Changing times require changing strategic direction
by Robert T. Yokl

It goes without saying that healthcare organizations want to save money beyond price, but reducing these invisible costs is an impossible task without the right kind of counterintuitive thinking, advanced training and masterful execution. Unfortunately, many organizations do not invest in ongoing training and education, and they assume that appointing committees to cut spending is effective supply chain management.

These organizations then pay the price, literally, for sticking with the same old supply chain management methods. Of course, with the right attitude, commitment and desire to change your strategic course, your healthcare organization can start mining new sources of saving that you once thought was impossible. And this book is an introduction to doing just that.

But don’t say you were not given fair warning. Changing the way an organization runs its supply chain management teams is difficult, and you will encounter resistance, both from employees who may not understand the importance of more targeted supply chain management and from managers who might not want to change the current way of doing things.

Such resistance, though, should not stop you from taking that first step — and then a second and a third.

Dr. Thomas R. Prince of Northwestern University gives us a stern warning when he says that, "an annual return (total margin) of more than 6 percent is necessary to sustain…(a) health care entity’s mission." This annual return is necessary for increases in salaries and benefits. It also helps healthcare organizations keep up with technology demands, introduce new procedures and services and replace old equipment and buildings.

Yet, healthcare organizations’ average total margins are running about 1.8 percent or less nationwide.

More importantly, if a healthcare organization plans only to break even annually (which many do), it almost certainly finds that its financial infrastructure erodes so much that it becomes impossible to provide needed services for the community. And worse still, the organization may slide slowly into bankruptcy.

Hospitals must do better than break even or simply cut back a few percentage points each year if they are to pay for future increases in staffing, equipment and new technologies.

Unfortunately, additional monies will not come from your patient revenues, because, in the future, patient revenues will be flat or weak at best. This is true of non-patient revenues, such as cafeteria and gift shop sales and building rentals and investments, because their growth potential is limited in today’s healthcare marketplace.

For example, a hospital cafeteria usually does a fixed amount of business with those people who are staying nearby because of sick loved ones. A hospital cafeteria is not like a McDonald’s or Wendy’s, which can run promotions to bring in additional business.

Similarly, land is very expensive, so a healthcare organization cannot simply decide to build out or lease space to doctors or other practitioners if no such space is available. Plus, it is expensive to renovate land and a hassle to deal with local building and zoning codes. So, healthcare organizations are limited in what they can do with their land and office buildings, because of the financial and manpower costs.

Looking to the future, most experts also envision even deeper cuts in Medicare and Medicaid reimbursement and continued skyrocketing pharmaceutical and malpractice costs. In addition, an increasing demand for new technologies will further negatively impact hospitals’ margins for years to come.

Healthcare organizations must then depend on the financial resources of debt bonds, bank financing and accumulated surplus as life preservers.

What is alarming is that such financing has become more impractical, nonexistent or difficult to maintain without adequate margins.

So, where does your healthcare organization go from here to survive and thrive?

There is only one area left in the vineyard, which represents about 35 to 45 percent of a healthcare organization’s operating costs. I’m referring to an area that can easily be harvested to improve a hospital’s total margins by as much as 6 to 9 percent within 18 months — if you know where to look for these improvements and then organize to capture savings.

What I’m talking about are those invisible costs or unnecessary supply chain costs in your healthcare organization’s operating budget. An example of an invisible cost is a linen service worker returning all linens, because they have another hospital’s name imprinted on them. This unnecessary return costs the hospital $151,296.34 annually.

Another example is when a hospital annually rents $193,492 in specialty rental beds, when, with new policies and procedures to manage these purchases, it only needs to spend $73,329.

Essentially, these invisible costs eat away at your margins. Unfortunately, healthcare organizations have been so challenged with the identification, classification and quantification of these invisible costs that they have not been able to decide what can actually be cut.

What healthcare organizations are missing in their management toolbox is a strategic approach to supply chain cost management, which we call Strategic Value Analysis, which creates new behaviors, organizational structures and other critical adaptations that improve an organization’s viability to control its supply chain expenses.

It has many similarities to the strategic long-range planning process, in that it is a systematic and defined planning process. It enables a healthcare organization to identify the gaps in its supply chain management strategies and tactics and to devise new strategies for reducing and controlling supply chain costs, beginning with defining your vision, mission, values, perspective, objectives, measurement, baseline, targets, strategies, tactics and timelines for success.

Begin also by determining what your aspirations are one, two and five years out. To do so, you must be able to answer the following questions:

•What supply chain savings and quality goals are real and achievable at your organization?

•What policies and procedures are required to align them with your new, renewed or reinvented supply chain management program?

•What steps need to be taken to develop value teams that will be creative enough to meet the challenges of your supply value analysis program?

•What problems or hurdles can we anticipate that would threaten the success of our supply value analysis program?

•And where do we get started?

This planning process positions your supply value analysis program to be successful, whereas just letting supply value analysis happen in an unplanned and disorganized manner is both useless and costly in the long term. If developed properly, a supply value analysis plan will provide you with a road map for your supply value analysis program and give you a defined direction to follow over the next three to five years.

Controlling costs can dramatically increase weak margins consistently over time, whereas the onetime initiative of tightening budget controls is not typically a long-term savings solution.