Asset Management for Healthcare: supply chain

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.

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: