Purchase Price is Just the Tip of the Iceberg

By Shannon Wheeler, Director, Supply Chain Solutions

Total Cost of Ownership (TCO) refers to the total of all costs associated with every activity in the supply chain. More than just the purchase costs, TCO uncovers the more unseen costs involved in purchasing. In fact, the purchase cost often accounts for only a small portion of total cost. Internal business costs as well as joint supplier and customer costs combine to impact your bottom line and it is important to understand the ramifications of each.

Let’s look at just three areas and how better managing them can prove beneficial:

Freight costs
Managing freight is an easy and effective way to reduce operating expenses without impacting patient care. The ROI is high and the level of change is low. Intalere member Physicians Day Center found managing freight was a great way to lower expenses. They implemented a solution which helped save more than 45% on previous costs.

Procure-to-pay

A standard requisition-to-pay process that guides requesters through procurement steps and automates approvals when purchasing from preferred suppliers reduces buyer involvement and relieves administrative time and costs. Yakima Regional Medical Center, an Intalere member, implemented a successful program to automate AP invoice statements, increase backoffice efficiencies and enhance vendor participation. The program, in collaboration with Intalere vendor CPS Payment Services, also resulted in the facility earning more than $14,000 in rebates monthly.

Inventory carrying costs

Carrying excess inventory above minimum safety stock impacts costs in other areas such as space, utilities, loss of materials, and material expiration or obsolescence. Reducing inventory to stock only enough material to conduct day-to-day business will reduce these costs and improve operational efficiency. Intalere member Summit Pacific Medical Center implemented a standardization and inventory management program that helped them save up to 49 percent in certain areas.

There are certainly many other areas in which gains can be made including logistics and distribution and losses due to expired or damaged products. These are really only the “tip of the iceberg” when it comes to hidden areas which can yield great savings and benefits in terms of realizing any efficiencies from adapting a total cost of ownership approach.

Review our total cost of ownership resource page to learn more.

 

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