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AHRMM Keys

The AHRMM Keys for Supply Chain Excellence are Key Performance Indicators (KPIs) that set the standard for supply chain management in the health care field. AHRMM has developed the AHRMM Keys for Supply Chain Excellence – twelve essential Key Performance Indicators (KPIs) that every health care supply chain should be measuring; basic metrics for supply chain professionals in multiple settings (acute care hospitals/systems, ambulatory providers, physician organizations, integrated delivery systems, etc.) to evaluate the health of your supply chain and move you closer to operating from the intersection of Cost, Quality and Outcomes (CQO)

The AHRMM Keys will help you:

  • initiate continuous process improvement dialogue with key stakeholders
  • demonstrate supply chain performance
  • change the conversation with the C-suite to make supply chain more strategic partners
  • unlock health care supply chain excellence
  • operate from the intersection of CQO

These initial KPIs are industry-standard metrics that define the essentials of supply chain performance in operations and finance. Additional phases of this project will build and expand into new areas, including clinical quality, patient safety, supply chain and environmental sustainability. The AHRMM Keys were inspired by HFMA’s Map Keys for revenue cycle performance and were designed similarly.

Data used to calculate the AHRMM Keys will come from a variety of sources; the most common data source for each key has been included in the template. Please use the AHRMM-HFMA definition for supply expense and the categories of supply expense for all AHRMM Keys.

We’d like your input! Please suggest metrics for the next phase of the AHRMM Keys here.

 

  • Health Care Supply Chain Key Performance Indicator (KPI): Supply Accounts Payable (AP) Days

    Purpose:

    Measures how effectively the health care organization is managing its payables.

    Value:

    May be utilized to ensure discounts are optimized, as well as provide greater insight into payment trends and cash flow fluctuations. An increase in accounts payable (AP) days over time may indicate a worsening financial condition.

    Equation:

    To calculate AP days, add the beginning AP dollars and ending AP dollars and divide the sum by two (2) to calculate the AP average. Next, divide the total supplier purchases by the AP average to calculate the AP turns. Next, divide 365 days by the AP turns to calculate the AP days.

     
    Beginning AP dollars + ending AP dollars ÷ 2 = AP average
    Total supplier purchases ÷ AP average = AP turns
    365 days ÷ AP turns = AP days
     

    Example:

    The system controller for Sergeant’s Health would like to determine the AP days for the last year. The beginning AP balance was $700,000 and the ending balance was $774,000. Total purchases for the past twelve months were $6,500,000. The AP days are calculated as: Beginning AP dollars $700,000 + Ending AP dollars $774,000 = $1,474,000 ÷ 2 = $737,000 AP average Total supplier purchases $6,500,000 ÷ $737,000 = 8.8 AP turns 365 days ÷ 8.8 AP turns = 41 AP days

    Includes:

    • Supplies (see AHRMM/HFMA supply categories)

    Excludes:

    • Real estate
    • Physician payments
    • Capital
    • Utilities
    • Services

    Sources of Data for KPI Calculation:

    • Health care organization’s AP file

    Points of Clarification:

    • Measuring monthly trending over a 12-month period is recommended
    • An organization’s stance on making partial payments will influence this metric
  • Health Care Supply Chain Key Performance Indicator (KPI): Supply Expense as a Percentage of Case Mix Index (CMI) Adjusted Discharge

    Purpose:

    This KPI can be used to measure supply expense on a volume basis. Case mix index (CMI) adjusts to account for patient acuity.

    Value:

    Enables the organization to measure and trend supply expense that is adjusted for volume and patient acuity.

    Equation:

    To calculate the supply expense per adjusted discharge and case mix index (CMI) adjusted discharge, divide total supply expense by adjusted discharges or CMI adjusted discharges.

     
    Total supply expense
    ÷
    Adjusted discharges: Gross outpatient revenue/gross inpatient revenue × Inpatient discharges
    OR
    Total supply expense
    ÷
    CMI adjusted discharges: Adjusted discharges × Medicare inpatient CMI
     

    Example:

    Source data, a hospital that has:

    • Supply expense: $1,000,000
    • Gross inpatient revenue: $10,000,000
    • Gross outpatient revenue: $8,000,000
    • Inpatient discharges: 60,000
    • CMI: 2.0
     
    Numerator: $1,000,000
    ÷
    Denominator: $8,000,000 ÷ $10,000,000 = .80 x 60,000 = 48,000
    =
    Supply chain labor cost per adjusted discharge = $20.82
    OR
    Total Supply Expense
    ÷
    CMI adjusted discharges: Adjusted discharges × Medicare inpatient CMI
    Numerator: $1,000,000
    ÷
    Denominator: 48,000 × 2 = 96,000
    =
    Supply chain labor cost per CMI adjusted discharge = $10.42
     

    Includes:

    • Net inpatient revenue (see AHRMM/HFMA supply categories)
    • Outpatient revenue
    • Case mix index (CMI)
    • Net cost of all tangible items that are expensed
    • Freight
    • Standard distribution cost
    • Sales and use tax (minus rebates)

    Excludes:

    • Contractual allowances
    • Charity care
    • Bad debt
    • Labor-related expenses and services
    • Some tangible items that are frequently provided as part of service costs (e.g. toner that is part of a copier contract)
    • Purchased services

    Sources of Data for KPI Calculation:

    • Electronic health record (EHR)
    • Enterprise resource planning (ERP) system
    • Materials management information system (MMIS)

    Points of Clarification:

    • The adjusted equivalent discharge calculation takes into account net inpatient revenue (which is measured as gross patient service revenue minus contractual allowances, charity care and bad debt) and outpatient revenue. The result of this formula allows outpatient activity to be factored into the volume statistic.
    • CMI adjustment gives additional weight to the volume statistics for high acuity patients. CMI is a standardized formula that is driven by diagnostic related group (DRG) mix of inpatients.
    • CMI index is not always reflective of the supply utilization patterns for hospitals with a high volume of complex, technology heavy surgical or interventional cases. They would benefit by calculating supply cost per surgical case or procedure in addition to supply cost per adjusted equivalent discharge.

    References

  • Health Care Supply Chain Key Performance Indicator (KPI): Number of Expired/Obsolete/Wasted Product(s) as a Percentage of Total Purchases

    Purpose:

    The longer a health system holds onto inventory, the more likely it will be damaged or become outdated. This KPI reveals the magnitude of expired or obsolete products in the health system, which may require write-offs.

    Value:

    Measuring this KPI can help a health system manage its inventory of clinical products and supplies to deliver patient care. Factors that contribute to expired, obsolete or wasted stock include: physician turnover resulting in unused physician preference items (PPI), overstocking leading to expiration and change in clinical practice that eliminates the need for certain supplies.

    By reducing expired products, the health system can reduce unnecessary inventory and holding costs. It can also reduce risk because use of expired products can negatively impact the quality of care.

    Equation:

    To calculate the number of expired/obsolete/wasted product(s) as a percentage of total purchases, divide the total value of expired/wasted/obsolete products by the health care organization’s total purchases.

     
    Total value of expired/wasted/obsolete products ÷ Total purchases
    = Number of expired/obsolete/wasted product(s) as a percentage of total purchases
     
     

    Example:

    • Hospital’s total purchases: $25,843,000
    • Total value of expired/obsolete/wasted product(s): $118,000.
    $118,000 ÷ $25,843,000 = 0.46%

    Includes:

    • Cost of all expired medical (clinical) and pharmaceutical supplies
    • Any supply that reaches a patient with a surpassed expiration date
    • Wasted or obsolete clinical or pharmaceutical supplies

    Excludes:

    • Office supplies
    • Services

    Sources of Data for KPI Calculation:

    • Materials management information system (MMIS)
    • Accounting system
    • General ledger (GL) review

    Points of Clarification:

    This KPI is an operational indicator and may be a standalone metric track, trend and report value to clinical and operational leaders. This KPI can be tracked monthly, quarterly or annually and can also be tracked by department.

    References

    • Inventory Cloud by WASP: The key performance indicators that are crucial to maximizing profits and efficiency in warehouse operations.
  • Health Care Supply Chain Key Performance Indicator (KPI): Supply Expense as Percent of Net Patient Revenue

    Purpose:

    This KPI is a high-level metric that monitors the relationship between supply expense and net patient revenue.

    Value:

    Changes to this metric may indicate a shift in the relationship between supply costs and the associated net patient revenue. If the change is a trend (versus single point of variation), it should trigger an evaluation of the root cause and the development of an action plan. Causes can range from increased supply cost or increased supply utilization, to changes in the patient and/or payor mix that effect net revenue.

    Equation:

    To calculate supply expense as percent of net patient revenue, divide the cost of total supplies purchased in the period by the net patient revenue in the same period.

     
    Total supplies purchased ÷ Net patient revenue = Supply expense as a percent of net revenue
     

    Example:

    The period in this example is 12 months. The same formula applies with any reporting period if the net revenue and the total supplies purchased are reported from the same period.

    • Net patient revenue: $300,000,000.00
    • Total supplies purchased: $55,000,000.00
    55,000,000 ÷ 300,000,000 = 18.3% supply expense as a percent of net revenue

    Includes:

    • Net cost of all tangible items that are expensed
    • Freight
    • Standard distribution cost
    • Sales and use tax (minus rebates)

    Excludes:

    • Labor
    • Labor-related expenses and services
    • Some tangible items that are frequently provided as part of service costs (e.g. toner that is part of a print contract)
    • Purchased services

    Sources of Data for KPI Calculation:

    • Enterprise resource planning (ERP) system/Materials management information system (MMIS)

    Points of Clarification:

    • Changes to this metric may be caused by both supply cost and net revenue shifts. Therefore, a root cause analysis must be completed prior to developing action plans. For example, if revenue reporting is favorable, this KPI may cause the health system to underestimate the potential of supply expense savings opportunities. The opposite is also true, if revenue reporting is unfavorable, supply expense saving opportunities may be overestimated.
    • Should there be a fluctuation in supply expense as a percentage of net patient revenue, it may indicate a change in supply consumption or utilization behavior (e.g. adoption of new supplies, emerging or disrupting technologies, change in practice variation, pricing, etc.) with no corresponding increase in patient revenue.
    • If using this metric for benchmarking keep in mind it does not take into account regional and national differences in reimbursement rates.
  • Health Care Supply Chain Key Performance Indicator (KPI): Spend Under Management (SUM)

    Purpose:

    To provide leadership with a measure of the amount of total spend that is being effectively managed by the organization’s supply chain team.

    Value:

    As the organization’s spend under management increases, the ability to optimize costs and forecast expenses increases. Effectively managed spend gives the organization greater control over the risk of using inappropriate products/services. It prevents the risk of having contracts in place that are in legal conflict with each other. SUM also identifies “maverick” spend in the organization.

    Equation:

    To calculate SUM, divide spend actively sourced/managed by supply chain by total spend (minus exclusions), then multiple the result of this first equation by 100.

     
    Spend actively sourced/managed by supply chain ÷ Total spend × 100 = SUM percentage
     

    Example:

    • Total spend actively sourced/managed by supply chain: $600,000,000
    • Total organizational spend on materials and services: $1,000,000,000
    $600,000,000 ÷ $1,000,000,000 = 0.60 × 100 = 60%

    Includes:

    • Direct materials and services
    • Indirect materials and services
    • Purchased services

    Excludes:

    • Taxes
    • Salaries and bonuses
    • Charitable contributions
    • Dividends, securities, interest payments
    • Stock repurchases
    • Organizational memberships

    Sources of Data for KPI Calculation:

    Data usually comes from multiple sources. It is extremely important to ensure that all sources are included. The main sources of data are the organization’s accounts payable (AP) system, which may be a module within an enterprise resource planning (ERP) system, and a purchasing card (p-card) system. If payments are made to third parties other than through the AP or p-card systems (e.g. voucher system, direct pay system, or travel and expense system), they should also be included.

    If available, a health care organization may find the following systems useful in determining its overall, non-payroll, influenceable and managed spend because they include additional information about the organization’s financial transactions:

    • E-procurement systems: For many organizations, spend managed by an e-procurement system has gone through an approval process and/or through a catalog (whether hosted or punch-out) and is more likely to be managed spend than other methods of buying.
    • Contract management systems: These systems can provide information on which vendors and goods have a contract in place and are therefore likely to be influenceable or managed spend.
    • Vendor management systems: They contain additional information about the vendors to help determine which transactions are influenceable and which are not.

    Points of Clarification:

    • Total spend refers to the cost of direct and indirect materials and services purchased (e.g. disbursements) in the year. The intent is "sourceable" spend not just "sourced" spend by supply chain professionals. Expenditures on taxes, employee base salaries and bonuses, charitable contributions, organizational memberships, dividends, securities, interest payments and stock repurchases should be excluded from the spend amount.
    • Spend actively sourced/managed by procurement professionals refers to spend that the supply chain organization led and/or was involved in the process of supplier selection and pricing.
    • Spend under management is not equal to identified or realized savings.
    • Spend management of 100 percent is not necessarily attainable or desirable.

    Generally accepted accounting principles (GAAP) for health care providers calls for supplies and purchased services as separate expense lines on the income statement. While much of this expense may not be the spend sourced by procurement, it should be the goal of the professional to capture this spend and include it in the denominator of this KPI.

    References:

    Some content adapted from the following:

  • Health Care Supply Chain Key Performance Indicator (KPI): Inventory Turns

    Purpose:

    Measures the hospital or health system’s ability to manage its inventory of products to support the delivery of care.

    Value:

    Allows hospital executives and supply chain leaders to understand the organization’s ability to order, store and deliver its products required for the delivery of care.

    In general, a higher metric suggests that the hospital is effectively managing its inventory by ordering and delivering the right amount of products to support patient care. Furthermore, a higher metric indicates that the hospital is ordering and turning over supplies at an optimal level, reducing unnecessary inventory and holding costs and improving overall profitability of the organization.

    However, hospital executives and supply chain leaders must also understand that maximizing inventory turns is not the desired outcome. Higher inventory turns must be balanced with the need to have enough products on hand to support patient care.

    Equation:

    To calculate average inventory for the most recent annual time period, first add the beginning and ending inventory balance for this period, then divide that total by two.

     
    Beginning inventory balance + Ending inventory balance = X
    X ÷ 2 = Average inventory
     

    To calculate annual inventory turns, divide the total annual spend of supplies by the average inventory for the most recent annual time period.

     
    Total annual spend of supplies
    ÷
    Average inventory for the most recent annual time period
    =
    Annual inventory turns
     

    Example:

    • Total annual spend of supplies = $5,000,000
    • Beginning inventory balance = $600,000
    • Ending inventory balance = $400,000
    $600,000 + $400,000 = $1,000,000
    $1,000,000 ÷ 2 = $500,000 Average inventory
    $5,000,000 ÷ $500,000 = 10 Annual inventory turns

    Includes:

    • All supply purchases stored in inventory

    Excludes:

    • None

    Sources of Data for KPI Calculation:

    • Materials management information system (MMIS): Inventory data, supply purchases (annual time period)

    Points of Clarification:

    • The metric can be utilized to understand trends and performance over time to determine if the hospital or health system’s strategies to increase or decrease turnover are yielding results.
    • Typically, health care organizations calculate inventory turns by category or procedural areas to further target and identify areas of improvement. (e.g. the operating room or cardiac cath lab).
    • Reporting by area provides a more advanced calculation of the hospital or health system’s ability to manage its inventory of products.
    • The audience should recognize that a lower metric may be justified in some instances; for example, lower turnover may be needed to ensure that sufficient clinical supplies and products are available to support delivery of patient care.
    • Labor costs to support inventory management should be factored when determining value delivered through higher inventory turns metrics. For example, a hospital that is relying on additional staff to increase inventory turns may not be as efficient as one that is leveraging technology and automation to increase efficiency levels.
  • Health Care Supply Chain Key Performance Indicator (KPI): Supply Expense per Adjusted Discharge and Case Mix Index (CMI) Adjusted Discharge

    Purpose:

    This KPI can be used to measure supply expense on a volume basis. Case mix index (CMI) adjusts to account for patient acuity.

    Value:

    Enables the organization to measure and trend supply expense that is adjusted for volume and patient acuity.

    Equation:

    To calculate the supply expense per adjusted discharge and case mix index (CMI) adjusted discharge, divide total supply expense by adjusted discharges or CMI adjusted discharges.

     
    Total supply expense
    ÷
    Adjusted discharges: Gross outpatient revenue/gross inpatient revenue × Inpatient discharges
    OR
    Total supply expense
    ÷
    CMI adjusted discharges: Adjusted discharges × Medicare inpatient CMI
     

    Example:

    Source data, a hospital that has:

    • Supply expense: $1,000,000
    • Gross inpatient revenue: $10,000,000
    • Gross outpatient revenue: $8,000,000
    • Inpatient discharges: 60,000
    • CMI: 2.0
    Numerator: $1,000,000
    ÷
    Denominator: $8,000,000 ÷ $10,000,000 = .80 x 60,000 = 48,000
    =
    Supply chain labor cost per adjusted discharge = $20.82
     
    OR

    Total Supply Expense
    ÷
    CMI adjusted discharges: Adjusted discharges × Medicare inpatient CMI
    Numerator: $1,000,000
    ÷
    Denominator: 48,000 × 2 = 96,000
    =
    Supply chain labor cost per CMI adjusted discharge = $10.42

    Includes:

    • Net inpatient revenue (see AHRMM/HFMA supply categories)
    • Outpatient revenue
    • Case mix index (CMI)
    • Net cost of all tangible items that are expensed
    • Freight
    • Standard distribution cost
    • Sales and use tax (minus rebates)

    Excludes:

    • Contractual allowances
    • Charity care
    • Bad debt
    • Labor-related expenses and services
    • Some tangible items that are frequently provided as part of service costs (e.g. toner that is part of a copier contract)
    • Purchased services

    Sources of Data for KPI Calculation:

    • Electronic health record (EHR)
    • Enterprise resource planning (ERP) system
    • Materials management information system (MMIS)

    Points of Clarification:

    • The adjusted equivalent discharge calculation takes into account net inpatient revenue (which is measured as gross patient service revenue minus contractual allowances, charity care and bad debt) and outpatient revenue. The result of this formula allows outpatient activity to be factored into the volume statistic.
    • CMI adjustment gives additional weight to the volume statistics for high acuity patients. CMI is a standardized formula that is driven by diagnostic related group (DRG) mix of inpatients.
    • CMI index is not always reflective of the supply utilization patterns for hospitals with a high volume of complex, technology heavy surgical, or interventional cases. They would benefit by calculating supply cost per surgical case or procedure in addition to supply cost per adjusted equivalent discharge.

    References

  • Health Care Supply Chain Key Performance Indicator (KPI): Perfect Order

    Purpose:

    Perfect order is a composite metric that serves to measure the process by which a purchase order (PO) electronically - from order to payment – occurs without human intervention to ensure it is delivered to the correct location, on time, undamaged, at the correct price with the desired quantity, all on the first attempt.

    Value:

    Perfect order enables performance measurement to cut across functional silos, while also allowing a multi-level view of results; facilitates analysis of performance failures to provide insight into failure patterns and trends, which can then be targeted as part of continuous improvement efforts; and helps galvanize collaboration across the internal/external organizations collectively responsible for supply chain performance.

    Equation:

    To calculate the percentage of perfect orders, multiply the following sub-metrics: Percentage of delivered on-time orders (arrive at their final destination at the agreed upon time between the customer and the shipper) by the percentage of shipped complete orders (shipped with all lines and units) by the percentage of shipped damage free orders (shipped in good and usable condition), by the percentage of orders with correct documentation (for which the customer received an accurate invoice and other required documents).

     
    Percentage of delivered on-time orders × Percentage of shipped complete orders × Percentage of shipped damage free orders × Percentage of correct documentation orders
    = Percentage of perfect orders
     

    Example:

    It is difficult to achieve a very high perfect order value because the final formula is based on multiplying the sub-metrics together. So if the orders delivered in a time period averaged 95 percent on time, 95 percent complete, 95 percent damage free, and had 95 percent documentation (0.95 × 0.95 × 0.95 × 0.95), the final perfect order number for that period would be only 81 percent.

    And the lower the initial percentages in the formula, the lower the resulting perfect order percentage. So if only 80 percent of shipments were on time and 80 percent were shipped complete, even if the health care organization was perfect in the other areas, the total perfect order value would only be 64 percent!

    Includes:

    • Delivered on-time orders
    • Shipped complete orders
    • Shipped damage free orders
    • Correct documentation orders

    Excludes:

    See Points of Clarification below.

    Sources of Data for KPI Calculation:

    • Materials management information system (MMIS)

    Points of Clarification:

    Organizations that measure perfect order typically include additional metrics to build up a comprehensive picture of cross-functional performance. In some cases these extra metrics are added to the above formula, but in others they may make up a further level of detail, below the on-time, in-full, and correct invoice metrics. In making the decision to include additional metrics, it is important to remember that the more metrics used to make up the perfect order result, the harder it will be to achieve a high perfect order percentage. Taking a simple yet consistent approach is recommended.

  • Health Care Supply Chain Key Performance Indicator (KPI): Total Suppliers Per $1M Non-Labor Spend

    Purpose:

    Measures the hospital or health system’s effectiveness in managing its total supplier base.

    Value:

    Allows both hospital executives and supply chain leaders to understand their organization’s ability to reduce fragmentation of its supplier base. A lower metric will typically indicate the organization’s ability to consolidate its supplier base, leading to more effective control of quality, and cost of products and services.

    For example, a health system may be utilizing multiple suppliers to deliver the exact same products and services with varying levels of quality and cost. If the health system can standardize to fewer suppliers, it can not only control the quality of products and services, but also leverage spend to negotiate more competitive agreements.

    Equation:

    To calculate total suppliers per $1M non-labor spend, first divide the total annual non-labor spend by $1M. Next, divide the total number of suppliers by the result of the first equation.

     
    Total annual non-labor spend ÷ $1M = X
    Total suppliers ÷ X = Total suppliers per $1M non-labor spend
     

    Example:

    A health system has $500M in total annual non-labor spend and utilizes 5,000 suppliers.

    $500M ÷ $1M = $500
    5,000 ÷ $500 = 10 suppliers per $1M non-labor spend

    Includes:

    • Total suppliers utilized by the organization (derived from annual AP data)
    • Total annual non-labor spend of the organization (derived from annual AP data)
    • Non-labor expense represents all non-personnel expenses with the exception of bad debt, interest, depreciation and taxes

    Excludes:

    • Expense reimbursements to individuals or contractors

    Sources of Data for KPI Calculation:

    • Enterprise resource planning (ERP) system / Materials management information system (MMIS)
    • Annual accounts payable (AP) data (1-year)
      • Ensure the same time period is used for supplier counts and spend

    Points of Clarification:

    • While differences may exist in each organization’s annual operational and capital expenses, the metric will normalize the differences between organizations.
    • If possible, organizations should clean and standardize supplier names when deriving supplier counts. For example, there may be instances when the same supplier shows up multiple times with different identification numbers in the materials management information system (MMIS). Cleaning and standardizing supplier data will ensure that a more accurate count is derived.
    • Output should clearly indicate key components of the equation, including annual supplier count and total non-labor spend.
    • The audience should not seek a “target” when viewing this metric, as each organization may have differing needs. Instead, this metric should be used directionally to determine how the organization compares with its peers. Furthermore, this metric can be more effective when leaders track progress and improvements made over time.
    • The audience should also recognize that a higher metric may be justified in some instances; for example, multiple suppliers may be needed to fulfill demand or inject healthy competition to achieve the best value within a category.
    • Organizations should include both operational and capital expenses when deriving total annual non-labor spend. Supply chain expends significant resources managing suppliers that deliver capital goods and services.
  • Health Care Supply Chain Key Performance Indicator (KPI): Efficiency in Clinical Supply Spend

    Purpose:

    To ensure clinical supply purchases are aligned with consumption demand for direct patient care.

    Value:

    Ideally what a health care organization purchases and what it uses should be in near total alignment. If purchases substantially outpace the consumption, it is a clear indication of greater risk and almost certain waste (e.g. expiration, obsolescence, loss). The value generation that results from reducing wasted product is relevant to the organization’s supply chain operations, as well as to finance and clinical line leadership whose budgets are directly impacted. Showing this data by clinical service line, as well as by item category, will pinpoint the areas of opportunity for cross-functional operational improvements and/or process and policy/governance changes. This metric is particularly applicable to organizations with substantial procedural and surgical volumes, where the majority of supply-related spend is not perpetually managed.

    Equation:

    To calculate efficiency in clinical supply spend, subtract the dollar value of total consumption over a 12-month period from the dollar value of total purchases during that same period.

     
    $ Value of total purchases - $ Value of total consumption over a 12-month period
    = Efficiency in clinical supply spend
     

    Example:

    Ideally, this information should be tracked on a regular basis, such as monthly or quarterly, to monitor whether the overall trend is going in the right direction (e.g. purchases are aligned with consumption needs). It should also be broken down by service line or cost center to show which areas need improvement.

    For example, a cardiovascular department has purchased $5M worth of supplies in the last 12 months, while its consumption values amounted to $4M. This data shows that $1M worth of purchased supplies was not used in the course of clinical care during the same period. These excess items are likely to result in waste due to expiration or obsolescence.

    To examine this data more closely for the underlying cause(s) of this discrepancy, the organization should ask the following questions:

    1. Have all items consumed been correctly documented as such?
    2. Have the excess items been used at all during this period?
    3. Have they been purchased in greater than needed quantities?

    Answering each of these questions will enable the organization to focus on the appropriate interventions to avoid unnecessary spending and the resulting waste. For example, if the items have not been properly documented as used, the intervention should focus first and foremost on improving the accuracy of documented consumption and associated patient records. If excess purchased items have not been used in the same time period, or been purchased in greater than needed quantities, then the focus should be to pinpoint purchasing practices and policies that result in potential waste.

    Includes:

    • Consumable items only

    Excludes:

    • Rebates
    • Rebates (deducted from supply cost)
    • Manufacturer rebates
    • Distributor rebates
    • Non-disposable surgical instruments
    • Non-clinical items and associated costs (see below)
    • Linens, patient apparel, and hospital-acquired scrubs and uniforms
    • Dietary products
    • Patient and cafeteria food
    • Nutritional supplements
    • Dish and flatware, disposable and non-disposable
    • Housekeeping/cleaning supplies
    • Cleaning products, floor finishes
    • Paper goods, toilet tissue, paper towels etc.
    • Office type supplies including computer supplies
    • Computer software (unless capital)
    • Copy/printer paper
    • Inks and toners
    • Forms (internally or externally produced)
    • Storage costs for supplier warehoused forms
    • Freight associated with any supply item
    • Standard distribution fees, not including additional costs for stockless or other value-added services
    • Supply portion of outsourced contracts, including dietary
    • Environmental services
    • Supply portion of any equipment rental or lease
    • Sales tax
    • Dividends from purchasing groups

    Sources of Data for KPI Calculation:

    • Enterprise resource planning (ERP) system / Materials management information system (MMIS)
    • Clinical documentation system and/or point of use system(s)

    Points of Clarification:

    • Consumption dollars should be calculated based on actual items used for direct patient care
    • Purchase data should come from the organization’s MMIS/ERP system
    • Consumption data should come from the clinical documentation system and/or point of use system(s) as long as it can be attributed to direct patient care
  • Health Care Supply Chain Key Performance Indicator (KPI): Percent of Purchase Order (PO) Lines with Expedited Shipping Costs

    Purpose:

    Monitor use and identify the source of expedited shipping orders.

    Value:

    Identify opportunities for improved inventory management and operational cost reduction, and avoid disruption in the buying process.

    Equation:

    To calculate the percent of PO lines with expedited shipping costs, first query your Enterprise Resource Planning (ERP) or Materials Management Information System (MMIS) to determine the total number of PO lines issued and the number of PO lines with expedited shipping for the time period being measured. Next, divide the total PO lines by the number of PO lines with expedited items.

     
    Total PO lines ÷ Number of PO lines with expedited items
    = Percentage of POs with expedited shipping costs
     

    Example:

    According to Healthy Hospital’s ERP system, they issued a total of 500 PO lines during the month of January. The system also indicated 10 POs had one line item that was expedited and incurred expedited shipping charges. The calculation would be:

    • 500 Total PO lines
    • 10 Expedited shipping PO lines
    • 10 ÷ 500 = 2% of PO lines had expedited shipping costs

    Includes:

    • POs for tangible goods
    • Expedited shipping costs

    Excludes:

    • Capital equipment
    • Expedited shipping costs

    Sources of Data for KPI Calculation:

    • Enterprise resource planning (ERP) system/Materials management information system (MMIS)

    Points of Clarification:

    • In order to perform this calculation, a facility must include expedited shipping costs as a separate line item in the PO.
    • The basic analysis excludes capital equipment. However, a separate analysis of the percent of capital equipment purchase orders with expedited shipping may reveal additional savings opportunities.
  • Health Care Supply Chain Key Performance Indicator (KPI): Supply Chain FTEs Per $1M in Total Non-Labor Supply Spend

    Purpose:

    Assess how many full time equivalents (FTE) are needed to cover supply chain purchasing and contracting operations. FTE represents the number of working hours that one full-time employee completes during a fixed time period, such as one month or one year.

    Value:

    FTE converts workload hours into the number of people required to complete that work, which helps simplify scheduling. More importantly, it helps budget analysts and project managers estimate the cost of labor. Managers may also benefit from looking at FTE to determine if overtime costs are making it worthwhile to open up a new full-time or part-time position (Newman, par. 1).

    Additionally, this KPI is helpful in budgeting FTEs and assessing supply chain labor costs related to non-labor spend. This, coupled with other supply chain KPIs, can help supply chain executives understand the efficiency of their purchasing and contract operations in relation to other hospital supply chain groups. It can also help executives broaden their perspective on the impact and influence of supply chain; by pegging FTEs to total non-labor spend, it enables executives to understand that supply chain has a role beyond traditional areas.

    Equation:

    To calculate supply chain FTEs per $1M in total non-labor supply spend, first divide the total annual non-labor supply spend by $1M, then divide the total supply chain FTEs by the sum of the first equation.

     
    Total annual non-labor supply spend ÷ $1M = X
    Total supply chain FTEs ÷ X = Supply chain FTEs per $1M in total non-labor supply spend
     

    Example:

    Source data, a hospital that has:

    • Total annual non-labor supply spend: $250,000,000
    • Total supply chain FTEs: 273
    Numerator: $250,000,000 ÷ $1,000,000 = 250
    ÷
    Denominator: 273
    =
    Supply Chain FTE per $1M in non-labor supply spend = 0.92

    Includes:

    Hours worked by full-time and part-time employees

    Excludes:

    • Insurance
    • Bad debt
    • Depreciation

    Sources of Data for KPI Calculation:

    • Finance or Business Intelligence department
    • Enterprise resource planning (ERP) system
    • Human resource information system (HRIS)

    Points of Clarification:

    • Regarding calculating non-labor supply costs: Hospital finance departments have their total non-labor supply expense number readily available. These costs typically exclude insurance, bad debt and depreciation. Pharmaceuticals may or may not be included.
    • Holiday hours and other paid leave (sick leave, maternity/paternity leave, etc.) are already accounted for as part of the hours worked, so special calculations for these hours are required.
 
 

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