations in delivery types. But don’t be dissuaded from tracking and reporting the high-level indicators because of their limitations. Over time they will show patterns in supply costs. The changes that are due to case and patient variations can be explained.

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