Running out of price and standardization savings?

Based on our discussions with hospitals, systems and integrated delivery network (IDN) supply chain executives, it appears that price savings are now harder to find, contain, negotiate or even identify now that their vendors have little more to give in concessions and most of your healthcare organization’s supply standardization efforts are substantially completed.

What does this mean to you? If you are betting your career on easily finding lower prices for the commodities you buy and more standardization savings as you did in prior years, you are going to be in for a rude awakening. It isn’t going to happen based on our in-depth research that documents that most hospitals, systems and IDNs are only saving 0.5 percent to 1 percent on their price savings (annual savings/total supply chain expense budget) versus 7 percent to 15 percent on their supply utilization. That’s why you need to look beyond price and standardization so you can make a quantum leap forward with supply utilization savings that are never-ending and right in front of your eyes just waiting to be harvested.

7 new workable rules

Based on our empirical experience over the last 15 years, for supply chain professionals to tap into this new and better savings source (supply utilization) they will need to follow 7 new workable rules to create this quantum leap forward and the double-digit supply utilization savings I just talked about. Here are those 7 new rules you need to follow to obtain the desired results:

1. Change your mindset from price thinking to supply utilization thinking to increase your savings yield by 200 percent, 300 percent or even 600 percent almost overnight. Believe it or not, price savings only represent about one-tenth of the total lifecycle cost of a product, service or technology. Correspondingly, your product, service or technology utilization costs over their life span represent nine-tenths of their total cost. So I ask you this question: With these facts in mind, where should you be spending your time and resources to reduce your supply expenses?
2. Make it a team effort to uncover these supply utilization savings because you need the buy-in and ownership of your department heads and managers to make change happen. We have found that value analysis teams are the perfect vehicle to attack these supply utilization costs because they generally include the customers, stakeholders and experts of the product, service or technology under investigation, making it a collaborative effort to save money.
3. Follow the money and where it is misspent on your commodities by employing analytics to identify where your supply utilization savings reside. Generally, you can’t see your utilization misalignments (e.g., wasteful and inefficient consumption, misuse, misapplication and value mismatches) in your supply stream with the naked eye. Therefore, you will need to rent, buy or develop your own clinical utilization management system to do so.
4. Measure, then observe where your supply utilization savings opportunities reside. One of the biggest errors that value analysis teams can make regarding your utilization misalignments after they have been uncovered by measurement, is not to shadow the customers of the product, service or technology to understand how it is employed. We have found that this one step alone can answer 90 percent of questions about why any product, service or technology is being over-consumed.
5. Discover why you are different from your peers when you identify an unfavorable variance through benchmarking. For instance, why are you using twice as many Oxisensors this year over last year when your census has remained stable? What are your peers doing different from you to conserve their Oxisensors? Maybe, your nurses think your Oxisensors are disposable?
6. Build in controls to hold your gains by employing a utilization dashboard to continuously measure and manage your supply utilization. Once you have eliminated one or more of your utilization misalignments, you want to ensure that your misalignments are still under control because things – and people – change. Therefore, you must continuously monitor that your wasteful practices don’t return. Our clients have found that a utilization dashboard showing where you stand monthly, quarterly and yearly with your past, current and future utilization misalignments, represents the easiest and best way to monitor your progress.
7. This remains a never-ending journey as circumstances change. Consequently, there always are supply utilization savings opportunities to be addressed. For example, one of our clients saved $100,000 annually when we flagged that their contrast media usage was twice that of other hospitals their size and characteristics. Once this utilization misalignment was corrected (a higher contrast media dose was being used than was medically indicated) this same hospital’s contrast media consumption rates repeatedly spiked over the years because the hospital staff reverted to their old bad habits. That’s why this vigilance of your utilization misalignments is never over!

As these guidelines suggest, supply utilization management is a new discipline with new rules that need to be followed for optimal performance. To shortcut any of these rules will limit your utilization management savings success.