Robert Yokl — Price increases don’t automatically mean costs go up too

I just read that Novation is predicting an inflation rate rise of 3.1 percent on healthcare products in the next six months, which incidentally is going to make supply chain professional’s jobs even more challenging than they already are today. 

This is why I have been preaching for years that purchase price is the smallest component (about 21 percent) of your total cost of ownership: If you want to truly beat the effects of inflation in any given year you will need to also focus your cost containment efforts on savings beyond price.  

 

For example, the actual cost of your needles and syringes isn’t just the price at the pump, but the total cost from acquisition to disposition (transportation, distribution, waste collection system and disposal) of these products. If your center of attention is just on the upfront cost on these commodities, you are missing an opportunity to shave as much as 79 percent from their total cost of ownership.

To put it another way, the more time you spend analyzing your total cost of ownership of any product, service or technology you are buying, the more sustainable savings you will wring out of their value streams.  I was just talking about this concept with a client of ours the other day. This client is buying thousands of dollars of disposable underpads a year, when he should be utilizing reusable underpads that can reduce his total cost of acquisition to disposition for this product by at least 60 percent. That’s how he can really beat the effects of rising inflation, not by beating up on his underpad vendor to obtain a better price.

One last thought … Novation also states that cotton has jumped 44.6 percent over the last 12 months, so just think about how many products you are buying (linens, dressings, uniforms, etc.) that have cotton in them. There is no way you are going to obtain a better price on any product made from cotton. However, you and I could think of 50 ways to reduce the total cost of acquisition of these same products, if we started to look at their total cost of ownership and not the relatively small cost of buying them.

Robert T. Yokl is Chief Value Strategist, Strategic Value Analysis® in Healthcare