One critical measurement I see that is lacking in supply chain circles is a return-on-investment calculation (figure 1) in assessing the potential or retrospective value of a value analysis, Lean Management or Six Sigma projects. Otherwise, how would you know if a project is advisable to undertake or profitable when completed? From my experience, return-on-investment is a key calculation in answering those questions as well as showing the project’s value and its impact on your bottom line, if any.
Beyond these obvious reasons why ROI should be important to you, it also shows your senior management the project’s worth, builds stakeholder support and prioritizes projects (highest to lowest). Chris Schweighardt, Certified Lean Six Sigma Black Belt, explains these benefits this way: “ROI can show business leaders dollar value of projects, turning the subjective into the objective,” thereby providing tangible evidence as to whether the project is valuable to pursue, or not. Besides, it could be a tie breaker on projects of marginal value.
On the flip side of the coin, ROIs can give you even greater insight into the impact of your completed projects, since it would show not just how much you saved but what the project’s financial value is to your healthcare organization. For instance, if you reduced your floor gloves cost by $120,000 moving from latex to vinyl gloves and expended time, money and resources of $6,000 to do so, your ROI on this project would be a whopping 95 percent. Conversely, if you saved $3,000 by changing your IV securement device manufacturer and it cost you $1,000 to do so, your ROI on this project would be only 67 percent.
The point of this discussion is that you should always be working on the projects with the highest ROIs first, before all others. This will contribute the optimum financial value to your hospital, system or IDN. That’s why we coach our clients to rank all of their projects by ROIs, which we have found is the easiest way to gain support, recognition and resources for their projects.
Just as important, ROIs will help you persuade the naysayers at your healthcare organization that your high financial value projects have enough merit to investigate, which might not be apparent to them without the numbers to back up your proposition. In any case, calculating ROIs to assess your projects’ value is one surefire way to sort your best projects from the just so-so projects enabling you to focus your limited resources on the right things – first!
Robert T. Yokl is president and chief value strategist of Strategic Value Analysis® In Healthcare, which is the acknowledged healthcare authority in value analysis and utilization management. Yokl has nearly 38 years of experience as a healthcare materials manager and supply chain consultant, and also is the co-creator of the new Utilizer® Dashboard that moves beyond price for even deeper and broader utilization savings. For more information, visit www.strategicva.com. For questions or comments, e-mail Yokl at firstname.lastname@example.org.
The formula for determining ROI
ROI = (Financial value – Project cost) X 100 Project cost