Supply cost reduction

Six Sigma – iSixSigma Forums Old Forums Healthcare Supply cost reduction

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    I’m starting a project addressing office supply costs.  I’ve been trained that money is not a defect.  I’m having trouble defining the defect for this project.  Can it be “a department that has a cost higher than the average?”  And then you reduce the number of departments that are higher?  I’ve got 12 departments and 7 are above the mean.  There’s a lot of variation.
    Help. I think I’m on the wrong track



                  Office Supply cost: We did a project some what like this at our distribution center, we looked at the inventory levels of our general supply, we took the historical inventory levels, collected data on daily / weekly use and calculated what our safety stock level was, what we found was that we were had 22 weeks of inventory and only needed to carry one week, what we found out that happened was that our original vender had a 20 week lead time, we changed venders, however no one ever changed the inventory level, this saved us over $90, 000.00 in inventory carrying cost.
    We calculated our safety stock as 3 stdev above the mean. So if we averaged using 1,000 cartons per week with a stdev of 50, our stock level was now 1,150. Before we had 22,000 cartons in stock.
    One other thing we are currently doing is applying 5s to our office, and what is amazing when we went through the supply room, our purchasing clerk found a whol cabinet full of staples, her comment was “I have ordered thousands of these over the past several months” we are now having everyone to bring all extra supplies to a central location, we are going to inventory and store, now the clerk before she orders any thing will check the office supply database to see if we have it in stock.



    Thank you for the info.  You’ve given me some great ideas.  Could you define exactly what the defect was and the opportunity.  Was it any item over the safety stock level?  Sounds like if that’s the case you had a starting DPMO of 1,000,000.


    Barry Cook

    Hi Kathy,
    i am currently undertaking a project around supplier invoice mismatch, and supplier consolidation.
    to my amzement i found that choice of supplier and terms of trading etc, was made at departmental level, so for my project i had 2 big Y’s, the first being around mismatched invoices, the second around consolidation and reduction of suppliers, please see below the supplier element taken from the problem statement on my charter :
    The average non oracle spend is approx £XM ($XM) per month. this is undertaken with limited supplier controls and processes. This dilutes purchasing power, exposes us to non authorised suppliers terms and conditions. Invoices have limited, outdated (manual) or no audit trail, no formal process of supplier engagement or RFQ policy, and no automated & unified process for managing authority hierarchy.
    i hope this gives you another angle to consider
    kind regards
    Barry Cook


    Tseumogne Noumodje

    Kathy, as you mention, savings are not the defect, they are the consequence from reduce the gap between the current performance and the right performance your organization could have.
    So possible ways you could define the defect in your project are:
    –         The excess of Inventory of office supply items.
    –        The extra cost of office items acquire by your organization compare with the average cost at the market.
    –         The non optimal consumption of office supplies, etc
    Also you could combine in one general statement.
    During the definition stage, in addition of total year expenses your organization has due to office supply, you had to collect preliminary information that provides a preliminary guide about where the opportunity is.  If that was not the case, you need to start measure stage collecting basic information about quantities; storage time, consumption etc and preliminary analysis will permit your team:
    –         To make narrow the scope of the project and focus the effort where you identified the higher defect. (You could have more than one).
    –         Establish a baseline and set a % of improvement against optimal situation. (current Sigma and proposed new sigma).
    Hope this help,



    In order to create a comparable metric I would recommend looking into normalizing $ expenditures with the served base of people utilizing the supplied materials. You may need to break this down by supply category to get more meaningful measures of how each office environment compares to others in the efficiency of the order/re-order process, minimum kanban levels based on past usage history, etc.
    The other aspect to investigate is whether any changes have occurred over time which require re-evaluation of min. re-order/kanban levels.
    Hope this helps you look at the problem from a different perspective.



    I work in Finance and will offer this opinion.  As has been mentioned in other posts, increased costs result from defects in the process.  Part of your data collection plan will be establishing where to focus your efforts.
    Costs are driven by the items price and usage.  Barry gives you some very good strategies on tackling pricing problems…vendor consolidation and mismatched invoices and I would add compliance with purchasing through preferred vendors, deductions, terms and conditions as other potential key drivers of costs.  Use of non-preferred vendors, improper deductions outside T&C, duplicate payment of invoices could be considered defects here.
    Harold and Cyrus both give sound advice in identifying how to focus your improvement efforts.  The Pareto principle may help you narrow the categories of supplies.  You will have to establish some type of usage patterns for key categories of supplies and establish some basis for comparison (Cyrus mentions the normalization versus employees) to determine if the usage is excessive.  As Harold mentions, metrics around consumption and excess inventories can be established and I would add returns to vendors and obsolete items (if appropriate).  Also, look for opportunities to standardize where possible to reduce both price and/or number of items on hand.
    From personal experience, if your organization is looking for faster impact, the pricing route is the simpler of the two, providing you haven’t signed long term contracts with every vendor. You are likely to meet with a high degree of resistance on the usage that will likely delay any improvements.  Both need to be looked at…I’d suggest the pricing and compliance with purchasing policies first while establishing the metrics and baseline for usage.
    I have worked several office/medical supply / cost reduction projects in Hospital and Business environments.  I’d be happy to share my experiences with you, if you’re interested, please leave me an email address and I’ll send you my contact info.
    …ps…I don’t agree with your comment that you’re on the wrong track.  Costs are needed to help you identify the cost drivers and major focus areas and this is where the defect(s) are located.  You’re developing the link between defects and costs (of failure).  The next phase of your project will be identifying those variables that are causing higher costs and determining which are most significant. 



    You’ve helped a lot.  Thank you.  As I said, I havee the number of departments and the cost per headcount in each one.  I also know how much of each item is ordered both in total and by department. 
    If the team decides to go after the higher cost items, how would I calculate the DPMO?
    If the team decides to focus on the departments with the highest cost per headcount, what’s the DPMO then? 
    Guess I need to see specifics.


    John G.

    I think you have a lean project.  The over use of office supplies typically stems from a famine mentality and efective supply chain management.  People tend to hoard stuff that they once ran out of because the company was on a budget kick and didn’t restock the item. 
    While descriptive statistics provide a good method for explaining the problem to the organizations.  The use of supplies can probably be managed best  and quickest by instituting 5s and then using simple kanban techniques to manage the supply inventory.  (Office supply manage is also an excellent area to consider for outsourcing particularly if you have a large dollar annual expenditure.
    If you want to create metrics for evaluating usage by department, then I would suggest you consider some form of ratio to normalize office activities to supply usage.  Consider the amount of transactions per department or copies per department as a denominator.
    Good Luck.


    Maria Madrigal

    Hello!  I didn’t read through all of the other responses to your question, but I was involved in a project recently to reduce waiting times for patients being seen in an Emergency Room.  Part of it is that we looked at the supplies in their medical supply closets.  A couple ideas I have for you:  one would be to actually calculate what percentage of the total expenses for the department are allocated for office supplies?  Is there a standard by which a budget is set upon?  Say, no more than 2% of all expenses go to office supplies.  Then choose the departments that are spending greater than 2% on office supplies.  Who’s to say that the “average” is where we want to be?  Check historical budgets to benchmark.
    The earlier messages about inventory amounts and 5S are also very good advice, too.  We “5’sed” the Emergency Department supply shelves and boy, what a difference!  We basically took off and returned all supplies that would not be used within a one-week time period (1 order was placed every week).  So, if your departments are ordering supplies once per month, you want to keep a month’s inventory and no more. 
    Lastly, I would also want to look at the office supply ordering processes for each department.  If they are ordering supplies haphazardly, without approvals or any type of process, it doesn’t come as a surprise that the costs are out of control. 
    Hope this helps!



    Im doing a research in cost reduction and improving patient care , could you please give me some recommendations and if possible your contact details .



    There are tons of web sites about quality improvement in
    healthcare. I recommend You might try the
    American Sociey of Quality website: Too, read
    “Crossing the Quality Chasm”, an excellent text on the topic
    you are researching.You may contact me at my email or through
    http://www.bryantsstatisticalconsulting.comGood luck

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