Objective:
To optimize the overall operating costs of the supply chain department relative to the expenditures on goods and services
Calculation:
| Supply chain operating costs | ||
| x 100% | ||
| Total value of all goods and services procured by supply chain |
Target:
Target will vary depending on the type and size of hospital
Background Details:
Rationale
This metric provides a high-level indicator to compare the efficiency of the supply chain department across like organizations and internally over time. Ontario hospitals are currently required to measure the cost of supply chain processes per expenditures for the Ministry of Health and Long-Term Care (MOHLTC) annually in their Ontario Hospital Reporting System (OHRS) submissions.
This metric is broad in scope, encompassing sourcing, contract management, purchasing, receiving and shipping, inventory control, central stores and internal and external distribution of supplies, thus giving an organization a complete look at the cost to bring supplies through the supply chain department to customers.
Benefits
Financial Stewardship
Increasing the productivity per dollar spent will generate savings that, among other options, could be
used to increase the supply chain department’s capacity to provide additional services to the hospital.
Process Efficiency
Transactional efficiencies can be created through the redesign and automation of supply chain processes by transitioning from manual to automated processes to eliminate or reduce paper handling, data entry and error rates in procurement, receiving and inventory management.
Employee Productivity/Satisfaction
Redirecting employee time towards more strategic value-add activities versus transactional processing will improve the overall productivity of the supply chain department while also improving employee
satisfaction through specialization of roles.
Underlying Leading Practices
Contract Centre of Excellence
Establishing a centre of excellence for contracting creates efficiencies in the sourcing and contract management aspects of the supply chain and value-add activities that increase the overall productivity and effectiveness of the supply chain department.
Logistics Process Automation
The use of electronic capabilities in the warehouse improves the efficiency of receiving, put-away and picking processes, and reduces overall receiving costs.
Purchasing Cards
The use of purchasing cards and other alternate methods for handling low dollar value purchases reduces the need for the supply chain department to process purchase orders and accounts payable to pay invoices.
“End to End” eSupply Chain
Using electronic commerce (EDI/XML) for sending information between the hospital and suppliers, such as purchase orders, ship notification, and invoices, improves the efficiency of both the hospital’s and suppliers’ processes.
Process Productivity Tools
Automated requisition, PO and invoicing processes lower labour requirements in purchasing, receiving and accounts payable to process orders.
Target Considerations
Establishment
The Working Group did not have much experience measuring this metric and recommends six to twelve
months of data collection and reporting before targets are established. Different targets could be set based on factors such as hospital type and size.
Impact of Other Metrics
Implementing leading practices, such as a contract centre of excellence that reduces spending on goods and services, may appear to reduce performance on this metric. For a more complete picture of overall supply chain performance, this metric should be viewed in conjunction with metrics 2.1 Average Cost to Issue a Purchase Order and 3.4 Average Lines per Purchase Order.
Related Metrics and Standards
| Related Metrics: | Related Standards: |
|---|---|
| 1.1 Percentage of Active Items under Contract 2.1 Average Cost to Issue a Purchase Order 2.2 Inventory Turnover in One Month 3.1 Number of Purchase Orders in One Month 3.2 Percentage of Rush Purchase Orders 3.3 Number of Purchase Orders Placed per Full-Time Equivalent in One Month 3.4 Average Lines per Purchase Order 3.8 Percentage of Low Dollar Value Purchase Orders |
1.1 Purchasing Policies and Procedures 1.3 Boilerplate Contracts and Key Legal Principles 2.2 Inventory Policy 3.1 Contracts Database 3.2 Low Dollar Value Transactions Strategy |
Implementation:
Calculation Parameters
Calculation:
| Supply chain operating costs | ||
| x 100% | ||
| Total value of all goods and services procured by supply chain |
| Variable | Include | Exclude |
|---|---|---|
| Supply chain operating costs | Include all supply chain labour costs for one-month period associated with the following activities:
7113505 – Administration 7113510 – Purchasing 7113515 – Capital Asset Control 7113520 – Receiving & Shipping 7113530 – Stores 7113560 – Distribution Internal 7113570 – Distribution External |
Do not include supply chain labour costs associated with the following activities:
7113540 – Reprocessing 7113550 – Printing 7113555 – Contract Management 7113599 – Combined |
| Total value of all goods and services procured by supply chain | Include total expenses in the following categories:
|
Do not include expenses in the following categories:
|
Data Accessibility Rating
EASY - Data are available for computation
Possible Data Sources
Electronic
Financial Reporting Module:
Monthly financial reports provide data on staff expenses that can be used to calculate the Supply chain operating costs. Ontario hospitals submit this information to the Ontario MOHLTC annually in their OHRS submissions. Organizations may opt to calculate it with a query to the OHRS dataset, with the functional centre and secondary code definitions.
Accounts Payable Module:
The accounts payable system should be able to report on total expenditures, sorted by expense code to calculate the Total value of all goods and services procured by supply chain for the included expenditure categories, as listed above.
Manual
To calculate the Supply chain operating cost for the in-scope activities in the table above, organizations with employees with both in-scope and out-of-scope responsibilities will need to estimate the proportion of each employee’s job related to the in-scope activities and allocate labour and other costs associated with those activities.
Implementation Challenges
Challenges:
- Organizations must be sure to maintain a focus on quality of service while implementing costcutting initiatives. This metric should be considered in conjunction with effectiveness metrics such as 1.1 Percentage of Active Items under Contract and service-oriented metrics like 1.2 Purchasing Response Time and 4.2 Fill Rates to Customers to ensure a balanced perspective.
- Organizations implementing process improvements may experience short-term spikes in this metric due to implementation costs. The metric should restabilize or even improve in the long term. Hospitals should not be deterred from making these positive changes.
