Price Savings Have Diminished by a Shocking 70% to 80% Overall
Many of my peers think I am crazy when I make the statement that price savings is fizzling and that the majority of the bonafide big savings opportunities now reside in utilization management of their supplies, services, and technologies we are now negotiating best prices for.
As I work with organizations throughout the country, I see different levels of maturity of Supply Chain Programs, and quite frankly it does not surprise me that the mainstream strategy is still price focused. We live in a price centric world, from our GPOs in healthcare to Costco, Target, and Best Buy in our personal lives. We are forever chasing the “best price” for our organizations and for ourselves. But is that same old tired horse we have been riding for over 40 years in the healthcare supply chain going to meet our savings and cost goals over the next 1, 2, or 5 years? The answer is a big NO!
Are there still price savings? Yes, there are always going to be some price savings from the vendors and manufacturers who can reduce costs and be innovative enough through tough economic times to bring you a lower cost product, but to what degree? When our price horse was a mature steed, about 6-8 years ago, we used to find 5% to 7% savings in total supply budget annually, but those days are far gone. Now, we are lucky to eke out 1% or 2% in savings opportunities each year in price savings. That means that our price savings have diminished by a shocking 70% to 80%. Your price savings are suffering from a serious case of the law of diminishing returns. Utilization is the next strong horse that we need to mount up and start riding if we are going to get back to the levels of savings we once achieved at 5% to 7% or higher! Yes, they are achievable! I have seen utilization savings in the range of 7% to 13% in overall budget achieved at hospitals throughout the country who have committed to utilization management. How could this be possible? If you are totally focused on price, you are overlooking the opportunity to reduce the supply utilization costs in your organization. If you are not looking for the salt then you will not find the salt, and the same goes for utilization. You must have systems, processes, and methods in place to find and drive out the utilization cost that is the next generation of supply chain savings.
I am not saying you should ignore price savings, since it is the first bastion of opportunity, and like anything else it is a part of our total supply chain management process just like inventory management and value analysis. We must now add a new systematic process to our departments and organizations, and that is utilization management. You can then utilize your value analysis committee and teams to attack these new and better savings. Once your value analysis committee or team has driven out the unwanted and unnecessary costs, you can continue to track the utilization of the products on an ongoing basis to ensue these savings stick.
Your new utilization management horse is ready for you to mount up and ride to achieve a new level of savings that is certifiably there in your supply streams for you to achieve. This is a different type of savings that you must develop new systems, new approaches, and refocus your value analysis teams and committees on these new opportunities that your utilization management program will uncover.
Traditionally, value analysis committees and teams are new product-cost-quality and conversion focused, but now you can add a new element to the mix with utilization management. Specifically, driving out the mismatches, misalignments, failures, and waste in your existing products and services in your supply chain.
Remember, this new horse will deliver you to the next level of savings but only if you mount up and start riding today!