Everyone wants to have the best price on everything they buy, but how important is price in the value equation? The answer is about 38%. Meaning, even if you have the best prices available in the marketplace, 62% of the value of the products, services, and technologies you are buying is related to “best value”, not price.
The definition of “best value” is the right price, the right product, in the right configuration, delivered and disposed of in the most cost effective and efficient manner. Let’s break down these elements that contribute to best value to see what they are worth:
- Price (38%): This is the easiest element to identify and control, since your GPO or local contracts make this information readily available.
- Product (37%): If your product, service, or technology is over-specified (higher performance requirements than required) it can increase your cost by a factor of three or more. For example, if you are purchasing a brand name product when a generic is available, you could increase the cost of the product by 50%.
- Configuration (12%): Feature-rich products, services, and technologies fit into this category. If you are standardizing on product features that are only going to be used 20% of the time, you are inflating your cost by 80% for the majority of your customers. I.V. sets are the perfect example of this occurring at most hospitals today.
- Delivery (10%): Automated replenishment systems are among the lowest cost options available to control this cost. Manual systems are the highest cost in this category.
- Disposal (3%): If you aren’t reprocessing where appropriate, you are inflating your disposal cost unnecessarily. This also applies if you are not sensitive to the over-packaging of some products you are buying.
Although the percentages cited above are estimates and not gospel, nonetheless they are meant to show the relationships between each of these groupings, and then the opportunities for cost reduction in each of these classifications. They should give you a new starting and end point in your value analysis studies.
This brings me to the main point of this article: If you are just attacking the price at the pump, then you are missing huge savings opportunities in your products, configurations, deliveries, and disposal cost.
While price is important, it pales in comparison to your total cost of acquisition to disposition of everything you are buying. That’s why price is only 38% of the value equation and the balance of your product, service, and technology cost is 62%. What cost drivers will obtain the best return-on-your-investment if you put them under your value analysis microscope? I’m sure you now know the answer to this question.