A strategy for supply cost savings.
SAVE 10% OF YOUR OPERATING BUDGET," said the officers of our hospital administration in 1989.
Stevens Memorial Hospital is a 212-bed, not-for-profit in Edmonds, Wash. As a full provider of laboratory services to the hospital and the surrounding community of physicians and clinics, we were faced with increasing operating costs and essentially stagnant test revenues.
We assumed the cost-containment policy and the flat revenues would stay with us for the foreseeable future. So how could we meet the 10% savings mandate without reducing staffing? We reduced supplies.
* Trimming costs. We identified areas where supply expenses could be trimmed and established three goals for doing so:
* Save 5% in price concessions from our suppliers.
* Save 5% in supply inventories and costs associated with ordering supplies.
* Involve our staff in the overall containment of operating expenses.
* Finding baseline. You can't get where you're going if you don't know where you've been. We needed a starting point or baseline from which to cut expenses. There was none, other than the monthly and annual expenditure runs that came from our accounting department between 15 and 20 days after the end of the month.
We knew that we were spending about $900,000 a year on supplies. We realized that our cost of supplies and staff was approximately $2.35 per 100 billable CAP workload units in January 1989, when the hospital administration's mandate arrived.
Furthermore, we anticipated an increase in workload because we were launching an aggressive marketing plan for outpatient testing. We did not want the expected rise in workload to be matched by an increase in supply or staff costs. Our challenges were sizable.
* Two steps. Our first move was to find a tracking mechanism to give us information on our supply management practices in real time, not 30 days later. Our second step was to establish management criteria and practices that resulted in more efficient acquisition of products and the use of them once they were in the lab. We also needed a new way for the technologists within each of our sections to order supplies.
* Materials management. Since our laboratory was responsible for its profit and loss, it was also responsible for issuing purchase orders (POs). Our laboratory remains separate from the hospital's materials management department. This independence gave our management team the opportunity to institute our own materials management principles, ones better suited to the operation of our laboratory. During this process we educated ourselves in the general principles of materials management and designed our own specific tools to effectively manage the supply side of our business.
* Error location. In reviewing the supply side of laboratory operations and learning general supply management principles, we quickly found errors and costs associated with:
* Additional and unused inventories of supplies on hand * Ordering products * The inventory and ordering mix of products * Incorrect prices paid
We also discovered extra costs buried in the following areas of supplies management:
* Unnecessary service and handling charges
* Emergency purchase orders
* POs that did not meet the vendor's minimum charges
* Laboratory personnel ordering products that were inconsistent with test patterns, were on back order, or had already been ordered by someone else
* Tracking tool. We quickly discovered that we needed a tracking tool to tell us exactly where we stood, at any moment, within our supply ordering and inventory process. What we needed was a computerized materials management system, but most systems available were too expensive (between $25,000 and $50,000) and were designed for the larger medical center's main stores department. Fortunately, we had the opportunity to act as an alpha-site evaluator for a software product--I'll call it System A--specifically designed for the management of supplies in the health care arena. System A's advantage to us was that it took into account the many ways of doing business in the clinical laboratory field. For example, the $2,500 system could handle standing orders, open orders, multiple-vendor ordering, and reagent-rental contracts.
System A seemed like it could help us successfully meet our cost reduction goals. It would:
* Inform us at any moment as to the status of our supply process
* Control and manage our vendors
* Provide immediate accountability for the departments, vendors, and products
* Create an electronic link to each of our vendors
We installed the system in December 1990. It immediately helped our operation by automating product ordering and accountability, and tracking product purchasing and supply maintenance. At the same time, we instituted an ordering procedure for each section supervisor. That was designed to make the supervisors aware of the impact of their ordering practices on the lab.
* Make me an offer. We implemented a strategy for negotiating with vendors for supplies in such a way that the number of POs was reduced by two-thirds and the prices we paid were the best possible. We also made it very clear to our vendors that they had to earn our business with competitive pricing and service or we would go elsewhere.
* The old way. The changes that we made in our laboratory are best illustrated by describing our supply ordering process as it was before the overhaul. Before 1989, supply ordering required several cumbersome steps. After a section supervisor wrote a product request on a piece of paper, the author would: * Find the index card on which was recorded the last order and price.
* Call the vendor to get the current price.
* Type the purchase order.
* Call the vendor again with the PO and read it off.
* Match the receiving invoice with the PO when the item came in.
* Code the invoice so that expenses accrued to the section responsible for the order.
* Key the invoice for the vendor and write a check. Accounts payable then issued an expense statement that the lab received 30 days later.
This old-fashioned supply workflow system required one person just to receive and put away the supplies, know the vendors and their pricing, interface with the vendors by telephone, and read the POs and the supply item details (catalog number, units, amounts, and pricing, for example).
* The new way. Our current laboratory supplies workflow is much more simple, organized, and accountable. Now we maintain a computer database of all vendors and supplies, with current pricing.
When we order supplies each month, we print an ordering log for each section. The log provides the section supervisor with an alphabetical list of all products he or she uses. Among the information printed out is the order date, minimum inventories, whether the item is on back order, the quantity last ordered, and any current inventory. There is also a space for requesting supplies.
The actual ordering of supplies (including transmitting purchase orders) now takes less than 2 hours per month. This is a job I do myself in my role as the laboratory operations director. One reason I do it is that it allows me to perform a final review of all supply orders.
By reading the information on the ordering logs returned to me by supervisors, I can see clearly any increases in supply usage. I can then go back to the supervisors for explanations.
Three answers are common:
* "We have had an increase in workload." The author and the section supervisors verify this assertion using test-ordering statistics. We also look to see if the increase is from inpatient or outpatient workloads and what that might mean in terms of changes in our patient market. As all laboratorians know, one popular magazine article on HDL can result in a flood of tests. * "We had an instrument or kit malfunction." Most of the time I can get credit from the manufacturer. In one case, a problem with a main instrument resulted in our lab being granted an extension on a maintenance contract and free reagents so the test could be run on a backup analyzer.
In another instance, tests were being run in duplicate. The technologist in question was avoiding time-wasting repeats by running everything in duplicate--much faster, but wasteful of supplies. Discovering the problem allowed us to review procedures with that employee and discuss the cost of duplicate work compared with the time involved in an occasional repeat.
* "We just didn't want to have to order it or put it away every month." This refrain is seldom heard anymore in our lab but may be common elsewhere. Hearing it has opened the way for communication with the staff on the financial operations of our laboratory.
Our staff has extensive training in science but very little in business. By using such everyday examples as home budgets, I have been able to make staff members aware of cash flow, inventory expense, cost of issuing purchase orders, and other financial considerations.
* Fostering involvement. The ordering log also gives our lab an important management tool. Department supervisors are now involved in the ordering process and can see the positive effects of lowering costs and increasing the productivity of supplies. The ordering log also reduces the on-hand inventory of items, eliminates duplicate orders and the reordering of back-ordered products, and increases our power both with vendors and our hospital administration. The computer system provides our managers with real-time accountability as to our expenditures by section. It used to require 30 days to generate a monthly expenditure report; the process now takes 2 minutes. The accountability aspect of our laboratory expenses has proved invaluable during our budgeting process and in the course of negotiations on pricing and terms.
* Bottom line. Our changes have resulted in a:
* Savings of 26% in our supply expenses over 3 years
* Reduction in our supply and staff expenses from $2.35 per 100 billable CAP workload units to $1.70 per 100 billable units over 3 years
* More efficient operation with less supply waste
* Improved relations with vendors and more competitive prices and terms
Another benefit: Members of our management team are now seen as heroes by the hospital administration.
To be cost-effective in the challenging environment in which we find ourselves requires combining the strength of well-designed computer software with aggressive personnel involvement. With our system in place and operating efficiently, I am confident that our contribution to our hospital's mission is significant.
At the close of fiscal '92, our lab was able to produce more billable tests while coming under our projected supply budget by $47,500. I anticipate that when fiscal '93 ends (as this issue of MLO is going to press), we will be at least $40,000 under budget on supplies.
Sherry Gibbons, M.B.A., MT(ASCP) is director of laboratory operations at Stevens Memorial Hospital, Edmonds, Wash.
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|Publication:||Medical Laboratory Observer|
|Date:||Jan 1, 1994|
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