The #1 Strategy for Reducing Costs In a Healthcare Organization’s Supply Chain

Most healthcare organizations’ non-salary expense initiatives are focused on lowering the price of the products, services, and technologies they are purchasing. In reality, this is the least potent strategy that can be employed to dramatically lower their non-salary expenses. Why? Vendors are screaming that they have no more price concessions to offer their healthcare customers! WE CALL THIS THE LAW OF DIMINISHING RETURNS. Now, what can we do about it?

 

Let’s think of your supply costs in terms of an iceberg. Today, healthcare organizations can save 2% to 3% annually with their group purchasing offerings, standardization, and prime vendor contracts on the piece of the iceberg that is showing above the waterline; however, the real savings are below the waterline and can only be reached with the tools and techniques offered by Strategic Value Analysis™. In fact, our clients save 30% to 50% on individual purchases – through functional analysis – by focusing their cost control efforts on streamlining and reinventing their products, services, and technologies’ value chain, rather than spinning their wheels on purchase price.

 

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By embracing the Strategic Value Analysis™ methodology, healthcare organizations can eliminate their fixation on purchase price, and refocus their non-salary expense management efforts on determining their exact customer requirements. By doing this, BIG savings can be obtained for their healthcare organizations; thereby eliminating waste and inefficiency in their products, services, and technologies’ value chain through scientific value studies to determine non-conforming or feature-rich products and wasteful practices.

 

Is Your Healthcare Organization Winging It?

 

Most healthcare organizations are “winging it” when it comes to value analysis (VA). Very few healthcare organizations, however, are practicing its classic tenets. Value analysis, in its classic form, is the most misunderstood and underutilized savings and quality improvement tool. VA is the most powerful savings technique in healthcare today if the concept is applied consistently and artfully. To clear up many misunderstandings about VA, we would like to clarify what value analysis is and what it is not.

 

STRATEGIC VALUE ANALYSIS™: What it is…

 

Strategic Value Analysis™ is a function-oriented, systematic team approach for providing, designing or investigating the right functions (primary, secondary, and aesthetic) for the millions of dollars of products, services, and technologies that are required to operate a healthcare organization. VA studies focus on cost, improvements in quality, and performance; they are paramount in the value equation. The value methodology can be applied to any product, process, procedure, system or service in your healthcare organization. Its goal is to ascertain, through value studies, those characteristics deemed most important by your customers (internal and external).

 

STRATEGIC VALUE ANALYSIS™: What it is NOT…

 

  • A committee of 20+ members reviewing and approving group purchasing contracts
  • Negotiating or bidding to reduce supply costs
  • Standardization
  • Approving new product, service or technology requests

 

Our surveys show that only 1 in 10 healthcare organizations are really practicing or applying the classic tenets of value analysis, thereby missing the opportunity to slash 5% to 15% off of their non-salary expenses annually. This is because they think they are performing value analysis studies, but they are really doing something else, such as, bidding, comparison-shopping, group purchasing or negotiating.

 

It has been our observation that most healthcare organizations have already picked "the ripe fruit" through group purchasing, re-negotiations of contracts, standardization, and prime vendor contracts, thereby obtaining the lowest price for the commodities they purchase. With little savings left in this vineyard, now is the time to drive out all of the hidden costs in your products, services, and technologies.

 

As an example, one of our clients (a 500-bed hospital in Philadelphia, PA) saved $86,000 (or a 35% savings) by performing a VA study to determine the reason they were using over 6 million glucose tests in their hospital annually. After discussing this with customers to determine their TRUE requirements, benchmarking other hospitals’ best practices, and defining the function or purpose of glucose testing, it was determined that the hospital was performing 40 times the tests that were medically required for this purpose. How did this happen? No one ever asked the question: WHAT WAS THE FUNCTION (primary, secondary, and aesthetic) OR PURPOSE OF USING THIS TEST ROUTINELY ON DIABETIC PATIENTS? All the hospital did before this VA study was negotiate a better price every year for the diabetes test strips.

 

Value analysis is a powerful savings tool, but if it is not practiced correctly or not practiced at all, you will generate only meager savings. On the other hand, if the right people have the right tools and training, and a proven VA process is deployed to look at the right things, then millions of dollars can be saved annually for your healthcare organization.

 

A Strategic Approach to Non-Salary Cost Management

 

As mentioned previously, most healthcare organizations’ non-salary initiatives wrongly focus on price and standardization; whereas, by employing a strategic and functional approach to non-salary expense management, huge savings can be obtained. It all starts with a Strategic Value Analysis™ plan.

 

The term “strategic planning” is not a new term in manage­ment’s lexicon. It is derived from military usage and the need for on-going assessment and self-appraisal of an organization’s strengths and weaknesses. It is a systematic and defined plan­ning process leading ultimately to the appropriate strategy or strategies necessary to enable an organization to adapt to change in an ever-changing marketplace. The end result of such a planning process is a clear vision for management of where an organization should focus its energies and resources in the short, intermediate, and long term to meet their stated mission and objectives. By updating an organization’s strategic plan on an annual basis, it will enable the organization to react quickly to changes in their environment, thereby making mid-course corrections as required.

 

Strategic Value Analysis™ plan has many similarities to the strategic long-range planning process, in that it is a systematic and defined planning process. This process enables a healthcare organization to appraise the strengths, weaknesses, or gaps in its non-labor cost containment and cost manage­ment strategies, then devise new strategies for reducing and controlling non-labor costs by employing the techniques and tools of value analysis. It begins with defining the vision, mission, and objectives of your value analysis program in terms of what your goals are for one, two, and five years out. We also need to define the savings and quality goals that are real and achievable, the policies and procedures that are required to align them with your new or reinvented value analysis program, and the steps that are needed to develop VA teams that will be creative enough to meet the challenges of this new or refined program. We need to consider the problems or hurdles that could threaten the success of our value analysis program and where we get started. This type of planning positions your value analysis program to be successful, rather than just letting things happen in an unplanned and disorganized manner. If developed properly, it will provide you with a road map for your value analysis program and give you a defined direction to follow, thereby increasing your probability of success.

 

Strategic Value Analysis™: A New Management System

 

Most healthcare organizations’ approach to managing and controlling their non-salary expenses are episodic, event-oriented, and reactionary in nature. Organizations react to requests or complaints on or about products, services or technologies when an internal customer or external supplier gets on their radar screen. A better way to manage is to have a management system with a unifying philosophy based on value which continuously evaluates the worth and relevance of products, services, and technologies in a strategic manner. It also considers their functionality and short and long-term cost and quality strategies.

 

Most healthcare organizations only focus their energies on new clinical products, services, and technologies, while millions of dollars of non-clinical products, services, and technologies are purchased without vigorous value justifications. At the same time, little or no emphasis is placed on value justifying the millions of dollars of existing products, services, and technologies that are purchased annually. Thousands of products, services, and technologies (and millions of dollars) never show up on anyone’s radar screen!

 

A more strategic approach in your search for savings and quality gains is to continuously place every product, service, and technology you purchase annually (over $25,000) under a microscope. This would determine if these commodities are in conformance or non-conformance as related to the functional requirements of your internal and external customers. The six most prominent reasons for non-conforming products, services, and technologies, and waste and inefficiency are as follows:

 

1. Tradition (or “we have always done it that way”)

 

Webster’s definition of tradition is, “a long–established way of thinking or acting,” but is this the best practice for a healthcare organization when it is deciding on the best product, service, or technology? We don’t think so. Since things change and people change continuously in a healthcare organization, we must always be testing the products, services, and technologies we purchase to ensure their relevancy and conformity to requirements.  

 

2. Poor or Inaccurate Performance Specifications

 

Most products, services, and technologies that are now in use at healthcare organizations were purchased from the data supplied from manufacturers’ catalogs or sales representatives. They were not based on the required performance specifications. This universal practice has given birth to thousands of over-performing and under-performing products, services, and technologies that are wasteful and inefficient.

 

3. Wasteful and Inefficient Methods and Practices 

 

There are three main factors responsible for 80% of a healthcare organization’s waste and inefficiency.

 

  • Old and New Technologies 

  • Old technologies such as printers, alarm systems, lab equipment, computers, OR equipment, etc., are prone to spit out too much paper, rip and mutilate forms, and require a huge amount of maintenance to keep operational; therefore, a targeted effort should be made to evaluate all technologies that have gone beyond their useful life to ensure that they are still meeting their performance requirements. 
  • New technologies such as point-of-care glucose tests, re-useable, disposable products, and automated supply cabinets are purported to be faster, better, and cheaper, but all too often they are in reality less reliable, supply intense, and more costly than the technology that they are replacing.

  • Too Many Hand-offs

 

A simple product like plastic trash bags could have six or more hand-offs (different people handling the product) before it reaches your trash can on any given day. Just think how much more complex the value chain is for drugs, food, forms, linens, instruments, and tests. You can see how easily waste and inefficiency can creep into a healthcare organization.

 

  • No One Sees The Big Picture

 

Products, services, and technologies are purchased, stored, distributed, consumed by numerous customers, and then disposed of after their useful life without having an owner of their value chains. By necessity and practicality there is shared ownership of a product, service, and technology’s value chains. This is why waste and inefficiency naturally creeps into value chains, because NO ONE EVER SEES THE BIG PICTURE. 

 

4. Customers Are Left Out of The Loop

 

Customers are not always consulted about changes in the value chains of products, services, and technologies. Because of this fact, inappropriate changes are frequently made (new storage area, new shelving, new personnel, new policy and procedure, new maintenance schedule, new disposal method, new contract, etc.), but if customers had been brought into the loop we would have seen the flawed thinking in the proposed change and would have taken corrective action to prevent this non-conforming change from affecting our value chain.

 

5. Feature-Rich Products, Services, and Technologies

 

Our world is too feature-rich, especially when it relates to healthcare organizations’ product, service, and technology purchases. Pacemaker features alone exceed 100 available choices, while only 10% to15% are really medically indicated; yet healthcare organizations continue to purchase hundreds of unnecessary pacemaker features that increase the price of a pacemaker by as much as 50%. The reason for these value mismatches is that healthcare providers accept most product, service, and technology features as being absolutely necessary as a functional requirement, when in most purchases the opposite is true.

 

6. Standardization Vs. Customization

 

In purchasing circles, it has been the conventional wisdom that to obtain the lowest cost for a product, service, or technology it must be standardized (or one size fits all) to conform to the same specifications organization-wide, when in fact, this theorem is a myth! Empirical data now makes it crystal clear that for a healthcare organization to truly have the lowest cost products, services, or technologies, a customized solution is required to meet the unique functional requirements of all customers.

 

By way of example, most healthcare organizations have standardized on disposable underpads to meet the primary functional requirement of protecting linens, thus meeting 80% of the healthcare organization’s customers’ needs, while other customers (20%) find the standardized underpad to be a functional mismatch for their needs. This practice then creates many outliers, such as, the pharmacy buying a higher quality underpad off-contract for chemotherapy drug preparation, OB wasting the value of the underpad by using it to line shelves, or the emergency department utilizing underpads as drawer liners, because no other product is available to meet this secondary function. As this example demonstrates, it is a rare occurrence that one product, service or technology can satisfy all of the functional requirements of all customers, without incurring waste, inefficiency, and a higher cost than is necessary in a product, service, or technology’s value chain. Once healthcare organizations understand and internalize this reality, they can embrace the concept of customization with enthusiasm, thereby, increasing the probability of success.

 

By definition, customization means “to build according to individual specifications” but in most circumstances these specifications will only meet the requirements of 80% of your customers. For the remaining 20% of customers, the products, services, and technologies they require will need to have either higher or lower specifications to fit their exact requirements. It could even mean purchasing different products, services, and technologies for the use of many customers to have an exact fit for their individual needs. Relating this new paradigm or system thinking to our example of the disposable underpads, this would mean that 80% of our customers could and would standardize on one underpad for their exact requirements, while the pharmacy would be permitted to purchase a higher grade underpad for chemotherapy drug preparation. The OB department and the emergency department would be provided with lower cost shelf and drawer liners to meet their precise functional requirements.

 

The bottom line is, once the total costs are calculated for a standardized versus customized approach to purchasing products, services, and technologies, the customization strategy will reduce waste and inefficiency by more than 10% to 15%.

 

TEAM-BASED PROJECT MANAGEMENT™ – Teaming Up to Save

 

Strategic Value Analysis™ is a management system to investigate the total cost from acquisition to disposition (or value chain) of the products, services, and technologies that you are purchasing in a scientific, systematic manner. From our experience, value analysis teams can best achieve the savings and quality gains you have been looking for. This is what we call the Team-Based Project Management™ Model.

 

Teams are now coming into their own right as a maturing force to be reckoned with by modern management. “In a world that is becoming ever more chaotic and dependent on brainpower, teams make more sense than lone rangers in getting the job done faster, better and by people who understand the business better than one person does,” as John Byrne of Business Week Magazine sees it.

 

Teaming becomes even more important as it relates to the evaluation and purchase of products, services, and technologies. No one person ever sees the negative and positive effects of how a product, service or technology is impacting its internal and external customers. Yet, billions of dollars of products, services, and technologies are purchased by healthcare organizations annually that are controlled by one person, many times, with a narrow vision. A better system to manage and control the purchasing process – from acquisition to disposition – is for executive management to appoint a value analysis team(s) for this purpose. In doing so, these VA teams involve all internal and external customers in the buying decision and subject all purchases to rigorous value analysis tests to determine the most appropriate products, services, or technologies based on functional requirements to meet customers’ wants and desires at the lowest possible cost.

 

TBPM Enables Goal Alignment

 

Value analysis teams have unique characteristics, roles, and an organizational structure to enable them to be effective in their sphere of influence. They must be in alignment with a healthcare organization’s compensation policies and its culture, and they will need to develop creative strategies to align themselves with their organization’s goals and objectives. Our approach to this challenge is the creation of the Team-Based Project Management™ Model.

 

TeamBasedProjMgtModel

 

Team-Based Project Management™ Model 

 

There are many different types of teams (parallel, process, time-based, and hybrid) functioning in the mar­ketplace today, according to Steven Gross, Principal, with William M. Mercer consultants. All of these teams are formed for different purposes within a corporation. 

 

  • parallel team is a part-time team whose members have two jobs and two bosses. The first is the job they were hired for and get paid for, reporting to a supervisor. The second is a cross-functional team position that they were appointed to, where they report to a team leader. These teams are temporary in nature and are established to solve specific prob­lems that have arisen in their work environment in a matter of weeks or months, such as a quality control issues, lost sales, etc. 
  • process team is a full-time team that performs many functions across many boundaries to maximize productivity and customer satisfaction, such as, an insurance claim process­ing team, customer service team, or a sales team. In some cases, a process team is a self-managed team given the authority to hire, fire, promote, change, and implement new policies and procedures in their team environment. 
  • time-based team is a team that is established with a specific purpose and time frame in mind to accomplish a specific task, such as designing a new computer system, accounting system, a new product line, or re-engineering a process or system. It can be either a full-time or part-time team position depending on the time require­ments and urgency of the project. The emphasis is on speed to gain competitive advantage. 
  • hybrid team is a combination of the characteristics of a parallel, process, and time-based team. 

 

Team-Based Project Management ™ Team is a hybrid team having many of the characteristics of a parallel, process, and time-based team, but some of its own unique attributes. The TBPM team is designed specifically for use as the vehicle to organize, investigate, and implement value analysis savings and quality improvement opportunities in a healthcare organization.

 

Characteristics of Value Analysis Team-Based Project Management™ Model 

 

The following characteristics of a Value Analysis Team-Based Project Management™ Team (TBPM) differentiate it, or in some cases show similarity to, a parallel, process or time-based team: 

 

  • Value Analysis Team membership is cross-functional by design
  • Value Analysis Team positions are part-time, not full-time
  • Value Analysis Team members have two reporting responsibilities (direct and indirect reports)
  • Value Analysis Teams are self-managing
  • Value Analysis Team members are also project managers
  • Value Analysis decisions are made by consensus
  • Similar to process and time-based teams

 

Value Analysis Team Membership is Cross-Functional by Design

 

The 10 members of the cross-functional Value Analysis Team-Based Project Management™ Team or value analysis team(s) are selected from a pool of company-wide employees, supervisors, and managers to represent their organization’s internal and external customers’ interest. Collectively, they are able to intelligently consider and agree to the best solutions offered to reduce costs or improve quality on product, service, or technology purchases for their organization.

 

Value Analysis Team Positions are Part-Time, Not Full-Time

 

As with a parallel team, value analysis team membership is a part-time position requiring about one to two hours a week (including two bi-weekly VA team meetings) to complete a value analysis study within a 90-day time frame. The term of membership is for 18 months. New value analysis team members will be appointed 45 days prior to expiration of each member’s term, so that there is enough time to orient and train the new members in the value analysis methodology. Replacement will be staggered so that current VA studies can be completed prior to current members leaving the team to ensure continuity of team projects. If a value analysis team member requests to be relieved of team duties or a leave of absence during their term, this request must be submitted in writing and approved by the Team Leader, Administrative Representative, and the Chairperson of the Hospital Value Analysis Steering Committee. All new value analysis team members must be selected and approved by the current VA team members. Value Analysis Team Leaders' terms of office are for five years, unless they decide to renew the team membership for another five years.

 

Value Analysis Team Members Have Two Bosses (Direct and Indirect)

 

Team members have dual reporting relationships. The first is their front line supervisor or direct report. The second is their VA Team Leader or indirect report. This reporting relationship can become conflicted at times, when the team member’s direct report or full-time boss places demands on the team member that conflict or are at cross purposes with VA team business. These conflicts can be avoided by evaluating the team member’s performance holistically; thus, if a team member fails the team, that performance is reflected on the evaluations of his or her overall job performance. If there is a conflict with team duties and job duties, management (hospital or system VA steering committee or team administrative representative) must resolve it for lower-level employees; higher-level employees must resolve it themselves by following a defined procedure set out by the VA steering committee.

 

Value Analysis Teams Are Self-Managed by Structure

 

Product, service, and technology VA studies, whether new or existing, must be carried out in an expeditious manner or customers and stakeholders will become disillusioned with the VA process. With this in mind, it is critical that each VA team has an administrative representative assigned in order to:

 

  • Guide the team through the political and administrative mine fields that will be entered into with new and existing VA studies.
  • Inform the team when it needs CEO approval for any change that it is contemplating.
  • Act as a liaison between other standing committees or teams that the VA team should gain approval from on its actions.
  • Keep the executive management team and VA steering committee fully informed on the activities of the VA team.
  • Facilitate and problem solve, when the need arises, on any VA study or investigation with customers to move the projects along to a successful conclusion.
  • Become a champion of the VA process throughout the organization, while at the same time, actively search for opportunities to give the VA team(s) positive exposure to the board of directors, executive management team, department heads/managers, media, and the public at large.

 

By employing the strategy of having an administrative representative on every VA team, the team becomes self-managing, more productive, and somewhat politically insulated.

 

Value Analysis Team Members Are Project Managers Too

 

Traditionally, teams consist of team members who work collaboratively and are selected because of their specific skills and knowledge, or are process owners that work together on an assigned project. Historically, project managers are assigned, from conception to completion, to manage projects as sole practitioners. A blending of a team and project management model is the foundation of the Team-Based Project Management ™ Model (TBPM). Team members progress into project managers as their Team Leader assigns them VA studies, in which they are responsible for defining, planning, implementing, tracking, and evaluating. At the same time, they are also team members responsible for adding value to projects by reviewing all project managers’ reports and findings for reasonableness and completeness. They are also responsible for giving final approval, prior to implementation, of all VA studies. The advantage of the Team-Based Project Management™ Model over other team models is that the TBPM Model is greatly enhanced by combining the synergism of team member skills and knowledge with the disciplined approach of value analysis, thereby, ensuring accountability, customer focus, and a scientific approach to lower cost alternatives and quality improvements that get it right the first time.

 

Decisions Are Made by Consensus

 

One of the strengths of TBPM teams is that they make decisions by consensus, which enables the best ideas of project managers and team members to be filtered in so that ill-conceived solutions can be eliminated before they are proposed to a customer. This decision-making or filtering process ensures that the right product, service or technology is recommended to customers with a high reliability factor that the lower cost solution will work the first time.

 

Similar to Process and Time-Based Teams

 

TBPM teams are in many respects a process team, since they meet as often as twice a month and conduct VA studies on a part-time basis. They are also a time-based team in that they are established with a specific purpose (management and control of non-salary expenses) and have a time frame of 90-days to complete their value analysis studies.

 

All of these characteristics make the Team-Based Project Management™ Model unique, yet similar to many of the teams that you have been members of in your working career. The big difference is that the TBPM Model is specifically designed as a continuous process to manage and control non-salary expenses in an organization. This sets the team apart from other parallel, process or time-based teams that have other charges and goals in forming and performing their given tasks and responsibilities.