Healthcare Supply Chain: The Worst Number in the Savings Game is One

Healthcare Supply Chain: The Worst Number in the Savings Game is One
By Robert W. Yokl, Sr. VP, Supply Chain & Value Analysis — SVAH Solutions

The number one strategy for saving money in the healthcare supply chain is by saving on price. When you look at contracting and strategic sourcing, it’s all about price. Standardization is a function of consolidating volume towards a common vendor(s) to attain a better tier or negotiate a better price. When an organization changes their group purchasing organization to another or joins a regional cooperative, it is to get a better price. Let’s face it, the healthcare supply chain has always been heavily leveraged towards saving with price. Price is King, but is this the only savings opportunity we have?

You Are Doing Everything Right with Price, But…

In a perfect healthcare supply chain world, you would only need to keep focusing on price year after year and keep switching GPOs or following a new regional cooperative that has created the next big approach to consolidating volume. Even the national GPOs are recruiting their own members into their regional super-cooperatives. Why? Because they know that the regionals can drill down better from the national contracts to better leverage price savings for members. Yes, you will gain savings when you join a regional cooperative, but the savings moving forward will be marginal at best because you have already wrung the towel dry from the national to the regional level with consolidated committed volume.

How Long Do We Keep Grinding Savings Out on Price?

Do you continue to grind on price savings and rely on one strategy to drive out all of your savings, or do you start to develop new and better strategies that will help you focus on the total cost of supplies that will include removing waste, inefficient use, product value mismatches, and life cycle shortfalls? By working towards eliminating these very real issues, you can start to add an additional 3%, 5%, 7% or even as much as 15% in annual budget savings on top of what you are saving with price.

Aliens Have Landed Outside Your Emergency Room

When I try to educate supply chain leaders and their teams in looking beyond price for major savings opportunities, many times the conversation starts with them looking at me like I just told them that aliens landed outside their ER. They acknowledge that savings beyond price might exist (the aliens) but then when I show them a benchmarking report on pulse oxisensors’ cost per adjusted patient day, they look at me like the aliens have landed because they just don’t get it. Inevitably, someone on the supply chain team or even the leader will say, “Wait a minute, our pulse oxisensor price is more than $1.80! How can this report be right?” Oxisensors are used in the inpatient and outpatient environment. Some are used for quick reads in the Emergency Department and others for long term inpatient care like ICU, and everything in between. Some departments do not require their use at all. Keep in mind, sensors have a longer life than just one per patient per day. You can admit a patient and keep an $8 sensor on them for up to two weeks, which would put the sensor life cycle cost at $0.57 per day.

What the report I shared in this example showed is that the consolidated use per inpatient and outpatient departments per day is an average of $1.80 for the entire organization and there are other like-sized organizations that have a lower cost per adjusted patient day of $1.30, or 28% better than your cost. You may still have the best price at the best tier with the best value selected products, but something else may be going on that needs to be investigated. There is no doubt that there is some waste, inefficient use, product value mismatches, or life cycle shortfalls which are making up the 28% savings opportunity which is substantial.

Saving Big Is Still Within Your Grasp

In the example above, we find these types of things every day at healthcare organizations and the first reaction is one of disbelief (aliens again). But the reality is that if your organization does not have any type of utilization reporting or benchmarking, then you probably have no way of knowing that there could be a big savings sitting right in your supply chain. Yes, you know you have the right price in your ERP/purchasing systems but there is more to saving big than just gaining the best price. Remember, price times the quantity purchased/used is the total cost. Even though you have 100% certainty in your pricing methods and strategies there are other major determining factors that can drive costs, namely the use patterns of your end customers.

There are Bigger Savings Hidden in Your Supply Chain

If you still think that price is the only savings option for your health system, then you may never realize that there are huge savings sitting right in your supply chain that will fill up the coming years with big savings numbers like we used to have 8-10 years ago. These numbers are about attacking your in-use costs beyond price which will net as much as 7% to 15% in overall budget savings. You have to first acknowledge that these saving are real and start down the strategic road to attaining these savings for your healthcare organization. When done deliberately, you will start to make major savings gains for a minimum of the next 5-7 years or more. The time to start is now!

About Robert W. Yokl, Sr. VP of Value Analysis & Supply Chain Solutions
Robert is the Program Leader for SVAH Solutions that provides value analysis, clinical supply utilization, and savings validation tools to help organizations to gain the next level of savings beyond price and standardization.

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