Adopt a Cost, Quality, and Outcomes (CQO) Approach to Procurement
All PIM content was independently developed and reviewed to be vendor-, product-, and service provider-neutral.
A CQO (cost, quality, outcomes) approach to procurement considers not only purchase price but also quality and outcomes aspects of the product, integrating a holistic approach to health care supply chain purchasing. CQO incorporates a total cost of ownership (TCO) analysis, which is a formula that considers purchase price, operations and maintenance costs, inventory and other "carrying" costs, and disposal or end-of-life issues. It is a multidisciplinary perspective on analyzing return on investment (ROI) for products and supplies rather than an ROI analysis based on purchase price alone; this is also an important tool for thinking about sustainability considerations.
Project Talking Points
- Total cost of ownership (TCO) is a management accounting concept that analyzes the direct and indirect costs of a product.
- TCO works in tandem with cost, quality, outcomes (CQO) to support a more holistic approach to procurement, covering direct and indirect costs of a product in addition to considering quality or care issues and outcomes related to using that product.
- Total cost of ownership and the CQO approach look beyond purchase price to include the cost to use, operate, and dispose of a product in a sustainably responsible manner.
- Example of a CQO approach: a mercury–containing thermometer may cost less than $1.00, but using it in the hospital means incurring the costs of having a highly hazardous material on-hand, including training personnel for mercury spill response, mercury spill kits, disposal of mercury-containing waste, and the risks and costs of shutting down contaminated areas after a spill, and associated potential for dermal or inhalation exposures. Electronic thermometers are typically more expensive than mercury-containing thermometers (but generally perform well). However, using non-mercury-containing thermometers avoids the toxin issues associated with mercury as well as the potential cost of mercury spill clean-up and disposal.
- Hospitals can make better informed decisions when comparing products and associated costs (associated processes and workflows) alongside quality (of care) and outcomes, which could result in measureable costs savings.
- Applying TCO analysis and a CQO approach to all purchases may not be practical. However, certain product categories warrant a closer look at the true costs of their ownership.
- Products that use consumables, contain hazardous materials that represent an exposure hazard, require significant training or maintenance, are difficult to dispose, and have high energy or water use should all be approached from a Cost, Quality, and Outcomes perspective.
Triple Bottom Line Benefits
The benefits of a CQO approach to procurement are unique to each product or contracted service.
Cost benefits may include reduced operating and disposal costs, potentially resulting in improved margins for product use and more cost competitive services for patients without compromising service quality.
Environmental benefits may include more efficient use of energy, water, consumables and the generation of less waste – packaging and end-of-process. Adopting a total cost of ownership analysis as part of a CQO approach may result in purchasing products that are safer to handle and operate or that use less toxic materials. Low product operating costs can improve margins for product use and provide a more cost competitive service for patients while maintaining high quality standards.
Patient and employee safety (opportunity costs) are benefits that need to be included.
Health and safety benefits: Metrics are in development. If you have suggestions, please contact us or participate in the discussion below.
Quality and outcomes: Metrics are in development. If you have suggestions, please contact us or participate in the discussion below.
While not a specification specifically, it’s helpful to ask a vendor or distributor the questions listed in the "How-To" section below to ensure you understand the total costs of using a particular product or contracted service, including operational impacts, satisfaction measures, and all impacts on quality and outcomes.
If you have suggestions for purchasing considerations, or suggested sample contract language for any product or contracted service, please participate in the discussion below.
1. Understand the functional groups within the organization that should be involved (and their associated roles and responsibilities) in the QO/ value analysis decision making process. Adopting a CQO approach to procurement often involves input from several groups, beyond traditional purchasing decision making were first cost ruled. Groups may include but certainly not limited to:
- Procurement/purchasing – review purchase price and act as the liaison with supplier.
- Environmental, heallth and safety – evaluate environmental and safety training, benefits, challenges, and compromises associated with the product.
- Finance – conduct a financial analysis of the products life cycle costs procurement, use, and end-of-life. For example, a Net Present Value analysis could provide an average annual total cost of ownership over the product's lifetime.
- Quality officer – evaluate ease of use and quality of product.
- Clinicians – perspective and “buy in” to TCO/CQO can ensure more stewardship and contribution to analyses.
- Facility engineering - evaluate the building systems impacts on energy, water, maintenance and operations.
- Community – are they stakeholders in the process? Is there any impact to unique groups of stakeholders that you have not considered?
2. Understand the issues of CQO and TCO. AHRMM’s CQO AHRMM’s Resource Center is a great resource that is growing. The Sustainability Roadmap Topics section includes a section on “rethinking product costs”. Help contribute to this body of knowledge by adding your case studies to the knowledge base.
3. Retool your evaulation process. Include some of these considerations as part of a total cost of ownership analysis:
- What will the hospital pay for the product?
- Are there unique delivery, inventory or handling considerations?
- Are there unique training requirements and what does the vendor provide and for how long?
- What are the cost of resources (energy, water, consumables) to properly operate and maintain the product?
- Are there unique environmental impacts associated with the product?
- What is the cost of product support and service (including subscription services)?
- Is the product durable and what is it's expected life?
- How much waste is generated by the product and what type of waste is generated? (e.g., hazardous waste, regulated waste, recycling). What is the associated cost of disposal?
- Can the product be recycled, or reused? Is there a vendor take-back on the product or any of it's packaging?
- How are patient services and quality affected by the product?
- How are staff impacted by the use of this product, compared to the alternatives?
- How does this product rate against the alternatives to proposed products/processes? Are there alternatives?
ROI calculators, data tracking measures, examples of KPIs
Commercially available software can be used when applying the CQO approach, particularly to assist in the total cost of ownership financial analysis. However, many organizations use an Excel spreadsheet and the built-in financial functions to conduct the analysis.
Search the Internet on “total cost of ownership product-you-are-seeking” to find a sample calculator. Test, for example, “total cost of ownership monitors.” This TCO calculator for computer monitors – downloaded as a Microsoft office.com template – was available. Try carpet or just about any product to find the tool that’s right for you – they are out there.
Prestigious Children’s Critical Care Facility Achieves Significant Savings...and Cleaner Air, Mid-west U.S. Hospital. This is a case study that begins to describe a TCO/CQO approach using air filters as an example. "The facility has 30 air handler units -- they removed inefficient pre-filters, and optimized filter lifetime and change outs ultimately saving more than $79,000 per year."
If you have other case studies to share, please contact us.
Cost, quality and outcomes criteria should be included in the procurement of all products and services. Refer to the full list of supply chain PIMs.
Please add to the body of TCO body of knowledge. Participate in the discussion below to add resources and additional tools.
- Strategic Operations
- Optimize Operations
- Purchasing/Materials Management/Supply Chain
- Comment, and please add information, tools, or additional resources you think should be added to the PIM.
- Write a case study or a PIM to contribute to the Roadmap (links are to instructions).