Yokl: Prescription for Even Greater Cost Avoidance

It was recently pointed out to me by one of the readers of my weekly e-newsletter that if a supply chain professional focuses solely on price vs. total cost of acquisition to disposition (e.g. freight, maintenance, service, disposables, waste removal, etc.) that this is a prescription for even higher costs for their healthcare organizations. This seems like common sense, but how often do we actually calculate the total life cycle cost of the products, services and technologies we are buying?  Or, worse yet, ignore or miss the hidden cost in the contracts we are signing?

For example, the total life cycle cost of an I.V. Pump, with a five-year life, could be in the range of $25,000 to $60,000 when you calculate the initial capital expense, and then the ongoing disposable cost (sets, tubing, etc.), maintenance, software upgrades, energy cost and waste removal.  Obviously, the prescription for even greater cost avoidance is for you to scrutinize, at the time of purchase, all of these costs of ownership over the life of the pump. This will determine the best value for your healthcare organization, since as you can see the life cycle cost makes the initial price of an I.V. of $5,000, $10,000 or even as high as $25,000 look small by comparison.

To cite a personal example, I found a few months ago that the running cost of my firm’s leased color copier was $4,600 higher annually than it should have been for our volume and color mix because we didn’t understand the click charges that were initially written into our contract. This is an example of ignoring or missing the hidden cost in the contracts we are signing.  It can happen to anyone, but this oversight increased our life cycle cost even though my monthly lease charge was very competitive. This taught me a big lesson about focusing on price of the lease vs. the total cost of acquisition in all of my office equipment purchases!

Now that everything we are buying is more sophisticated, feature rich and high tech it is easy for us to miss or ignore the true cost of ownership of everything we are purchasing.  We need to start to calculate the life cycle cost of almost everything we buy and understand the implied, obscure and unintended consequences of the contract terms we are signing.   

By the way, it is easy to set up a simple spreadsheet in Excel to automatically perform the life cycle analysis for you.  All you will need to do is plug in a few numbers to get the answer to what you are looking for. If you would like me to e-mail you the life cycle formula, just drop me a note at bobpres@strategicva.com and I will promptly send it to you.

Robert T. Yokl

Chief Value Strategist

Strategic Value Analysis® in Healthcare