The “Law of Diminishing Returns” asserts that it requires more time, effort, and resources to generate less of a return-on-investment in just about any area of business over time. This is the situation with your price savings today! You and your national and regional group purchasing organizations have wrung the towel dry on supply chain expense savings which has resulted in little or no savings on your new or renewal contracts today. In fact, price increases are the norm in today’s healthcare economy. Yet, your healthcare organization still needs to reduce their non-salary expenses just to keep pace with inflation every year, which is averaging six percent as I write this blog article. So, what’s the answer to this dilemma?
Three New Areas To Mine For Non-Salary Savings In The New Healthcare Economy
Although your price savings are disappearing, there are still three other non-salary expense strategies you can mine for new savings as follows:
1. Supply Utilization Management: We haven’t found a healthcare organization that doesn’t have millions of dollars of wasteful and inefficient consumption, misuse, misapplication, or value mismatches in their supply streams. This is because anything can happen, and usually does, when supply chain delivers a product, service, or technology to their customer. Up to 35% to 65% of a healthcare system’s products, services, and technologies could be costing millions of dollars more in unnecessary costs because supply chain professionals can’t see that waste, misapplication, and misuse is happening in many areas of their organization.
2. Life Cycle Cost Analysis: When you analyze the total cost (purchase price plus all additional cost – maintenance, utilities, repairs, etc., over its lifetime) of a product, service, or technology you will often discover unnecessary expenses that can be eliminated, reduced, or re-engineered to lower its overall cost. For example, after a life cycle analysis was conducted one of our clients decided to add new beds to their inventory of specialty beds through their capital budget process in order to all but eliminate the high dollar expense of renting specialty beds. This was because this hospital’s specialty bed costs continued to increase exponentially every year, so it made sense to make a onetime purchase of new beds to eliminate over $150K in annual rental cost for the next 3-5 years.
3. Best Value Standardization Optimization: Even though you might have the best price on a commodity, its “in use” cost should be the determining factor on your standardization decisions. This is because, in many situations, like wound care dressings, we should measure the overall cost per patient day as we keep dressings on the patient for 24, 48, and sometimes 72 hours now with extremely better healing results. Yes, a longer lasting wound care dressing is going to cost more initially but you will actually use less dressings over the length of the patient’s stay and they will have better healing outcomes. That’s what we consider a “best value” vs. “best price.”
Price Savings Is Just The Tip Of The Iceberg
As you can see by these three strategies, price reduction is only one tool you have in your supply chain cost optimization toolbox. Our empirical experience has shown that these three cost optimization strategies will yield even bigger savings (7% to 15% of your supply budget to be exact) than any price reductions you might source today. Remember, your price savings are just the tip of the iceberg in today’s new healthcare economy.
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