Benchmarking 102

Last month I wrote about the importance of benchmarking and described the three types most frequently encountered in healthcare supply chain – competitive benchmarking, punitive/or else benchmarking and operational benchmarking. At the end of the article, I promised to write about 10 specific benchmarks this month.

Shortly after our newsletter was published, I received inquiries concerning the development of key benchmarks as well as questions about how benchmarking could be successfully implemented. I will also address those questions this month.

Benchmarking began as a localized tool. A craftsman wanted to measure the results of specific effort, so he laid his work on his bench, made a mark at the point that he wanted to measure, did whatever he thought he needed to do to achieve his improvement goal, brought the altered work back to the bench, laid it down and made another mark to see how his efforts measured up to the starting point – the “bench mark.”

In that distant time, there was no Internet, no instant exchange of information, and no intense and ruthless competition. Today, benchmarks (aka “performance indicators”) are measured nationally, and are often used by leading-edge organizations to measure the overall performance of their operations, including the supply chain.

These are the “macro” benchmarks – global indicators of performance. Here are five that measure supply chain performance:

  1. Supply and Purchased Services Cost per CMI-adjusted Discharge: This is a global indicator. It indicates that portion of each discharge that is related to supplies and purchased services. The Case Mix Index adjustment makes the benchmark valid for comparison with other organizations. The calculation is made by dividing the total supply and purchased service (including drugs) costs by the number of Case Mix Index-adjusted discharges.
  2. Supply Cost per CMI-adjusted Discharge: This calculation is the same as above, except it factors out purchased services, becoming a pure supply cost relationship.
  3.  Supply Cost as a Percentage of Operating Revenue: This calculation will show the manner in which revenue is compromised by supply costs. For an organization operating at a 5% margin, $19 of every $20 are spent on operating expense. This calculation is made by dividing the total supply costs by operating revenue.
  4.  Supply Cost as a Percentage of Operating Expense: This calculation is similar to No. 3, except that it relates to operating expense. Whenever supply costs are reduced, the effect is immediate and one-for-one on expenses. Therefore, expense reduction is more important than revenue enhancement.
  5.  Supply Cost per Adjusted Patient Day: To calculate this, total supply costs (including pharmaceuticals) are divided by total adjusted patient days.

And a bonus:

  1. Supply and Purchased Services Expense as a Percentage of Operating Expense: This calculation includes all purchased services as well as supply costs.

These benchmarks can be easily calculated across all organizations and provide indicators that are both generic enough and applicable enough to be global indicators of the supply chain’s performance.

There are, however, a couple of caveats to be proffered here:

  • The “best” scores do not necessarily represent the best performers. They “imply” excellent performance, but as my colleague Joe Shiel wrote last month: “The devil is in the details.”
  • Benchmarks do not represent answers. They represent a comparison of two key activity elements. In reality, benchmarks produce questions, not answers—the most common one being, “What if…?”

Let me demonstrate by taking you from macro-level benchmarking to micro-level benchmarking. To do that, let us turn our attention to a function-specific component of operations: Laundry and linen expense.

A high-level benchmark for this function might be (No. 7 of our list of 10) Laundry and Linen Expense per CMI Adjusted Discharge: Components of this benchmark include all the elements related to laundry and linen, including laundry or laundry service expense, linen replacement expense and linen distribution expense.

Here is where we transition to micro benchmarks and the traditional concept of local application as it pertains to operational benchmarking.

The process associated with operational benchmarking is simple:

  • Measure (establish the concept of the benchmark and make the initial measurement)
  • Understand its components (this may lead to “sub-benchmarks” – measurement of components within the more global benchmark)
  • Develop a plan of attack to impact the benchmark
  • Implement the plan
  • Measure the results
  • Review and discuss

Laundry and linen costs have several components:

  • Processing (laundry) costs (calculated on a per pound basis)
  • Linen replacement costs (calculated as the total pounds processed divided by the total linen purchased to be added to the system)
  • Utilization (pounds of linen processed)
  • Labor costs (FTE expense per pound processed)

Each component can become a micro benchmark, because each has an effect on the higher-level benchmark. Here are the micro benchmarks:

  1. Laundry Expense per Pound Processed
  2. Linen Replacement Costs per Pound Processed
  3. Pounds of Linen Processed per CMI Adjusted Discharge
  4. Labor Cost per CMI Adjusted Discharge (OK, so I lied, I am covering 11 benchmarks)

Initiatives taken against any of the micro-benchmarks roll up to the more global one:

  • A new laundry contract could lower costs per pound processed
  • A new contract with the textile vendor could lower acquisition costs
  • A new bed making policy could lower the pounds of linen processed
  • The implementation of an automated distribution system could lower FTE requirements

Not only do the micro benchmarks roll up to the higher one, but, by measuring the impact of individual initiatives, an evidence-based audit trail is created that can be used to explain, support and defend outcomes to senior leadership.

As stated in last month’s newsletter, we at Optimé Supply Chain understand the value and support the practice of collaborative operational benchmarking. To that end, we are looking for organizations that want to collaborate to develop and share key operational benchmarks. If you are interested in participating in the development of a benchmarking tool, contact me at:

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