Realizing Cost Savings

Payday. You have finally developed a clear, complete picture of where your main pools of supply chain cost savings are. You are ready to begin realizing these savings. The easy part is done. Now comes the hard part: making the savings real.

Why? Because most of the savings opportunities will require significant headcount reductions. Figure on 25 to 40 FTE's to achieve each $1 million in annual (variable) operating cost reduction. And, inventory reduction opportunities are likely to be mainly (up to 90%+) in physician preference items.

If you are including the savings potential you have discovered in your operating budgets, you may want to allow for a substantial realization period. Many of these costs are typically tough to realize except over a significant time frame. Manage expectations.

Headcount Reduction

Reducing headcount through attrition is probably the most common approach. Attrition, however, does not always occur in the departments you have targeted and it rarely occurs as quickly as you might like. Union rules can also interfere with targeted attrition and timing since a single job change can cascade into several personnel shifts.

Attrition is especially slow in recessionary periods and in periods of high unemployment. Larger organizations may be able to move people around in some cases to take advantage of attrition in non-targeted units.

Performance-based headcount reductions are also slow in general because of the need to build up documentation and to provide for necessary remedial opportunities.

Traditional layoffs are increasingly reserved as last resort options, often restricted to major workforce reductions.

Make sure that your savings realization commitments take into account the practical pace of headcount reductions in your particular organization.

Inventory Reduction

If your hospital is typical, your med/surg supplies capital is heavily concentrated in physician preference items and in slow and non-moving "just-in-case" items. These can easily account for 75%-90% of your book inventory. Unfortunately, these items tend to be very sticky and hard to remove.

Efforts to address this savings opportunity are becoming more common and productive. Associations such as HFMA have developed very specific programs for this purpose — see "Engaging Physicians for Supply Chain Savings: Physician Preference Items", Healthcare Financial Management Association webcast, Nov. 2, 2009 — for details, go to:  http://www.hfma.org/events/webcasts/.

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Managing Expectations

Under-promise and over-deliver. How many times have you heard this sound advice? How many times have you tried to follow it and failed?

One trick that seems to work is using any quick, smaller hits to build momentum and evidence of progress. This means going after some second- and third-tier savings opportunities simply because they can be realized with minimal time and effort.

Another approach is to break major opportunities into several staged efforts. It may be possible to create milestones, to add pilots, or to create multiple projects — each having some savings potential. If you are lucky, one or more of these will be quick hits. This helps buy time for implementing the more difficult and longer-term steps.

Some headcount reductions must also allow time for job consolidations and retraining. Such necessary preliminaries may in fact control the rate at which reductions may be realized.

Perhaps the "under-promise" dictum needs to be replaced by the somewhat more practical "promise only what you know you can deliver".