What does the
healthcare industry have in common with the automobile
industry?
First, stand-alone hospitals and hospital systems average
profit margin in 2004 was 4.1% to 4.28%.
Whereas, automobile manufacturers struggle to make profits
equal to 5% of sales every year. Chrysler’s
first-half operating profits represented just a 3% return.
Does this have a familiar ring to it? So as you can
see, based on profit margins, healthcare organizations and
the automobile industry are in the same ballpark when
measured by their profitability.
Second,
hospitals and systems and the automobile industry don’t
watch their costs in good times. The mantra is
“we’re making money, so why do we need to pinch pennies”.
They find to their amazement that market forces,
regulations, or the need for capital spending have changed
the rules of the game and they then find themselves in a
DEEP HOLE that they need to dig themselves out of by
cutting their cost again.
Third,
healthcare organizations and the automobile industry have a
proclivity for adding production capacity (or beds, clinics,
operating rooms, centers of excellence in the hospital
world) or building or expanding their physical plants that
has exacerbated both industries’ boom-and-bust
cycles. Instead both industries need to revamp their
existing asset base when volume demands it by adding shifts
and technology but no new buildings or employees.
Cost Is Our
Enemy; We Must Always Be On The Attack
Chrysler didn’t
learn this lesson (doing more with less) after they went
bankrupt in 1979, but they finally get it, that COST IS
THEIR ENEMY AND THEY MUST ALWAYS BE ON THE ATTACK!
Since 2000, Chrysler has saved billions by streamlining
their manufacturing plants. Now they are pruning their
capital budgets by 5% to 10% below their 2005 levels,
launching a new initiative to eliminate unnecessary work and
bureaucracy within their company and cutting their expense
budgets one cost center at a time.
What Chrysler
is finding is that their employees have become more creative
when they realize they must “do more with less”, such
as, expanding their product line by 50% by creating three or
four cars from one platform or having many of their cars use
the same set of basic components, while cutting their
capital budget to $30 billion.
When Will
Hospitals And Systems Get It Too?
When will
hospitals and systems figure it out as Chrysler has, that
“cost is their enemy and they must always be on the attack”?
The answer is “some do”, “some are thinking about
it” and “some will never get it”, because they
think the BOOM times will last forever and the
BUST times will never come again.
This reminds me
of a story of when I first started in this industry. As a
supply chain professional I worked for a financially
struggling children’s hospital that never had enough
money except for the essentials (food, water, light, drugs
and dressings) that it needed to operate. For instance,
when I received a requisition for a desk, chair and file for
a new hire I had to buy used military surplus
furniture (for a total cost of $75.00) and then have our
maintenance department paint them and put a new Formica top
on the desk (for a total cost $100.00) so the furniture
would look new to the new hire, because we didn’t have the
money to buy anything new unless it was donated to us. By
the way, I had to go with my Chief Engineer to the
Philadelphia Naval Ship Yard to pick out the desk, chair and
file and bring it back to my hospital with our hospital’s
jeep.
With this
unique job experience under my belt of always “doing
more with less” I found that I had to be more
creative to do my job effectively than a hospital supply
chain manager who had a lot of money to spend for whatever
his or her hospital required to be purchased. This
experience enabled me to bring a new and different
prospective to my career as a supply chain professional. I
found that it is actually more fun to “do more
with less” than to just throw money at every problem you
encounter along the way! Try it – you might like the
results too!
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MAILBOX
I’m a value analysis manager for an IDN who is interested in
scorecards and dashboards to show how our value teams are
improving our IDN’s financial performance. How would you
suggest I get started on this initiative? B.K.
Like in the game golf a “scorecard” is used
to keep statistics on how you or your IDN is doing in a
global sense or a snapshot in time related to supply chain
management performance. A “dashboard” is a
panel of information like a pilot would use that shows
various indicator dials, switches, and controls so you and
your executive management know the status of all of your
value analysis goals, objectives, projects, measures,
milestones, cost drivers, benchmarks, outcomes and savings
for any given time period. Although these instruments
are similar in nature “dashboards” are more robust
and encompassing and include drill downs so you and
your executive management team can see at the ground level
the detail behind the metrics you have chosen to be
displayed on the front panel of your “dashboard”.
With this said, I would suggest you start
with a “Scorecard” to show your executive management all of
your IDN hospital’s supply chain metrics (with comparative
benchmarks) at a given point in time (calendar or fiscal
year), than build on this data to create your “Dash-board”.
Your “Dashboard” should show all of your value team’s
financial and operational information that you believe
influences your IDN’s financial performance, with relevant
measures and benchmarks. I’m suggesting this phased
approach, since I believe it will take you at least a year
to build your “Dashboard”, but with a “Scorecard” you can
have one up and operational within a month. If you would
like to take a “test drive” with our new scorecard
www.strategicvaluenalysis.com which will show how to
design your own “Scorecard”, please be my guest.
Good
luck,
Bob
Yokl, Sr.
Chief Value Strategist
Strategic Value Analysis In
Healthcare
800-220-4274
bobpres@strategicvalueanalysis.com
P.S. If anyone
else has a burning question that you would like me to answer, please
call or e-mail me and I would be delighted to answer.
There Is Still “Gold In them Thar Hills”
Maintenance, Repairs And Operations (MRO) Supplies Are Ripe
For Savings Of Between 27% - 51%
Historically, MRO Purchases Have Been The Domain Of Your
Hospital’s Maintenance Department, Which Is The Most Costly
Way To Buy Your MRO Supplies
I didn’t
realize that MRO purchases could be a windfall in
savings until I came on board as a Corporate Director of
Material Management for a large for-profit healthcare
system in the 80s and was introduced to my Senior MRO Buyer
who’s name was Joe B. Joe had been a MRO buyer for 35-years
for this system when I met him. I quickly found that Joe
knew everything (and I mean everything) there was to
know about buying maintenance, repair and operational (MRO)
supplies. That’s when I started to learn how important and
profitable it could be to buy MRO supplies right the first
time. Here are four lessons Joe taught me about MRO
buying:
The
First Lesson:
Joe was able to find used or refurbished parts for our
equipment 99.6% time as opposed to buying new parts. This
represented an average savings of 51% for my system
on most of our high-cost MRO purchases.
The
Second Lesson:
You never need to pay list price for anything, if you know
how to tell a good story. Joe would tell such sad and
believable stories about how our system couldn’t afford to
pay list price for the part he was buying that he had our
vendors crying before he got off the phone with them (and
with a big discount from them too!)
The
Third Lesson:
Joe knew how to cultivate relationships and source new
vendors who could drive our MRO cost of doing business to
the lowest possible levels. Before the days of the Internet,
Joe would search the Thomas Register (this was the MRO
buyer’s Bible before the Internet made it obsolete)
religiously and/or asked his huge network of suppliers where
he could find new sources for our MRO supplies. Joe was
never satisfied with the price or service and was always
searching for a better way to do things.
The
Fourth Lesson:
An experienced MRO buyer can obtain emergency MRO supplies
faster than your maintenance department can, because that’s
a professionals job to do so, thus, improving your
hospital’s up time on any critical piece of equipment you
own. Your maintenance department just has too many
things to do to expedite emergency purchases effectively and
expeditiously.
What can
you learn from Joe? Well, if you don’t have a
“professional” MRO buyer (vs. your maintenance
department) dedicated to buying your critical high
cost MRO supplies, then you are missing out on big savings
and quality improvements for your hospital.
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