Capitalize on Total Cost of Ownership

total cost of ownership

How a Comprehensive Approach—a Total Cost of Ownership look—Can Be Helpful for Capital Acquisitions

In today’s environment, it’s vital to reimagine cost analysis in capital acquisition in terms of total cost of ownership. Supply chain managers need to consider the scope of capital project planning differently. Every project should be included in a capital-planning framework.

You might wonder, “Why do we need such a framework? Isn’t each instance unique?” In many cases it’s reasonable to assert that each situation is different, but there are predictable areas of opportunity and common pitfalls to navigate. Many cost drivers aren’t always easy to discover, but they can be more quickly identified and mitigated within a planning framework.

Supply chain managers who adopt a capital-planning framework ensure their project request has the best chance of approval. Each manager’s appeal for capital funds is probably competing with many other managers’ requests. A planning framework requires adequate documentation that illustrates the request’s value to the entire organization, not just to one department. It also requires that costs be correctly anticipated, minimizing the risk that there will be cost overruns and ultimately freeing up contingency funds for other capital requests.

Unfortunately, not all projects can wait for the planning cycle to run its course. Here are some best practices when managing emergency projects:

1. Flexible Evaluation Frameworks

The enlightened planner seeks to find commonalities across different categories of equipment and purchased assets. One of the most frequently used techniques to achieve this goal is total cost of ownership (TCO) analysis. TCO adds the cost of equipment to the cost of service, construction, retrofitting, installation, technical support, software upgrades and other relevant costs stemming from the purchase. Using TCO allows purchasers to compare different pieces of equipment according to a unified set of cost-related criteria.

A higher-level cost evaluation approach is total cost of technology acquisition (TCTA). This approach considers multiple purchasing and leasing options. TCTA is more flexible than TCO analysis because it forces a dig into the expected useful life of the asset, instead of the norm for useful life. The norm for useful life expectancy can come from a survey of providers, and equipment manufacturers can also aid in this determination. However, the expected useful life of the asset can be vastly different from the norm. For example, a piece of equipment can be maintained in service well beyond the norm. Equipment like radiation linear accelerators or urinalysis machines traditionally have longer-than-expected useful lives, especially if they are well maintained.

In other cases, equipment can fail to keep up with changing patient characteristics. The addition of a bariatric program creates the need to replace standard MRIs with large-bore types, for example. Therefore, capital planning should consider the usage condition of the equipment as specified, and consider where change could come from and how it would impact the equipment’s operation. This approach might find that TCTA is lowest under an operating lease or rental configuration.

2. Templates for Procedural Implementation

Another best practice in capital planning and acquisition is the utilization of templates for procedural implementation. Software packages are available to document, streamline and integrate all factors of implementation. Sometimes robust templates for urgent projects exist within these packages, as well as within the capital equipment departments of GPOs such as HealthTrust. These templates can help ensure that specialized, procedure-focused equipment is placed in a suitable environment. For example, beds, trash cans and other products that are used in an MRI room need to function properly and not come apart in a strong magnetic field.

3. Generalized Value Analysis Procedures

Value analysis is designed for situations where asymmetrical alternatives, or incomplete/imperfect substitutes, are being considered to solve a clinical, operational or financial problem. Project champions and organizational leaders are always needed to manage controversy. But certain situations can trigger the need for the value analysis process, including:

  • Ambiguous benefits in patient care, outcomes or satisfaction resulting from a technology, process or supplier change;
  • Outsourcing a core organizational function, such as food service or biomedical engineering; and
  • Innovative and new supply options that displace multiple current modalities, such as new diagnostic or therapeutic options that replace current care pathways.

Value analysis can be employed in the selection of supplier substitutes, where one supplier displaces another one entirely. Orthopedic or cardiac implants are a prime example. However, if clinical studies and medical opinion support the notion that supplier A can substitute for supplier B, value analysis is arguably unnecessary. Justification can be done based on proof statements, without the diversion associated with value analysis.

An organization’s GPO affiliation can be used to justify many decisions, including the need to replace suppliers. HealthTrust, for instance, relies on clinical advisory boards comprising hands-on, facility-level representatives with expertise in their respective specialties to help make such decisions. These representatives facilitate review of products, suppliers and emerging technologies, and provide subject matter expertise and direction to HealthTrust’s Custom Sourcing team. HealthTrust’s well-developed processes for value analysis can help hospitals reduce their costs and increase their speed of acquisition. A hospital that tries to go it alone, replicating a rigorous and comprehensive GPO assessment by itself, rarely has a positive return on investment.

Gunter Wessels, PhD

Gunter Wessels, PhD

Wessels is a partner at Total Innovation Group Inc., a consulting firm specializing in healthcare. Clients of his firm include policy makers, payers, providers, group purchasing organizations and supplier companies, both in the United States and internationally.