By Robert W. Yokl, Sr. VP, Supply Chain & Value Analysis — SVAH Solutions
What do I say to supply chain professionals who don’t believe in savings beyond price? I think the best way to answer this question is to talk about the history of how we got into looking at savings beyond price. Eventually, you may run into things that will help you steer your organization to this next level of supply savings, but you should have a plan in place to do something about these savings sooner. Sit back and find out how we found this incredible gold mine in our clients’ backyards.
There is Value in Knowing the History of Savings Beyond Price
For 33 years, our company has specialized in value analysis. More specifically, we teach, coach, and implement value analysis programs throughout the United States. We still consider ourselves a value analysis firm, but we have learned that there is more to the value analysis equation than just value analysis methods, teams, and program elements. When we first began working with hospitals and health systems, the group purchasing marketplace was not what it is today. There was a lot of low hanging fruit available that made value analysis a bit easy. In the late 1980s through the 1990s, value analysis was more about looking at high dollar purchases and finding waste and inefficient use for big savings. Many times, we assisted in customizing their contract portfolios for big savings with value analysis helping to evaluate these contracts and products.
Group Purchasing Price Savings Has Matured, Now How Do We Save Big Beyond Price?
Fast forward a bit into the early 2000s where we now have committed national group purchasing, whereby our hospital clients are committed to the GPO’s price and contracts. We could no longer recommend new contracts, yet they still needed more savings. Interestingly, the teams we helped start, train, and coach weren’t as keen on just looking at their top spend categories to see if there were any savings beyond contract price. These teams needed more proof to look at than just being told to look into their pulse oxisensors because they were spending $440K a year on them. They thought they were fine because they were buying at the best tiered contract and thought that was all they should be doing. We would have to prove our case for these new value analysis teams to even look at pulse oxisensors or any other value analysis savings opportunity.
This led us to look beyond price, which in this case was supply benchmarking. Since we had been working with so many customers and had their spend data and statistics already, we were able to share with them the proof that they were asking for. We could confirm that, yes, they had the best price on pulse oxisensors at the best tier for their GPO, but that they were spending $5.60 per patient day (early 2000 benchmark, much different today) and their peer hospitals were spending between $3.35 and $4.10. This resulted in a juicy savings opportunity with proof for the value analysis team of 27% to 40% in increased spend over their peer hospitals with similar operating characteristics. We then started working with the teams further to analyze and drive out the savings.
Price is Only a Small Portion of the Overall Cost of Any Product
The key to these savings beyond price is that they are encompassing the entire spend of each product’s in-use costs which includes the price as well. Simple math tells us that if you save 10% on a product and lock in the price that you will save 10% on each and every product purchased. The challenge here is that the forgotten denominator is that the quantity purchased/used at the organization is the big X-Factor in savings beyond price. In the oxisensor example above, the hospital had their best price locked in but found that they were buying 35K in mostly disposable sensors only to find out that they should have been buying only 14K to 26K total in sensors instead.
Value Analysis Teams Now Require Savings Opportunities that are Bullet-Proof
Fast forward to 2020. Value analysis teams who are primarily made up of department heads and managers not only require proof that there are big savings opportunities, but also want proof that is bulletproof. I can’t blame them. To spend 2, 3, or even 6 months working on a big savings initiative only to have the savings fizzle out is very disappointing. That’s where the savings beyond price approach works best, especially as we are now reaching the point that we have already implemented the major committed volume contracts and have little or no room to negotiate further. The only thing you can really affect in these contracts is how much you consume/utilize. This is the hidden gold mine that we were talking about and it is only stumbled upon in bits and pieces (a category here, a category there). It does not have to be that way if you move towards a systematic approach to savings beyond price!
Yes, Savings Beyond Price Non-Believer, there are huge savings in how much you consume, which entails waste and inefficient use of products as well as identifying feature rich products. In the case of oxisensors and most other products, if you choose a feature rich product when a lower feature/cost product could meet your clinical requirements, then you can substantially reduce your total cost within the confines of your locked in pricing contract. We don’t waste on price. We waste on how much we use/consume.
How Much Savings Beyond Price is There?
How much savings beyond price opportunities are there? Our studies over the past 10 years show that there is as much as 7% to 15% of total supply budget savings available to hospitals and health systems. How do you start to get to these savings? First, you have to establish a baseline and benchmark from there. This initial baseline will prove invaluable on your quest for savings beyond price.