Executive IDN Insights are emailed to you bi-weekly to provide executive supply chain leadership insights from two of the most trusted healthcare supply chain leaders. For decades they’ve led large supply chain organizations and now offer you their strategic thoughts on pressing issues you should be considering.
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Managing Expenses
Brent Johnson

Many years ago, I had a neighbor down the street that lived in a humble home and I knew that he had a modest income.   In talking to him, he said his family does well and is out of debt.  I asked him how he does it.  He said, “Being rich or self-reliant is not a factor of how much you make, rather it’s a matter of spending less than you make!”  I had other well-to-do neighbors that could have taken a lesson from him because they struggled: financially burdened with their large houses, large mortgages, expensive vacations, and many “toys”. 

That was very insightful to me.  Managing your expenses is very important. 

Many years later I became a supply chain manager in large companies.  The same principle applies.  Managing your expenses is very important and likely more critical - and controllable - than managing your revenue. 

I’m a passionate disciple of supply chain principles and their impact on any company big or small (or even a home).  You can own a single gas station on the corner or be part of a $10 Billion company and the same supply chain principles apply.  If fact, I spent 21 years in the electrical utility industry and every supply chain principle I learned there applied to healthcare.

On occasion, when people don’t understand supply chain management or the complexity of “best practices of supply chain management,” I often like to make it simple.  Below are what I consider the basics of SUPPLY CHAIN 101:

  1. Know where you spend your money.  Do spend analysis. What are the biggest categories? Do you spend the same amount of time buying a $5 pen set as a $1M tool?
  2. Understand total cost.  There are many factors that will affect your buying decision beyond price.  For example, what’s the impact of poor quality or poor service? 
  3. Organize yourselves – act as one.  Don’t let everyone buy as they want without being trained and knowing how to leverage the size and reputation of your company. 
  4. Know who makes supplier decisions.  Who makes purchasing decisions? Who decides what supplier to choose? Are they non-biased and free of conflict of interest? 
  5. Do a better job of negotiating. The difference  in price between the beginner, an untrained buyer/negotiator, and one that is highly skilled can often be 10-15%. 
  6. Take time to manage the biggest suppliers.  Who are your biggest suppliers?  Who manages them?  Do they help you identify your inefficiencies and lower your costs?   
  7. Simplify your processes.  Once you have decided what to buy and from whom, all other activities are “extra costs”.  The procure-to-pay process should be simple and efficient. 
  8. Look at your warehouse and distribution costs.  Again, you get no return on costs associated with moving and storing products.  Reduce, simplify, or eliminate these. 

Companies, large and small, that practice supply chain management experience 15-20% reduction in their costs.  It’s not rocket science, but it’s often a forgotten or even an underachieved area.  You can read supply chain text books, or hire expensive consultants, but in the end they will all address the above principles.  Understanding Supply Chain 101 is very important.