Cost optimization is a challenging road to go down today since the bulk of the savings are no longer in the contract price due to market conditions, inflation, and more price increases than decreases on new contracts. We are lucky to hold the line on price and existing rebates. The good news is that there are still new and bigger savings to go after that you have not formally engaged in. I am talking about cost optimization areas like reducing consumption levels, feature-rich products, inefficient usage patterns, waste, and enhancing the life cycle cost of products and services to your healthcare organization.
These are clearly beyond the existing scope of work that Supply Chain and Value Analysis has engaged in in the past in a formal program manner. You will need better strategies in order to gain the buy-in of your organization so that you can attain the next level of cost optimization. Below are some strategies that I would highly recommend you start to work towards so that you can lead your healthcare organization to the next level of savings success.
4 Cost Optimization Strategies
1. Take Control of the Next Level of Cost Optimization or It Will Control You. There is a strategy to sit back and wait for your senior leadership to set the course for the next level of cost optimization for your organization, but this may not work out in your favor. Some leaders will just slash budgets and throw it back on the supply chain department to assist all of the department heads in your health system to make this happen. This will be extremely overwhelming if this happens, and most department heads will push it off to the supply chain team. It may help you get a few of those tough physician preference items through contractually, but the reality is that it will be more of a mess. It is better to make your own plan that you can achieve that won’t make you and your department look bad because you were thrown into an unwinnable situation that your team was not prepared for.
2. Start Selling Your Bosses on the Next Level of Cost Optimization. Let’s face it, your C-Suite wants your organization to engage in next level cost optimization but there needs to be some sort of effective plan for achieving these goals in non-salary areas. You cannot discount what it means to have C-Suite support behind your initiatives, and cost optimization can be most difficult without this support. If you are going to formulate a next level program for cost optimization, then you should definitely start selling/influencing your C-Suite with your plans for achieving all new savings beyond what you are doing now. With their support, you will be able to overcome the normal objectives and roadblocks as well as have definite timelines and maybe even more assigned support or budget dollars for the tools or personnel you will need to make this happen.
3. Put the GPO Contracts on Cruise Control and Move On. GPO contracts still have valid savings opportunities tied to them and they are still viable to work on, but they are not what they once were. They will save you some good dollars here and there, but these are not breakthrough next level cost optimization opportunities. So, what do you do with viable savings? You put it on cruise control and keep accumulating the savings as you normally do but you don’t chew up 90% of your staff’s time focusing on these. You will need to reallocate their time to the next level cost optimization initiatives.
4. Put the New Product Requests on Hold. New product requests (NPR) account for a small percentage of annual increases to your supply chain budget so when your supply chain teams achieve savings of 3% to 5% annually on your supply chain program you will most likely have to net out the increases from your new product requests. NPRs can be as much as 3% of your total supply chain budget which totally negates all the good work you have achieved in reducing costs and leaves you with a meager 2% net. Many organizations throughout the country have put a temporary hold on new product requests due to the fact that these do increase costs and they want only savings opportunities to be worked on.
This will free up your supply chain and value analysis teams to work on your next generation of cost optimization and not have to deal with new products that inevitably will increase costs.
These strategies will take you down the road towards the next level of savings beyond contract price and also give you the valuable time you and your team will need in order to engage in the next generation of cost optimization. Keep in mind, this is not a sprint, it is a marathon. Once you move your cost optimization efforts towards the savings beyond price, it will power your savings engine not only for this year and next, but for the next 3-5 years at minimum. There is that much there
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