By Peter Cayan, Vice President and Tracey Chadwell, Senior Director, Advisory Solutions
While controlling cost and reducing variation will always be mission-critical functions to any and all supply chain managers, these tip-of-the-iceberg savings represent only about 37% of the total lifecycle cost of supply purchases. The preponderance of your product, service and technology life cycle costs, or 63%, is in your deployment and utilization, or how your commodities are employed by staff in your healthcare organization.
Total lifecycle management has a beginning, middle and end. At the beginning, there is your value analysis process (i.e. deciding on best value); the middle is your utilization management system (i.e. controlling when and how the product is used) and at the end of the lifecycle you need to economically and ecologically dispose of the product.
While most hospitals, IDNs and other healthcare providers have focused on the beginning and end of this total lifecycle management process, only a few healthcare organizations have a system in place to rein in the middle of this process, or utilization, where most of their lifecycle costs are incurred. This fact could be costing your healthcare organization a significant amount of money each year.
Defining Utilization Management
By definition, utilization management is control of the wasteful and inefficient consumption, misuse, misapplication or value mismatches in the products, services or technologies you are buying. It’s all those things that happen after you deliver products to your customers.
Waste and inefficiencies in the consumption of products is where 79% of all new supply chain savings are hidden – inferior products, value mismatches, and misused, misapplied, or misappropriated products must be identified and eliminated. What happens?
- We evaluate, select and contract for a product/service/technology, then staff will often use too many, misuse or waste products, or choose feature-rich products that are more expensive. In addition, vendors may upsell new, higher cost products outside the new contract.
- Redundancies in supplies and unnecessary deviations in inventory processes lead to variations in practice, many times sacrificing operational excellence for personal preference or comfort.
Let’s say, for example, that your I.V. pump set cost is $4.65 each and you use 100,000 sets per year. Then this $465,000 represents your annual utilization cost for this I.V. set. If your clinical staff is misusing or misapplying, or the I.V. set is a value mismatch (i.e. lower cost alternative available, but not being employed or purchased) of 10%, you are losing $46,500 annually in what we call a utilization misalignment.
Now, multiply this factor by the 7,000 to 15,000 products, services and technologies that you buy annually to help you to understand the impact of how not having a system in place to effectively, efficiently and easily manage and control your supply utilization is compromising your overall cost efficacy.
That’s why price is just the tip of the iceberg to be considered in your spend. This is because you could actually pay more for a product but have a lower utilization cost (e.g. electrode, bath system or lab test, etc.) and still be way ahead of the game. This fact is important to remember as we move to value-based purchasing.
In our follow-up post, we’ll take a look at what it takes to achieve real improvement.
We Can Help. Intalere helps you better understand the strategic nature of supply chain and provides resources that can assist in bringing efficiency and savings to every area of your supply chain. Reach out to see how we can help. Contact Customer Service at 877-711-5600 or email@example.com or your Intalere representative.