The Right Way to Save Money: Targeted Cost Savings

I can’t count the number of times a supply chain leader has told us that his or her goal is to save 3, 5 or even 10 million dollars in supply chain savings as a one-time event. However, as HealthLeaders Media so wisely says, “One-time slashes are not a long-term solution. You need smart, sustainable plans for spending less” on an ongoing basis.

 Your Costs Will Keep Creeping Back Up

One reason this “episodic” approach to cost cutting doesn’t work over the long-term is that you think you have cut your expenses permanently in a category of purchase, but these same costs keep creeping back into your supply chain expenses in less than a year (if not sooner). How do we know this to be a fact? We have frequently seen hospitals, systems, or IDN’s hire consultants, form cost cutting teams or mandate draconian cuts in their supply chain expenses only to see these same costs sneak back into their healthcare organization’s cost centers because they have no expense monitoring system in place to prevent this from happening.

The Right Way to Save Money: Targeted Cost Savings

It is our observation that successful healthcare supply chain leaders are cutting millions from their supply chain budgets permanently, not randomly, by targeting their cuts based on hard data and then monitoring these expenses going forward to ensure that their savings stick. The three recognized ways to target your best savings opportunities for your value analysis teams to pursue are as follows:

  • Benchmark all of your supply expenses with peer hospitals, systems, or IDNs to see why you are different in your major cost drivers (e.g., orthopedics, cardio, custom packs, gowns, etc.) utilizing an activity-based costing system.
  • Employ historical benchmarks (an average of 12 or more months running activity-based costs) to determine your best savings opportunities. As a bonus, we have found this benchmarking model to be universally accepted by clinicians as real, obtainable, and trustworthy; therefore, it is easy for them to accept the results of these value analysis analytics.
  • Analyze Year-Over-Year (Fiscal Year) purchases, again utilizing activity-based costs, to determine what items or categories of purchases have increased, higher than expected, over the last 12 months.

In our own value analysis analytics practice, we utilized all three metrics in tandem to confirm what the best supply chain savings opportunities are for our clients. We call this technique “triangulation” to ensure that we aren’t recommending a “dry hole” to our clients. Meaning, your VA team members could work for months on a VA study and then find out to their frustration that there is no savings or very little savings to be achieved. This isn’t a good way to build confidence in your value analysis program.

Don’t Play Whack-A-Mole with Your Expenses

This targeted approach to supply expense management is based on the theorem: Better to fix your costs the first time, rather than to continually revisit them. A good analogy would be a “Whack-A-Mole” game where you are constantly trying to put a mole back in its hole. This is what happens with “one-time” savings events; you are forever whacking your expenses back in their hole instead of monitoring, managing, and controlling them on a day-to-day basis.

 

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