The Central Question
Most people visiting this site, and particularly this page, are likely to have a fundamental question about their hospital's supply chain. From what we have heard in our hospital supply chain studies, the question will probably be something like:
- "How efficient is my supply chain?"
- "How can I reduce my supply chain costs?"
- "How much money are we wasting each year on supply chain inefficiencies?"
These are all pretty much the same central question and concern your supply chain efficiency.
Supply Chain Efficiency
Efficiency is inherently a comparative metric. It measures, for example, your current costs relative to best achievable costs. Efficiency measures wasted spending.
So how do you go about developing an efficiency metric?
Baseline Costs___Your costs at the start of a coordinated and sustained cost reduction effort are your baseline costs. This is your starting point, a reference metric that can be used to track your progress.
Target Costs___As you develop action proposals for your cost reduction effort, you will want to be able to estimate what your supply chain costs would like under each proposal. You will almost certainly implement those action proposals offering the greatest cost reduction (net of implementation costs). These are your target, or "best achievable", costs.
Current Costs___As you implement your best action proposals, you will want to know, probably monthly, your rate of progress on each one. This requires making a monthly supply chain cost update.
So, you really need to know three costs — baseline, current, and target — two of which are going to change as you implement action initiatives. Tracking current costs against baseline costs gives you a progress metric. And, as you learn of better practices, your "best achievable" cost target should routinely move upward as well.
Measuring Supply Chain Efficiency
As just noted, the answer requires three cost data points, two of which are (or should be) steadily decreasing.
Baseline supply chain costs can be estimated using standard activity costing techniques. If that is all you were after, you don't need anything like a model.
Current supply chain costs, because they normally need to be updated monthly as a minimum for progress tracking purposes, could also be done with an accounting approach. Over any extended period, however, this can get to be a real chore for a larger hospital. Automated costing mechanics (i.e., a model designed for this purpose) are virtually essential here.
You also need current tracking costs in order to identify any unintended adverse consequences of your action initiatives. Hardly anything you do today affects just your target. Our processes have become so highly and tightly linked that most significant actions have consequences outside of their target domain. Early warning of adverse consequences can therefore be extremely important.
Target supply chain costs, your estimate of best achievable costs, are where modeling is almost unavoidable. You may have to iterate through several dozen action ideas before settling upon a few to implement. Doing this with an Excel spreadsheet can take close to forever. Worse yet, you should really iterate within each action proposal to find out the best way to implement it. Simulation is often the only practical solution.
At this point, you should be able to see clearly why we believe that a simulation modeling approach is essential to improving supply chain efficiency.
In the sidebar at right, we have listed links to a number of explanation and commentary pages elaborating on our approach to supply chain costing.
