Value Analysis

VALUE ANALYSIS IN HEALTHCARE PURCHASING 
We have another article request from a client.  I promise I will get to my own scheduled series of articles someday, but I want to always give priority to customer inquiries.  This most recent one piqued my attention because I was caught making a mistake, about which I have constantly lectured my HCS staff.  I tell them they should, “Never speak to a client about products using industry jargon!  Explain yourself clearly!” 

And, as most of you know I spent the first 23 years of my career in health care purchasing for two different multi-billion dollar health care corporations (back when a billion dollars was serious money). And now my customers and staff are telling me that the things I say about purchasing (that I take for granted) sometimes come off as “jargon” to the rest of the world. 

So, here is my oops and apologies to all!  And this criticism really hit home just last week when another client asked me to expand on what I mean when I refer to the application of “Value Analysis” when making a purchasing decision.   … so, as my penance, here goes my answer to your request in an overview of the purchasing process  … 

CATEGORIZING THE PURCHASE DECISION 
My first advice to someone making a health care purchasing decision is that they should put that project into one of two categories.  The first category is CONSUMABLES, DISPOSABLES, EXPENSABLES AND SERVICES (a good place to start might be to consider unit prices below 250-500), and the second category is CAPITAL PURCHASING (products with a depreciable useful life). 

Next, the buyer must get comfortable with the idea that the process of purchasing items for one category is COMPLETELY DIFFERENT from the process of purchasing items for the other. 

And Dennis’ false assumption #1 is that everyone understood this basic premise. 

CONSUMABLES, DISPOSABLES, EXPENSABLES AND SERVICES 
Consumables, disposables, expensables and services are an easy category for purchasers.  It is just like shopping for yourself!    Everyone seems to be comfortable with this category and in fact my greatest criticism is that far too often the purchasing criteria for this category are used when purchasing capital equipment.  Using a “consumables” approach to “capital purchasing” can be a huge and costly mistake. 

AXIOM:  WHEN ALL ELSE IS EQUAL, PURCHASE CONSUMABLES, DISPOSABLES, EXPENSABLES AND SERVICES AT THE LOWEST DELIVERED COST OF ACQUISITION! 

CAPITAL PURCHASING 
When it comes to capital purchasing the buyer should be ready to do some serious analytical work, especially when the TOTAL purchase is for a significant amount of money. 

AXIOM:  WHEN ALL ELSE IS EQUAL, PURCHASE CAPITAL EQUIPMENT AT THE LOWEST COST OF OWNERSHIP! 

ESTABLISHING COST OF OWNERSHIP 
Dennis’ false assumption #2; everyone understands the “value analysis” process which determines “the lowest cost of ownership”. 

Let’s keep the example simple and generic.  Let’s say the buyer has been told to purchase 100 new beds for their facility.  The beds vary in price from 600 - 1600.  Which one has the lowest cost of ownership? 

It may come as a surprise to some, but the higher priced beds MIGHT have the lowest cost of ownership.  Let’s examine that possibility. 

DISCLAIMER:  This example is not meant to represent a “value analysis” checklist.  It is only an example of a few of the issues that might be considered when making a “value analysis” purchase.  A good bed analysis will probably have at least 50 or more “value consideration” columns to review. 

WHERE TO START? 
An error that the inexperienced buyer might make is to START the purchasing process using the specifications from a known product.  What the buyer should do is to look at what their facility is using now and try to determine what works and what doesn’t work for the staff … how much are the repair and maintenance costs? Have there been any injuries related to the product…to clients or employees?  What bed features are on the employee’s wish list?   Interview patients/residents, employees, your management team, the finance department, doctors and therapists regarding their needs for these beds.  Speak to anyone who will talk to you about their ideas for the new beds.  Be sure to discuss the “amortized” useful life and the “expected” useful life with management.   

And after gathering this information, determine what features you NEED and what feature you WANT and then write your own specs to submit to the manufacturers! 

AXIOM:  WRITE YOUR OWN SPECS.  USING SOMEONE ELSE’S SPEC GUARANTEES YOU WON’T GET THE BEST VALUE FOR YOUR COMPANY. 

QUALIFY YOUR VENDORS 
Make a list of all the POTENTIAL bed vendors and begin the process of qualifying (or disqualifying) them for your project.  How long have they been in business? Are they financially stable (very important in today’s economy)?  Are they a certified regulatory compliant manufacturer?  Are they actually the manufacturer or just a distributor? When negotiating, you want to be sure you are speaking to the “organ grinder” and not to the “monkey”. 
   
Make your selected list of vendors based on their qualifications and ONLY offer the chance to participate further to those vendors you have qualified.  You do not need to include EVERY vendor.  Once you have qualified a number of vendors for the project and shown them your specs to confirm that they are interested and capable, you only need enough vendors to make sure that the bid will be competitive. 

EVALUATE THE MANUFACTURER’S RESPONSES And just as your business needs change, so does the manufacturing environment.   An example of that would be that one of your qualified manufacturers may decide to go “off shore” for production.  That manufacturer’s decision could/should dramatically change your weighted points of evaluation for the analysis and potentially alter the final purchasing decision. 

A few, very large manufacturers have done very well with off shore production but most average size companies experience quality assurance challenges and you don’t want to be the guy caught in the middle of such a transition.  Those are the kinds of things you are probing for when interviewing manufacturers. 
   
MAKE FORWARD LOOKING DECISIONS 
When you purchase consumables, disposables, expensables and services, those products are purchased for IMMEDIATE CONSUMPTION and are USED UP promptly.   If you made an error, it is an easy one to correct and has very short-term financial impact. 

When you make a capital equipment purchase you will own that equipment for a long time.  The potential for significant financial impact due to a bad selection can be huge.  In the case of our example, most beds are warranted for 15 years or more.  Over the 15 years, those beds need TLC (parts, maintenance, repairs, touch-ups).  The prudent buyer takes the knowledge of that need into account. 

So, What if you purchased from a manufacturer who goes out of business? Or discontinues the product? Where will you get parts?  Will you throw those beds away?  What does that do to the expected useful life of your beds? 

So, What if you purchased from a manufacturer who has regulatory problems?  Are you going to throw those beds away? Risk Management will want you to do that? What does that do to the amortized value of the product?  Is your company going to take a huge write-off? 

So, what is your customer going to look like in 15 years?  And will the bed you are buying today service that population?  Are you going to replace the beds sooner if they don’t? 

So, What if the bed that you purchased saved 200 per unit at the time of purchase but that bed requires 15 minutes a day of extra attention by staff?  No big deal you say? 

15 minutes per day times 100 beds = 25 hours per day 
25 hours per day times 365 days per year = 9125 hours per year 
9125 hours per year times 15 years (useful life) = 136,875 hours over the life of the beds 
136,875 hours at ? per hour =   ? .   

If you use something conservative like 25 per hour the total is 3.5 million in wasted labor to save 20,000 in acquisition costs.  I sure am glad I am not the person that made that buying decision! 

AXIOM:  AT THE VERY LEAST, HOLD THE PRODUCT AND THE MANUFACTURER ACCOUNTABLE TO PERFORM “AS EXPECTED” FOR THE AMORTIZED LIFE OF THE PRODUCT.  MORE IS BETTER. 

SUMMARY 
I can only begin to “teach” about value analysis in 10 paragraphs, but let me conclude that “any effort” on the buyer’s part to make thoughtful capital purchasing decisions is better than “no effort at all”.  Is it intimidating to do this the first time?  Yes!  But the goal is not to make a “perfect decision”.  The goal is to make the “best decision possible” and document how you arrived at the decision  … and so that is what I mean by citing the term “value analysis” when we talk about purchasing capital equipment.   

Then, once you have made your decision, don’t be looking “over your shoulder” or second guessing yourself.  Make the informed decision and embrace it.  Execute your buying program in the most conscientious way.  You will have the opportunity and the documentation to go back and see how well you did in two or three years (unless it was a REALLY bad decision and someone else like “the boss” beats you to it… just kidding…). 
   
Purchasing decisions are often delegated by management to financial or operations people who do not have a great deal of purchasing experience.   We hope that this outline will help those people move forward with their purchasing project with a new found confidence.