My previous article, Another
No-Cap No-No (part 2), uses satire to contrast two similar contracts, a
rental agreement for a vehicle and a rental agreement for supply cabinets. A Supply
Chain Manager or Materials Director is asked to approve a terribly structured contract;
rent a new vehicle for over 30% more than its
purchase price then give it back to the dealer at the end the five-year term. A $36,000 car became a $46,800 vehicle that will be returned to the dealer when the term has ended.
Maintenance contracts, taxes, and other fees are additional
costs. Banks and leasing companies offer
far better options.
 |
| Rent this $36,000 Dodge Charger for only $46,000 -Renter Responsible for Maintenance and Taxes -Must Return at the End of Contract -Renew at the End of Term for 3 Years Total Payout = Great Deal, just over $93,600 |
Then, Another
No-Cap No-No 2 turns sharply from the vehicle, in that case, a Dodge
Charger, to satirize that straight rental agreements for supply cabinets, “So you do have supply cabinets?”
It seems that this is one hard case
to crack, despite pointing to the huge expenses incurred even after “hard" negotiations. The longer the term or the more renewals
the deals tend to be worse for the buyer. Vendor supplied cabinet rentals just don’t seem to get the
same scrutiny as comparative equipment acquisitions despite how excruciatingly bad these
contracts tend to be for the buyers. In fairness, these rental programs appear to make life easy. There is no easy button to hit here. Presenting other options is viewed as risky, getting unwanted
questions. So, rentals remain a default play at a huge expense.
First, managers tend to focus
on Annual Percentage Rate, APR, instead of markup. Personally, I prefer to view term agreements
simply stated as markup. Markup does
tend to ring of wholesale and retail – the need to create profit. The term also refers to total cost. A low APR does not mean less cost. In contrast, markup shows the dollar amount
that will be paid in rental fees and applicable buy-out in comparison to the
purchase price. In this scenario, less
versus greater cost becomes more obvious. Second, the purchase price is a
markup. The rental imposes an additional
markup. So, to be clear, we are talking the markup on a markup.
Below is one line on a typical highly
discounted supply cabinet proposal. In
this case, there is no buy-out nor will ownership pass to the customer.
A vendor may offer to upgrade
current software and extend the contract at the current monthly fee. The markup actually grows.
Granted, the software adds some value to the operational
side and Net Asset Value. How much value
is arguable, but it’s really beside the point of rental cost. Any increase in value that the software adds can
exist despite the acquisition method. Going
back to the example of the car gives a perspective on such value. The Dodge Charger has a software – aided
eight speed transmission. Suppose that
dealer upgrades the software to potentially obtain better gas mileage and
deliver more torque but does not touch the transmission hardware at all. The price: keep the same rental fee for
another three years.
Switching back to an actual supply cabinet rental, that means the buyer will pay $52,800 over eight years for a cabinet that cost $25,000 . There are situations where the markup runs more than 200% over the sales price, $105,000 in this case for a $25,000 asset.
Switching back to an actual supply cabinet rental, that means the buyer will pay $52,800 over eight years for a cabinet that cost $25,000 . There are situations where the markup runs more than 200% over the sales price, $105,000 in this case for a $25,000 asset.
Oh the inculcated incorrigibility of this common vendor
business practices:
- Does that sound like a best practice?
- Should rental be the default position?
- Does extending the term for a software upgrade summarily justify continuing such rental agreements?
For the last points of a very costly deal, remember, the proposal is for only one
double cabinet. How many cabinets,
double or otherwise, are there is your hospital or IDN? Additionally, compare the markup of the
equipment below which reflects the same markup for supply cabinet rentals. The last system, Cost Cutting
Supply Management System, is meant to help significantly reduce
inventory cost.
Hardy AMC has partnered with CHG-Meridian to apply the
principles of Life-Cycle Asset Management and TCO analysis to extract clients
from this quagmire to a money saving position:
- Reduced total cost of ownership and current markup status
- Passive RFID, for inventory control
- Inventory in one place, with quantity, type, and Net Asset Value
- Leave a comment with your contact information or email alfordhardy@gmail.com
 Covering Your Assets by Exposing the Butt-Ugly Truth |
| http://assetmanagementhc.blogspot.com/2015/10/supply-cabinets-another-no-cap-no-no.html |
These automated supply cabinets (I assume that's what you are talking about here) are a huge waste of money. While the automated medication cabinets offer value and benefit, based on the testimony I have heard from supply chain directors, the supply cabinets are a bust. Compliance is low (the old garbage in - garbage out adage), they are very inefficient from a space/storage point of view, and they cost a fortune. I heard one Supply chain director at AHRMM illustrate how they removed 50 automated cabinets in their ED, replaced them with a simple kanban system, and the outcome was that nurses stopped hoarding supplies, space was gained, supply usage was accurately managed and they saved $250k a year i rental costs. Simple high-density storage solutions, utilizing kanban methodology with flexible storage options and configurations are the best answer for managing supplies.
ReplyDeleteIf you want a solution that captures charge capture and manages high-cost supplies, there are RFID systems that don't need cabinets (they turn the entire supply room into a cabinet) and that supply utilization information is captured at the point-of-care. For commodity supplies, automated cabinets are a complete waste of money.
Glenn, thanks. I am definitely a fan of kanban. For those who choose to remain with supply cabinets, reducing the fortune spent is key. Fiscal and physical asset management, one shouldn't exist without the other. How one buys is as important as what one buys, especially in the case of RFID.
DeleteExcellent points Al. I recommend RFID only for the high-value items where security and individual track & trace is important. What's nice is that kanban can be used without RFID, even as a manual solution to manage supply replenishment (although using a simple barcode scanning cloud-based software solution provides valuable supply usage data). Charge capture should always be at the point-of-use, not from an automated cabinet when items are removed.
ReplyDeleteWhat do you think about RFID Enabled Cabinets?
ReplyDeleteRFID Enabled Cabinets were a good idea when there were no other options. Since there are solutions now that can enable an entire room or area with Passive RFID capabilities, I find RFID cabinets no longer the best solution for managing high-value assets. The ability of solutions to integrate with the clinical software and document the item usage at the point-of-use provides a much more accurate method of charge capture, traceability, and inventory replenishment (for the high-value items) - especially as many of the device manufacturers have finally begun to tag their inventory so the hospital does not need to go through this process. Also, since most supply items are not high-value, the provider can focus on the best way to store and manage ALL of their supplies in an efficient method that utilizes space in the most efficient manner - rather than dividing the high-value items from the non-chargeable/traceable. These items can be replenished through a kanban system that is low-tech and inexpensive.
ReplyDeleteRFID Tags from the manufacturer or distributor... how many years behind with that are we in healthcare? Checkout Covering Your Assets by Exposing the Butt-Ugly Truth, http://www.amazon.com/Covering-Assets-Exposing-Butt-Ugly-Truth-ebook/dp/B007OM83GU/.
ReplyDeleteWhile automated supply cabinets may not be the best way to manage certain items, customers signed and continue to sign contracts under the term discussed in the article at very high cost. How do you think this happens?