TCO - Innovative, Profit and Efficiency Oriented Tool for Evidence Based Laboratory Management. Citilab’s theoretical model and subsequent month-long, full flow production validation on 2 competing technological platforms

ОРГЗДРАВ: новости, мнения, обучение. 2015. № 2. С. 96-102.

Introduction and objective all over the world medical diagnostic laboratories face high indirect or hidden production-related costs that are not easily identifiable and attributable.

This is particularly relevant for laboratories with a workload of over 5.000 tubes a day, as the hidden costs of automation can be extremely high and more difficult to identify than with manual or semi-automated techniques. These costs mostly depend on the technology production platform, workflow and number of analysers used. The production concept of the core-laboratory is more important than the acquisition price of the individual reagents or other technology related components.

Yet, most decisions about which technology platform to deploy are still made mostly on the basis of reagent costs, final discounts, installation time and cost, while the major part of the operating costs, which directly depends on the chosen platform, is not usually taken into consideration to an appropriate extent. Furthermore, most of the time, the choice of technology is made by administrative staff based on results of tenders, where Direct technology cost per reported result is taken into consideration - but not the Total Cost of Ownership per reported results. This happens because most of the time objective, comprehensive and validated set of data to support such decisions does not exist. So managers make decisions based on non-comparable itemised price lists and then blame and sometime punish operations for production costs that run too high, without understanding that they are ultimately responsible and they have to live with this mistake until the end of the contract cycle.

As operators of the 2nd largest medical diagnostic laboratory chain in Russia, we have started collaborating with our main technology suppliers to determine and validate the Total Cost of Ownership (TCO) per reported result of our main diagnostics tests, in order to make evidence based management procurement decisions and to choose a production platform best suited for our workflows, needs and profitability goals. This effort started in February 2014 and has continued to this date. TCO is a concept widely used in industrial and technology intensive production companies worldwide and has become the most relevant and broadly validated indicator to engage with technology suppliers in KPI dependent procurement contracts.

The initial TCO project has lasted for 1 year, with preparation of production platforms, selection of tests, identification of team members, discussion on KPIs, reagent purchasing and validation process. We have identified and selected for this study the top 20 immunoassays in our automated core-lab that have been found to represent approximately 82 percent of our Immunoassays (IA) production volume, and the top 20 Clinical chemistry assays that represent 78 percent of our Biochemistry (BC) production volume. We decided not only to have a detailed theoretical costing model, but to integrate into the model the Complete central core-lab workflows, and then to go through a full real life volume validation, running all our lab volume for these evaluated parameters through each technology solution for one month and produce a real-time, real-life, full volume comparison.

This was made possible by the fact that we still had in place the full production platform from the previous supplier and in parallel the production platform from the new supplier. What also helped was the fact that our staff was trained and could operate efficiently on both platforms and we had sufficient inventory of reagents and consumables for both platforms. Our study was carried out in collaboration with the 2 suppliers, on standard existing analysers from both companies and we paid for all reagents and consumables. This was not a sponsored study.

The more than 3,5 million data points that we gathered during the validation period have been validated and accepted by our both technology suppliers as true validated reflection of our reality with their solutions.

Definitions

According to Oxford English Dictionary, 2015 “Total cost of ownership (an estimate of all the direct and indirect costs involved in acquiring and operating a product or system over its lifetime):

calculating the TCO for any given piece of technology is the most basic kind of cost assessment

MORE EXAMPLE SENTENCES

  • - Energy consumption is rapidly becoming a significant component of the TCO.
  • - The total cost of ownership (TCO) comprises much more than the obvious capital costs.

The TCO for an IT organization obviously includes more than just assessing the costs of storage hardware.”

Prof. Lisa M. Ellram from the University of Arizona Tempe on the other hand in her 1999 book “Total Cost of Ownership”, defines TCO as following:

“an innovative philosophy aimed at developing an understanding of the “true” cost of doing busi ness with a particular supplier for a particular good or service”

For a better understanding of TCO, comprehensive literature references as well as published articles review on the subject, we refer you to the working paper entitled “Total Cost of Ownership:

A differentiated approach” published in 2009 by Frederik Zacharassien and Jan Stentoft Arlbjorn from the University of Southern Denmark

For general understanding we will use the commonly accepted definition of TCO per reported results:

(TCO / RR)= (Cvd+Cvi+Cfd+cfi) / RR

Where:

RR = Reported Results - total number of reported results for the studied object

Cvd = Variable Direct costs - include such costs as reagents, consumables, direct power and water consumption, etc-

Cvi = Variable Indirect costs - include such costs as technology specific workflow components, ancillary consumables, indirect power and water consumption, etc-

Cfd = Fixed Direct costs - include such costs as Laboratory normal production staff, cost of technology like machines, maintenance, production specific informatics, real estate costs of used space etc-

Cfi = Fixed Indirect costs - Long term overhead staff due to wrongmodeling of staff costs at purchasing time, technology specific ancillary, additional middleware to complement or replace obsolete original middleware etc-

Methods

Nowadays, most global In Vitro-Diagnostics vendors involved in complex core-lab automation have simple “technological price per reported results” or what they consider as simple version of TCO models. They use or supply these models in calculations when making commercial proposals to clients. The major issue is that these models are very theoretical and do not take into account the hidden or indirect costs of production. Procurement approaches that compare reagents, reruns, QC, calibration and service only in static and often inaccurate models are far from being a correct representation of the real costs and can actually lead to wrong decisions.

Typically, the classical or retrospective approach suffers from the following:

  • - Mostly if not exclusively accounting based
  • - No one drives the process is actually close to the operations routine
  • - Only direct technology related costs can be correctly assessed or planned
  • - Remaining costs are based on assumptions

On the other hand, our approach is based on a cross-departmental, cross functional effort involving the following teams:

  • - Finance
  • - Medical
  • - Production
  • - Quality
  • - HR
  • - Internal Audit

For the purposes of this study, our Central laboratory in Moscow fully operated routine immunoassays and clinical chemistry assays while alternating between 2 platforms: one full month on equipment from Vendor 1 and second full month on equipment from Vendor 2 (Figure 7, Production Platforms).

This gave us the possibility to fully identify and attribute the direct and indirect costs (Figure 1) of each methodology used. It was indeed a large-scale operation that included monthly changes and communication of reference ranges as well as changes in workflow etc.

We were aware of the magnitude of the undertaking represented by this study and had no choice but to execute it. In effect, our new production platform was not generating the expected improved costs per reported results even after providing us with cheaper reagents costs, and we were witnessing increased total production costs.

This was the primary impetus for launching this study.

Results

The Total Costs of Ownership (TCO) for both

Vendor 1 and Vendor 2 were calculated using the following 4 step procedure (Fixed direct costs were stable and therefore not included):

Figure 3

STEP 1 - Starting point - Cost of reagents

STEP 2 - Cost of reagents plus variable direct costs

STEP 3 - Costs including variable indirect costs

STEP 4 - Total costs (including all fixed costs)

Overall absolute values of costs

The absolute values of the immunoassays’ costs were calculated as follows. Solution 2 total product cost was 17% higher than Solution 1. After adding variable direct costs, the cost of Solution 2 was found to be 56% lower than Solution 1. After adding variable indirect costs, the cost of Solution 2 was found 36% lower than Solution 1. Finally, after adding fixed indirect costs, the cost of Solution 2 was 33% lower than Solution 1 (figure 2).

The absolute values of the clinical chemistry costs were calculated as follows. With Solution 2 total product cost was 226% higher than Solution 1. After adding variable direct costs, the cost of Solution 2 was found to be 29% higher than Solution 1. After adding variable indirect costs, the cost of Solution 2 was found to be 27% lower than Solution 1. Finally, after adding fixed indirect costs, the cost of Solution 2 was 26% lower than Solution 1 (Figure 4).

Absolute values of costs per assay

The graphic charts of Figure 5 represent the absolute values of 4 of 20 selected immunoassays, namely TSH, HBSAG, PSA Tot, Ferritin, figure 5 indicates 4 of 20 selected clinical chemistry assays that is Glucose, Cholesterol, AST, Urea.

Conclusions and key messages

To conclude, our data suggests that this novel approach is more advantageous compared to the conventional procurement approach since it:

  • - Enabled us to understand the detailed real costs per reported results
  • - Allowed us to impact our costs where it matters and if necessary adapt or reverse past procurement decisions with the support of this new objective and more comprehensive data
  • - Facilitated the practice of “evidence based” management regarding technology and procurement decisions

For Citilab and its main technology suppliers, our TCO methodology and the studies that derive TCO data have become:

  • - A preliminary step to all complex procurement decisions
  • - The common systematically shared datasets to initiate discussions with suppliers
  • - An evidenced based cross-functional cross-departmental management tool
  • - An objective basis for reimbursement, budgets or pricing discussions as well as for new technology introduction
  • - An ideal mechanism to introduce objectively evidenced poison pills or exit clauses in long lasting, tender-driven, technology contracts
  • - An efficient tool to put focus on cost efficiency without losing focus on quality, complexity and time

The results published in this paper reflect our reality. They might give you a gross indication of how it would apply to your operation.

Nevertheless, you need to do your own TCO studies to figure out the best solution for your laboratory and its specific processes.

Additional benefits of the approach:

  • - TQM reference base and sanction mechanism for TCO derived KPI bonuses
  • - Enables “panoramic” as well as detailed view of all cost components
  • - Allows integration of financial “optionslike” clauses in long-term technology supply contracts, to make sure selected solution delivers on its promises
  • - Involves complex technology partners into joint constant cost monitoring optimization efforts through a collaborative approach
  • - Enables aggressive segment pricing strategy of desired assays
  • - Enables evidence-based process optimization and live control mechanism
  • - Permits operator to escape the “prison effect” of long term technology tenders

Disclosures:

  • - This study was initiated by Citilab and was not sponsored by any Vendor
  • - Validation was done on real Citilab paying patients
  • - Validation was done by Citilab full-time employees, no additional staff was hired for validation
  • - Reagents, calibrators, QC, consumables were purchased by Citilab
  • - All results were given to patients and clients of Citilab
  • - Both Vendors have validated our TCO model

Conclusion:

  • - For Citilab the solution with higher reagent costs ended up leading to significantly cheaper overall production costs.
  • - TCO methodology provided an objective basis for reimbursement, budgets or pricing discussions as well as for new technology introduction
  • - TCO proved to be an ideal mechanism to introduce objectively evidenced poison pills (exit clauses) in long lasting, tenderderived, technology contracts

Translated from Russian by Khlamov V.V.

Материалы данного сайта распространяются на условиях лицензии Creative Commons Attribution 4.0 International License («Атрибуция - Всемирная»)

ГЛАВНЫЙ РЕДАКТОР
ГЛАВНЫЙ РЕДАКТОР
Улумбекова Гузель Эрнстовна
Доктор медицинских наук, диплом MBA Гарвардского университета (Бостон, США), руководитель Высшей школы организации и управления здравоохранением (ВШОУЗ)

Журналы «ГЭОТАР-Медиа»