FREE WHITE
PAPER - Strategic Value AnalysisTM: Saving
Beyond Price
The #1 Smart Strategy for Taking Out Cost
in a Healthcare Organization’s Supply Chain
Most
healthcare organizations’ non-salary expense initiatives are focused on
lowering the price of the products, services and technologies that they
are purchasing, as if this is the only weapon they have in their arsenal
to combat the negative effects of the balanced budget amendment of 1997.
In reality, this is the least potent strategy that can be employed to
dramatically lower their non-salary expenses. Why?
Over the next three to five years
the savings from group purchasing, standardization and prime vendor
contracts will be almost invisible. In fact, supply costs are beginning
to rise because the excess costs are now and will continue to be squeezed
out of your healthcare suppliers’ supply chain. Vendors are screaming
that they have no more price concessions to offer to their healthcare
customers!
“WE CALL THIS THE LAW OF DIMINISHING RETURNS”. Now,
what can we do about it?
Let’s think
of your supply costs in terms of an iceberg. Today healthcare
organizations can save 2% to 3% annually with their group purchasing
offerings, standardization and prime vendor contracts on the piece of the
iceberg that is showing above the waterline; however, the real savings are
below the waterline and can only be reached with Strategic Value Analysis™
concepts, tools and techniques.
In fact, it’s been our
clients
experience to save 30% to 50% on individual purchases -- through
functional analysis -- by focusing their cost control efforts
on streamlining and reinventing their products, services and technologies’
value chain, rather than spinning their wheels on purchase price.
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By
embracing the Strategic Value Analysis ™ methodology, healthcare
organizations can eliminate their fixation on purchase price, and refocus
their non-salary expense management efforts on determining their exact
customer requirements -- by building specifications from a blank piece of
paper. By doing this, BIG savings can be obtained for their healthcare
organizations; thereby eliminating waste and inefficiency in their
products, services and technologies’ value chain through scientific value
studies to determine non-conforming feature rich products, services and
technologies, wasteful methods and practices being employed, and
maintaining conformance to requirements.
Is Your Healthcare
Organization
“WINGING IT”?
Most
healthcare organizations are “WINGING IT” when it comes to value analysis
(VA), which does have high name recognition. Very few healthcare
organizations, however, are practicing its classic tenets. Value
analysis, in its classic form, is the most misunderstood and underutilized
savings and quality improvement tool. VA is the most powerful savings
technique in healthcare today if the concept is applied consistently and
artfully. To clear up many misunderstandings about VA, we would like to
clarify what value analysis is and what it is not…
STRATEGIC VALUE
ANALYSIS™:
What it is!
Strategic Value Analysis™ is a function-oriented,
systematic team approach for providing, designing or investigating the
right functions (primary, secondary and aesthetic) for the millions of
dollars of products, services and technologies that are required to
operate your healthcare organization. VA studies do focus on cost,
improvements in quality and performance, they are also paramount in the
value equation. The Value methodology can be applied to any
product, process, procedure, system or service in your healthcare
organization. Its goal is to ascertain through value studies, those
characteristics deemed most important by your customers (internal and
external).
STRATEGIC VALUE
ANALYSIS™: What it isn’t!
Strategic Value Analysis™ isn’t:
-
A
committee of 20+ member reviewing and approving group purchasing
contracts
-
Negotiating, bidding or doing something else to reduce supply cost
-
Standardization, new product, service, technology conversions or
introductions
-
Approving new products, service or technology requests
-
Any
of these things that most healthcare organizations call VALUE ANALYSIS
Our
surveys show that only 1 in 10 healthcare organizations are really
practicing or applying the classic tenets of Value Analysis, thereby
missing the opportunity to slash 5% to 15% off of their non-salary
expenses annually. This is because they think they are performing Value
Analysis studies, but they are really doing something
else, such as, bidding, comparison-shopping, group purchasing or
negotiations.
It's our observation that most
healthcare organizations have now picked "the ripe fruit" in their
healthcare organizations through group purchasing, re-negotiations of
contracts, standardization and prime vendor contracts,
thereby obtaining the lowest price for the
commodities
that they purchase. With little savings left in this vineyard, now is the
time to drive out all of the hidden costs in your products, services and
technologies.
As an
example, a current client of ours (500 bed teaching hospital in
Philadelphia, PA) saved $86,000 (or a 35% savings) by performing a Value
study to determine the reason they were using over six million glucose
tests in their hospital annually. After discussing this with customers to
determine their TRUE requirements, benchmarking other hospital’s
best practices, and defining the function or purpose of glucose testing,
it was determined, that the hospital was performing 40 times the tests
that were medically required for this purpose. How did this happen? No
one ever asked the question: WHAT WAS THE FUNCTION (primary, secondary and
aesthetic) OR PURPOSE OF USING THIS TEST ROUTINELY ON DIABETIC PATIENTS?
All the hospital ever did before this Value study was negotiate a better
price every year for the diabetes test strips.
Value
Analysis is a powerful savings tool, but if it is not practiced correctly
or NOT PRACTICED AT ALL, then you will generate only meager
savings. On the other hand, if the right people have the right tools,
training and a proven VA process and Value Practitioners are deployed by a
healthcare organization to look at the right things, then millions of
dollars can be saved for your healthcare organization annually.
A Strategic Approach
To Non-Salary Cost Management
As
mentioned previously, most healthcare organizations’ non-salary
initiatives wrongly focus on price and standardization; whereas, by
employing a strategic and functional approach to non-salary expense
management huge savings can be obtained. It all starts with a Strategic
Value Analysis™ Plan.
The term
“ strategic planning” is not a new term in management’s lexicon. It is
derived from military usage and the need for on-going assessment and
self-appraisal of an organization’s strengths and weaknesses. It is a
systematic and defined planning process leading ultimately to the
appropriate strategy or strategies necessary to enable an organization to
adapt to change in an ever-changing marketplace. The end result of such a
planning process is a clear vision for management of where an organization
should focus its energies and resources in the short, intermediate and
long term to meet their stated mission and objectives. By updating an
organization’s strategic plan on an annual basis, it will enable an
organization to react quickly to changes in their environment, thereby
making mid-course corrections as required.
A “Strategic Value Analysis™ plan” has many similarities to the
strategic long-range planning process, in that it is a systematic and
defined planning process. This process, enables a healthcare organization
to appraise the strengths, weaknesses or GAPS in its non-labor cost
containment and cost management strategies, then devise new strategies
for reducing and controlling non-labor costs by employing the techniques
and tools of value analysis. It begins with defining the vision, mission
and objectives for your value analysis program in terms of what your goals
are for one, two and five years out. We also need to define the savings
and quality goals that are real and achievable, the policies and
procedures that are required to align them with your new or reinvented
value analysis program, and the steps that are needed to develop value
teams that will be creative enough to meet the challenges of this new or
refined program. We need to consider the problems or hurdles we can
anticipate that would threaten the success of our value analysis program
and where we get started. This type of planning positions your value
analysis program to be successful, rather then just letting it happen in
an unplanned and disorganized manner. If developed properly, it will
provide you with a road map for your value analysis program and give you a
defined direction to follow, thereby, increasing your probability of
success.
“Value Analysis is a powerful savings tool, but, if it is
not practiced correctly or NOT PRACTICED AT ALL, then you will generate
only meager savings.”
Strategic Value
Analysis™: A New Management System
Most
healthcare organization’s approach to managing and controlling their
non-salary expenses are episodic, event oriented and reactionary in
nature. Organizations react to requests or complaints on or about
products, services or technologies when an internal customer or external
supplier gets on their radar screen. A better way to manage is to have a
management system with a unifying philosophy, based on value, which
continuously evaluates the worth and relevance of products, services and
technologies in a strategic manner, and recognizes how a product, service
or technology fits into the hierarchy of healthcare organizations overall
product, service or technology mix. It also considers their functionality
and short and long term cost and quality strategies.
Most
healthcare organizations only focus their energies on new clinical
products, services and technologies, while millions of dollars of
non-clinical products, services and technologies are purchased without
vigorous value justifications at all. At the same time, little or no
emphasis is placed on value justifying the millions of dollars of existing
products, services and technologies that are purchased annually by the
healthcare organization.
THOUSANDS OF PRODUCTS, SERVICES AND TECHNOLOGIES (and millions of dollars
$$$) NEVER SHOW UP ON ANY ONES RADAR SCREEN!
A more
strategic approach in your search for savings and quality gains is to
continuously place every product, service and technology you purchase
annually over $25,000 (and their value chains) under a microscope. This
would determine if these commodities are in conformance or in
non-conformance as related to the functional requirements of your internal
and external customers. The five most prominent reasons for
non-conforming products, services and technologies and wasteful and
inefficient value chains are as follows:
Tradition (or “we have always done it that way”)
Webster’s definition of tradition is, “a long –established
way of thinking or acting,” but is this the best practice for a health
care organization when it is deciding on the best product, service or
technology. I DON’T THINK SO! Since things change and people change
continuously in a healthcare organization, we must always be testing
the products, services and technologies we are purchasing to insure their
relevancy and conformity to requirements.
Poor
or Inaccurate Performance Specifications
Most
products, services and technologies that are now in use at healthcare
organization around the world were purchased from the data supplied from
manufacturer’s catalogs or sales representatives. They were not based on
the actual performance specifications required for the product, service or
technology. This universal practice has given birth to thousands of
over-performing and under-performing products, services and technologies
utilized throughout a healthcare organization that are wasteful and
inefficient.
Wasteful and Inefficient Methods and Practices
There
are four reasons that we have uncovered for waste and inefficiencies in a
healthcare organization’s value chain that are causing 80% of the waste
and inefficiency:
1. Old and New Technologies
Old technologies
such as printers, imprinters, alarm system, lab equipment, computers,
OR equipment, etc., are prone to spit out too much paper, rip and mutilate
forms, and require a huge amount of maintenance to keep operational;
therefore, a targeted effort should be made to evaluate all technologies
that have gone beyond their useful life to insure that they are still
meeting their performance requirements.
New technologies
such as point of service glucose tests, re-useable, disposable products
and automated supply cabinets are purported to be faster, better, cheaper
and glitzier, but all too often they are in reality less reliable, supply
intense and costlier than the technology that they are replacing.
2. Too Many Hand-offs
A simple product like plastic trash bag liners could
have six or more hand-offs (different people handling the product) before
it reaches your trash can on any given day. Just think how much more
complex the value chain is for drugs, food, forms, linens, instruments and
tests, then you can realize why waste and inefficiency creeps into value
chains without you even realizing it.
3. No One Sees The Big Picture!
Products, services and technologies are purchased,
stored, distributed, consumed by numerous customers, and then disposed of
after their useful life without having an owner of their value chains. By
necessity and practicality there is shared ownership of a product, service
and technology’s value chains. This is why waste and inefficiency
naturally creeps into value chains, because NO ONE EVER SEES THE BIG
PICTURE.
Although
we would all like to think that we, as customers, are always consulted
about changes in our products, services and technology’s value chains, we
rarely, if ever, bring our customers into the loop. Because of this fact,
frequently, inappropriate changes are made every day in our products,
services and technologies' value chains (new storage area, new shelving,
new personnel, new policy and procedure, new maintenance schedule, new
disposal method, new contract, etc.) that if we had been brought into the
loop we would have seen the flawed thinking in the proposed change and
would have taken corrective action to prevent this non-conforming change
from affecting our value chain.
Feature
Rich Products, Services and Technologies
Our
world is too feature rich, especially when it
relates to healthcare organizations’ products, services and technology
purchases. Pacemaker features alone exceed 100 available choices, while
only 10% to15% are really medically indicated; yet healthcare
organizations continue to purchase hundreds of unnecessary pacemaker
features that increase the price of a pacemaker by as much as 50%. The
reason for these value mismatches is that healthcare providers accept most
product, service and technology features as being absolutely necessary as
a functional requirement, when in most purchases the opposite is true.
Standardization Vs Customization
In
purchasing circles, it has been the conventional wisdom that to obtain the
lowest cost for a product, service or technology they must be standardized
(or one size fits all) to conform to the same specification
organization-wide, when in fact, this theorem is a myth! Empirical data
now makes it crystal clear that for a healthcare organization to truly
have the lowest cost products, services or technologies, a customized
solution is required to meet the unique functional requirements of all
customers.
By way
of example, most healthcare organizations have standardized on disposable
underpads to meet its primary functional requirement of protecting
linens, thus meeting 80% of the healthcare organization’s customer’s
needs, while other customers (20%) find the standardized underpad
to be a functional mismatch for their needs. This practice then creates
many outliers, such as, the pharmacy buying a higher quality underpad
off-contract for chemotherapy drug preparation, OB wasting the value of
the underpad by using it to line shelves. The Emergency Room utilizing
underpads as drawer liners, because no other product is available to meet
this secondary function. As this example demonstrates, it is a rare
occurrence, if ever, that one product, service or technology can satisfy
all of the functional requirements of all customers, without incurring
waste, inefficiency and higher cost than necessary in a product, service
or technology’s value chain. Once healthcare organizations understand and
internalize this reality, then they can embrace the concept of
customization with enthusiasm, thereby, increasing your probability of
success.
Customization by definition means, “to build according to individual
specifications,” which in most circumstances these specifications will
only meet the requirements of 80% of your customers. For the remaining
20% of our customers, the products, services and technologies they require
will need to have either higher or lower end specifications to fit their
exact requirements. Or it could even mean purchasing different products,
services and technologies for the use of many customers to have an exact
fit for their individual needs. Relating this new paradigm or system
thinking to our example of the disposable underpads, this would mean that
80% of our customers could and would standardize on one underpad for their
exact requirements, while the pharmacy would be permitted to purchased a
higher grade underpad for chemotherapy drug preparation. The OB
department and the Emergency Room would be provided with a lower cost
shelf and drawer liners to meet their precise functional requirements.
The
bottom line being, once the total costs are calculated for a standardized
Vs customized approach to purchasing of your products, services and
technologies, the customization strategy will reduce a healthcare
organizations' value chain waste and inefficiency by more than 10% to 15%.
TEAM-BASED PROJECT
MANAGEMENT™
Teaming Up to Save
Strategic Value Analysis™ is a
management system to investigate the total cost from acquisition to
disposition (or value chain) of the products, services and technologies
that you are purchasing in a scientific, systematic manner. From our
experience, Value Teams can best achieve this search for savings and
quality gains that you have been looking for, and which we call Team-Based
Project Management™ Model.
Teams
are now coming into there own right as a maturing force to be reckoned
with by modern management. “In a world that is becoming ever more
chaotic and dependent on brainpower, teams make more sense than
trailblazing superstars,” as John Byrne of Business Week Magazine,
sees it, “than lone rangers in getting the job done faster, better and
by people who understand the business better than one person does.”
This teaming
of America in the late 20th Century and now in the 21st
Century, becomes even more important as it relates to the evaluation and
purchase of products, services and technologies. No one person ever sees
the negative or positive affects of how a product, service or technology
is impacting its internal and external customers. Yet, billions of
dollars of products, services and technologies are purchased by
health-care organizations annually that are controlled by one person, many
times, with a narrow vision. A better management system to manage and
control the purchasing process -- from acquisition to disposition – is for
executive management to appoint a Value Team(s) for this purpose. In
doing so, these Value Teams involve all internal and external customers in
the buying decision and subject all purchases to rigorous value tests to
determine the most appropriate products, services or technology based on
functional requirements to meet customers wants and desires at the lowest
possible cost.
TBPM Enables Goal
Alignment
Value Teams
have unique characteristics, roles and organizational structure to enable
them to be effective in their sphere of influence. They must be in
alignment with a health care organization’s compensation policies, and its
culture and they will need to develop creative strategies to align
themselves with their organization’s goals and objectives. Our approach
to this challenge is the creation of Team-Based Project Management™
Model.
Team-Based Project
Management™ Model
There
are many different types of teams (parallel, process, time-based and
hybrid) functioning in the marketplace today, according to Steven Gross,
Principal, with William M. Mercer consultants. All of these teams are
formed for different purposes within a corporation.
¨
A parallel team is a part-time team
whose members have two jobs and two bosses. The first job they were hired
for and get paid for, reporting to a supervisor. The second is a
cross-functional team position, which they were appointed to, where they
report to a team leader. These teams are temporary in nature and are
established to solve specific problems that have arisen in their work
environment in a matter of weeks or months, such as a quality control
issues, lost sales, etc.
¨
A process team is a full-time team
that performs many functions across many boundaries to maximize
productivity and customer satisfaction, such as, an insurance claim
processing team, customer service team or a sales team. In some cases a
process team is a self-managed team given the authority to hire, fire,
promote, change and implement new policies and procedures in their team
environment.
¨
A time-based team
is a team that is
established with a specific purpose and time frame in mind to accomplish a
specific task, such as designing a new computer system, accounting system,
a new product line, or re-engineering a process or system. It can be
either a full-time or part-time team position depending on the time
requirements and urgency of the project. The emphasis is on speed to
gain competitive advantage.
¨
A hybrid team is a combination of the
characteristics of a parallel, process and time-based team.
A Team-Based Project Management ™ Team is a hybrid team having many of
the characteristics of a parallel, process and time-based team, but some
of its own unique attributes. The TBPM team is designed specifically for
use as the vehicle to plan, organize, support, control, investigate, study
and implement Value Analysis savings and quality improvement opportunities
in an healthcare organization.
Characteristics of Value Analysis Team-Based Project
Management™ Model
The following are a list of the
characteristics of a Value Analysis Team-Based Project Management™ Team (TBPM) that
differentiates it or in some cases shows similarity to a parallel, process
or time-based team:
¨
Value Analysis Team membership is cross-functional by design
¨ Value
Analysis Team positions are part-time, not full-time
¨ Value
Analysis
Team members have two reporting
responsibilities (direct and indirect reports)
¨ Value
Analysis
Teams are self-managing by its structure
¨ Value
Analysis
Team members are also project managers
¨ Value
Analysis
Decisions are made by consensus
¨
Value Analysis
Projects are process and time-based in
nature
Value
Analysis Team Membership
is Cross-Functional by Design
The 10 members of the cross-functional
Value Analysis
Team-based Project Management™ Team or Value Team(s) are selected from a
pool of company-wide employees, supervisors and managers to represent
their organization’s internal and external customer’s interest. By
design, collectively they are able to intelligently consider and agree to
the best solutions that are offered by and which Value Analysis Project Managers
(individual team members) have identified to reduce costs or improve the
quality on product, service, or technology purchases for their
organization.
Value
Analysis Team Positions are Part-Time – Not
Full Time
As with a
parallel team, Value Analysis Team membership is a part-time position requiring
about one to two hours a week (including two bi-weekly Value Team
meetings) to complete a value study within a 90-day time frame. The term
of membership is for 18 months. New value analysis team members will be appointed 45 days
prior to expiration of each member’s term, so that there is enough time to
orient and train the new members in the value methodology. Replacement
will be staggered so that current value studies can be completed prior to
current members leaving the team to insure continuity of team projects.
If a value analysis team member requests to be relieved of team duties or a leave of
absence during their term, this request must be submitted in writing and
approved by the Team Leader, Administrative Representative and the
Chairperson of the Hospital Value Analysis Steering Committee. All new
value analysis members
must be selected and approved by the value team membership. Value Analysis Team Leaders'
terms of office are for five years, unless they decide to renew the team
membership for another five years.
Value
Analysis Team Members Have Two Bosses (Direct
and Indirect)
Team members have dual reporting
relationships. The first is their front line supervisor or direct
report. The second is their Value Team - Team Leader or indirect report.
This reporting relationship can become conflicted at times, when the team
members direct report or full time boss places demands on the team members
that conflict or are at cross purposes with Value Team business. These
conflicts can be avoided by evaluating the team member’s performance
holistically; thus, if a team member fails the team, that performance is
reflected on the evaluations of his or her overall job performance. If
there is a conflict with team duties and job duties, management (Hospital
or System Value
Analysis Steering Committee or team administrative representative) must
resolve it for lower-level employees, higher-level employees must resolve
it themselves by following a defined procedure set out by the Value
Analysis Steering Committee.
Value
Analysis Teams Are Self-Managed by Its Structure
Products, services and technology
value studies, whether new or existing, must be carried out in an
expeditious manner or customers and stakeholders will become disillusioned
with the VA process. With this fact in mind, it is critical that each
Value Team has an administrative representative assigned to it in order
to:
¨ Guide the team through the political and
administrative mine fields that will be entered into with new and existing
value studies:
¨ Inform the team when its needs CEO approval
for any change that it is contemplating.
¨ Act as liaison between other standing
committees or teams that the Value Analysis Team should gain approval from on its
actions.
¨ Keep Executive Management Team and Value
Analysis Steering Committee fully informed on the activities of the Value
Team.
¨ Facilitate and problem solve, when the need
arises, on any value study or investigation with customers to move the
projects along to a successful conclusion.
¨ Become a champion of the VA process
throughout the organization, at the same time, actively looking for
opportunities to give the Value Team(s) positive exposure to the board of
directors, executive management team, department heads/managers, media and
the public at large.
By employing the administrative
strategy of having an administrative representative on every Value
Analysis Team,
the Value Team(s) becomes self-managing, more productive and somewhat
politically insulated.
Value
Analysis Team Members Are Project Managers Too!
Traditionally, teams consist of
team members who work collaboratively and are selected because of their
specific skills and knowledge, or are process owners that work together on
an assigned project. Historically project managers are assigned, from
conception to completion, to manage projects as sole practitioners. A
blending of a team and project management model is the foundation of the
Team-Based Project Management ™ Model (TBPM). Team members’ progress into
project managers as their Team Leader assigns them value studies, which
they are responsible for conceiving and defining, planning, implementing,
tracking and evaluating, while at the same time, they are also team
members responsible for adding value to projects by reviewing all project
managers’ reports and findings for reasonableness and completeness. They
are also responsible for giving final approval, prior to implementation,
of all value studies. The advantage of the Team-Based Project Management™
model over other team models is that the TBPM model is greatly enhanced by
combining the synergism of team member skills and knowledge with the
disciplined approach of value analysis, thereby, insuring accountability,
customer focus, and a scientific approach to lower cost alternatives and
quality improvements that get it right the first time.
Decisions are made by Consensus
One of the strengths of TBPM teams
are that they make decisions by consensus, which enables the best ideas of
project managers and team members to be filtered in so that ill-conceived
value solutions can be eliminated before they are proposed to a customer.
This decision-making or filtering process insures that the right product,
service or technology is recommended to customers with a high reliability
factor that the lower cost solution will work the first time.
Projects are Process and Time Based in
Nature
TBPM teams are in many respects a
process team, since they meet as much as twice a month and conduct value
studies on a part-time basis. They are also a time-based team in that
they are established with a specific purpose (management and control of
non-salary expenses) and have a time frame of 90-days to complete their
value analysis studies.
All of
these characteristics make the Team-Based Project Management™ Model
unique, yet similar to many of the teams that you have been members of in
your working career. The big difference is that the TBPM model is
specifically designed as a continuous process to manage and control
non-salary expenses in an organization. This sets the team apart from
other parallel, process or time-based teams that have other charges and
goals in forming and performing there given tasks and responsibilities.
STRATEGIC VALUE
ANALYSIS:
A Proven and
Scientific Approach To Supply Cost Management
By
employing the Strategic Value Analysis™ methodology for all non-salary
expenses you will have a proven scientific approach to evaluate your
non-salary expenses on a continuous basis, not by event.
Your
organization can begin to focus on the functions of your products,
services and technologies where 30% to 50% savings on a commodity group
are achievable. The alternative to applying this value strategy is to
continue to utilize your current product, services and technology
evaluation model, thereby, continuing to achieve the same meager results
you always have!
About the Author
THE
7 MOST DANGEROUS MYTHS ABOUT PRICE SAVINGS
