PERISCOPE
Strategic sourcing should hinge on utilization management
Price not enough to bend supply cost curve, savings yield by Robert T. Yokl
f pushed, most strategic sourcing managers will admit that their price savings record has been marginal over the last few years, since they and their group purchasing organizations have been hammering away at price concessions from their suppliers for decades.
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Yet, time marches on and new and renewal contracts are bid, negotiated or renegotiated every day either to chip away at current prices or to locate new sources of supply to save a few percentage points. It is our contention that this tactic only results in 1 percent to 3 percent savings (total sup- ply expenses/annual savings) annually for healthcare supply chain organizations that are married to price savings as their primary saving tactic. Unfortunately, this course of action to
keep pushing for better prices or even fi nd- ing new sources of supply isn’t the ultimate answer for a hospital, system or integrated delivery network to bend their supply cost curve. What is needed for strategic sourc- ing managers to have a breakthrough in cost management is for them to also focus on their healthcare organization’s supply utilization to dramatically increase their savings yield on each contract in which they sign off. Here’s why this is important.
Operate in the know
If you knew you were running 21 percent over in the total cost-per-patient-day (or $126,999 annualized) on your disposable oxygen sensors just as you were ready to renegotiate a new contract, wouldn’t this information give you an edge on your nego- tiations? You bet it would. That’s why price and supply utilization must be intertwined in your negotiations with your suppliers (including your GPO contracts) if you want to increase your annual savings yields by as much as 7 percent to 15 percent overall. To paraphrase Wikipedia, strategic sourc-
ing is a purchasing process that continu- ously improves, evolves and re-evaluates the purchasing activities of a healthcare organization. The biggest life-cycle cost element of a new or existing commodity is its utilization cost, by a factor of 10, 20, 50, or more.
Therefore, a strategic sourcing manager would be malfeasant in this era of value- based purchasing if he/she didn’t approach each contract bid, negotiations or renego- tiations with this salient fact in mind. This is because if you save 10 cents on 10,000 widgets you have been buying, when you only should be utilizing or buying 1,000 annually, have you really saved any money for your hospital, system or IDN? Of course not. Yet customarily the 10-cents-per- widget savings would be reported to your hospital, system or IDN’s management as a home run. This is fuzzy math!
Benchmark utilization data I know that every strategic sourcing man- ager compares price benchmarks when preparing for bid/negotiations on any com- modity group prior to the bid/negotiation event. Yet shouldn’t you be doing the same (benchmarking) with these commodities’ utilization costs? Of course you should be measuring, monitoring and managing all of your commodities’ utilization costs because this is where the real money is – not in price. Here’s how it works. You have bench- marked the current price of a commodity under bid/negotiations and have set a tar- get price for your new contract. Now you can do the same thing with this same com- modity’s utilization cost if you have clinical supply utilization in place. If not, you can do a back-of-the-envelope calculation (e.g., cost per patient day, cost per procedure, cost per test, etc.) on your prior year’s contract utilization data on any product, service or technology you are buying then compare this metric to your peers. For example, if your electrosurgical supplies are running $44.75 per surgical procedure and your peer benchmark is $21.42 per surgical for a contract year, your hospital is unnecessarily over-spending $186,677 (annualized) on this commodity group. These metrics need to be factored into your negotiations for the next multi- year agreement.
Use benchmarked data Now that you have calculated a target price and a target utilization rate for your new
56 October 2017 • HEALTHCARE PURCHASING NEWS •
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or renewal contract you are now ready to share your utilization goal with your pro- posed vendor or vendors. In turn, you will need to ask them to come up with an action plan to rein in their commodities’ utilization to match or exceed your $21.42 benchmark. This is where the real negotiations begin with your suppliers and the huge savings yields emerge.
The point of this discussion is to encour- age you to start partnering with your suppliers to reduce your commodities’ utilization cost at the time of negotiating or renegotiating your contracts. It’s too late to be doing this after a contract is already in place. In addition to monitoring that you are paying your contracted price, you will now need to have your suppliers report quarterly on your utilization of the prod- ucts, services or technologies under those contracts.
More that price Profi t or non-profi t corporations can’t stay in business today if they only worry about the price they pay. Therefore, all corpora- tions must ensure that every dollar spent isn’t wasted by misuse, misapplication, misappropriation or is a value mismatch to be truly competitive in their marketplace. Strategic sourcing managers are tip of the spear on this forefront, and therefore can be real supply chain heroes if they not only strive to obtain the best price for the commodities they are buying, but also strive to achieve the best in-use cost for the millions of dollars they purchase annually by including price and utilization in all of their contract negotiations. HPN
Rober t T. Yokl is President and Chief Value Strategist of SVAH Solutions. Yokl has four decades of experience as a healthcare supply chain manager and consultant, and also is the co-creator of the Clinitrack Value Analysis Software and Utilizer Clinical Utilization Management Dashboard that moves beyond price for even deeper and broader clinical supply utilization savings. For more information, visit
www.svahsolutions.com. For questions or com- ments, email Yokl at
bobpres@strategicva.com
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