Virginia Mason - Total Supply Chain Cost System

The total-supply-chain-cost (TSCC) system is an activity-based pricing model that aims to capture the total landed costs involved in the just-in-time / low unit of measurement system, or the true cost to get a product to a patient in Virginia Mason (VM). By capturing the total landed costs involved, VM and O&M are able to better identify cost drivers that were previously hidden under the old costing models. By finding these hidden cost drivers VM and O&M are able to identify errors and inefficiencies, and as a result, streamline the JIT system. The TSSC system also incentivises efficiency by rewarding both VM and O&M to cut costs and reduce errors.

The TSSC model rewards VM for choosing effective and less error prone suppliers based on a 23 parameter efficiency weighting, if VM choose more efficient suppliers then the model rewards them with a discount. With better suppliers O&M will also benefit by cutting costs on holding inventory and reduce the chance of backorders. These efficiency based rewards work to streamline the JIT delivery services by eliminating costly errors, which hamper the delivery process and waste time.

The previous costing system, named the cost plus method, worked by adding a fee on top of the cost of the product. Under this method it was much more difficult to uncover the finer details of the product cost. Under the TSCC model VM were able to identify hidden costs in the supply chain. One such cost driver that was identified was the high cost of keeping many different SKU’s on hand. With less SKU’s O&M will save on inventory costs as well help streamline the JIT service by lowering the amount of order discrepancies that are possible, thus increasing the accuracy of the orders.

The concept of gain sharing is also incorporated into the TSCC model, where both VM and O&M share profits as well as the burdens of losses. Gain sharing means that it is in the best interest of VM and O&M to keep costs low and profits high, while also reducing the potential for an adversarial relationship which is very difficult to repair. Both companies are able to keep costs low by reducing costly errors (rush orders and delivery discrepancies) and constantly searching for new and more efficient suppliers to lower transport costs and add more accuracy to orders. All of these cost saving measures thus indirectly improve the JIT delivery service.

Define JIT

• JIT is delivery based on exactly what VM needs for the day
• Delivered daily
• Rush orders can be placed at an extra cost

How does TSCC negate some of the disadvantages of JIT?

• Can identify that are costing VM and O&M a large amount that was not recognised before
• Less errors
• Faster more accurate delivery

Examples of TSCC negating disadvantages of JIT

• TSCC incentivizes efficiency by including a supplier factor based on 23 parameters to to assign VM an efficiency weighting to a supplier. If VM choose a more efficient supplier, then the model will reward them with a discount.
• Helps identify unnecessary costs associated with an inefficient supply chain, such as cab fees. Nurses were worried they may run out of a product so they rush order more, requiring O&M to put the product in a cab and rush it over.
• Cost and profit sharing meant that both VM and O&M keep costs low and profits high. O&M and VM decided to split he cost of reworking errors. Cost sharing also eliminates the potential for an adversarial relationship by sharing the economic burden of discrepancies.
• TSCC lowers the cost of by sharing some of the cost of storing the unit to VM, thus VM will be incentivized to keep the number of different SKU’s being ordered low. This will increase efficiency and lower the errors made due to lower SKU count.

• High cost of SKU holding was identified before, with TSCC now they are able to