Capital Planning That Actually Works

Capital equipment can make a hospital grow or quietly drain millions through rushed buys, weak justification, and devices that end up parked in a hallway. We want fewer surprises, fewer spreadsheets, and a capital process that actually helps clinicians while protecting margins. So we sit down with Tom Derek from Open Markets to talk about the unglamorous but high-impact work of capital asset management and capital equipment planning in healthcare supply chain.

We get specific about why so many organizations still run capital like a year-by-year scramble and how to change that without waiting years for a “perfect” redesign. Tom explains the difference between a front door strategy (where every request enters the funding process) and a back-end asset replacement strategy (important, but never enough). We also unpack what standardization really looks like in practice, why formulary management matters especially during mergers and acquisitions, and how buy-in from clinical leaders and administrators determines whether any process sticks.

Then we tackle tools and governance: why your ERP is great for cutting POs but not built for early planning, research, or replacement forecasting. We walk through a practical cadence for asset replacement planning with clinical engineering, finance, and supply chain, plus a simple scoring mindset to test ROI, patient safety impact, network needs, and regulatory requirements. You’ll also hear real-world examples, including what Banner Health is doing and how regional aggregation can drive measurable savings.

If you care about smarter capital procurement, fewer wasted purchases, and better visibility across teams, hit play. Subscribe, share this with a colleague in finance or clinical engineering, and leave a review so more healthcare supply chain leaders can find the show.

Transcript

Welcome And The Hidden Problem

SPEAKER_00 0:03

Hello everyone. Welcome back to another episode of Taking the Supply Chain Pulse. I'm Megan with StainEng Company, and we're glad you're with us. In this episode, Fred sits down with longtime listener and first-time caller Tom Derek from Open Markets to discuss a topic that touches virtually every healthcare organization but often flies under the radar, and that is capital asset management and planning. Together they break down why this crucial function remains underoptimized and share strategies to maximize the value of capital assets. Now let's hand it over to your host, Fred Kranz.

SPEAKER_02 0:38

We're going to be talking about something that has always been high interest to me, and I believe something that's always been under optimized in virtually every supply chain organization in the country, and that is capital asset management and planning. Tom, thanks for joining us.

SPEAKER_01 1:02

Thanks for having me. Longtime listener, first time caller.

SPEAKER_02 1:07

I love it. You're the first guy that's ever said that, by the way. So tell us a little bit about yourself, your background, how you uh how you got interested in founding open markets, what open markets does, and then we'll talk about capital equipment planning.

Tom’s Path Into Capital Supply

SPEAKER_01 1:25

Sure. So, Fred, I've been in healthcare my whole 20-plus year career. It started on the lobbying and regulatory side, built some accreditation organizations for the orthotic and prosthetic industry. We made a real difference around the Gulf War when vets were coming home from Iraq, raised the level of care, and I got a love for fast-growing businesses as we grew that company. Um, fast forward to 2012, met some partners here in the Chicago area, and we started open markets to tackle the healthcare capital supply chain. I mean, Fred, it's no secret. Listening to some of your other guests in the past and friends in supply chain across the industry, capital is not always the top priority for any healthcare supply chain executive. But when you pull them across the board, they all say improvement is possible. Anything controversial there?

SPEAKER_02 2:23

No, I would say that you didn't go strongly enough. I think improvement is necessary. There's a big difference.

SPEAKER_01 2:32

Do it. Yeah. The question is, how do you do it? Do you try to tackle it at once with the CFO? Do you seek incremental improvement? Do you try to tackle better planning and procurement at the front end of the cycle, or do you go all in for an asset replacement planning cycle?

SPEAKER_02 2:50

Okay, well, let's take a look at you. Are currently actively involved in this today, so you know how things are done today.

SPEAKER_01 2:57

It is.

SPEAKER_02 2:58

Um, I'll start back in the 1970s when I first uh became involved with materials management

Why Capital Still Feels Scrappy

SPEAKER_02 3:05

and where I first had responsibility for planning the capital budget. And in those days, it was a year-by-year um fight for money uh of which uh we would get random requests in. Uh very seldom were they well uh prepared and well defended and and well explained, and without question, uh our budget would uh be one-fourth of the dollar value of the number of requests we got in. And at that time, there were two types of uh capital budget items that were requested clinical items and the non-clinical facilities items. Uh and there was no contingency budget. That was uh that was not thought of, and since then uh the big bear in the woods has been IT, which cannot be ignored and must be fed, or it doesn't work. So what do you what are what are you seeing today? Is it still a uh a uh year-by-year scramble or has it gotten better?

SPEAKER_01 4:12

It's there's still too much of that year-by-year scramble. We find about half of the health systems that we interact with will practice a year-by-year annual capital approach. And that can be fine as long as supply chain has visibility, you can still impact change. Leading organizations are going to multi-year planning, whether that's two, three, five, ten-year horizons. One thing that did stick out to what you said is there used to just be clinical and non-clinical equipment. Now there is that third bucket. So, Fred, the stats that we have show about $11 million worth of equipment is purchased per year for an organ and per hospital. So you can extrapolate that however you see. And I think the three buckets that exist today are medical equipment, which is about 40% of a capital spend, your facilities and construction equipment, which is another 40% of your spend, and then that IT bucket that is still just at 20%. Now, for that, you can certainly say everything that goes into a hospital today is IT, right? Yeah. But if you if you keep the equipment in that equipment bucket, equipment can't sit still be bigger than IT unless you've got a big project going on.

SPEAKER_02 5:35

So uh one of the things that you talked about is is

Front Door Versus Back Door

SPEAKER_02 5:38

a front door versus a backdoor asset manage management strategy. Could you explain that term to me? That's it's new to me.

SPEAKER_01 5:48

Fred, I would say the biggest opportunity in capital uh is about controlling the very first step of the capital procurement cycle. Um let's put supply chain in a position where they can see demand early, standardize smartly, and source proactively. Uh the front door is being there when requests are created, whether it's part of a fleet replacement, whether it's part of an asset replacement strategy, or if it's a service line expansion. The front door is the funding process, Fred. Uh and if supply chain is not there with visibility to the funding process, then you can't get 100% visibility over the capital needs of an organization. Okay.

SPEAKER_02 6:46

Um why is why why focus on a front door strategy?

SPEAKER_01 6:52

Yeah, the simple fact is that a front the front door strategy is where 100% of all your capital comes in. And if you think about a capital procurement, let's first think of it in a linear workflow. You've got an end user that requests uh new imaging equipment to support a new procedure. They have to go through a funding and a vetting process to ensure that it meets clinical efficacy and has a nice ROI for the health system. That's usually done with your finance colleagues. Supply chain should be a part of that equation as well. Everything goes through that funding process. Now, asset replacement we think of as the back end of the capital process. Where you're studying your current fleet, where you're looking at what equipment needs to be replaced and when. Even in a well-functioning organization, that's not going to cover a hundred percent of your capital requests. Because when outdated imaging equipment is end of life, you're not necessarily replacing it with the same. Not to mention, IT changes, you know, I require us to think about entirely new types of equipment to support entirely new practices and entirely new services and solutions and surgeries that weren't around before. So growth-oriented capital is never captured through a back-end asset replacement process. It's part of the mix. But when supply chain aligns themselves at the front end of the process, controls the front door with their finance colleagues, you actually can impact and get visibility to 100% of all capital requests.

SPEAKER_02 8:41

So in doing that, um you talk you what you know you talk about a process of going through, and um the uh a lot of people wait for the perfect process. Um what are the risks of waiting for the perfect process?

SPEAKER_01 8:59

I get it. You you want to make sure that you've got the process right, you've got the people right. Um the concern for that is that requests keep coming in through email, spreadsheets, side conversations, local habits. And perfect can be the enemy there. If you can start small by creating a single intake path and a single source of truth with visibility for supply chain, you don't have to change your financial workflows on day one. But you just need that insight and that visibility for supply chain to start a more proactive capital equipment process. You know, Fred, an interesting, interesting story I heard last week. So a good friend of mine, and I'm sure you know Rosa Costanza down at Miami, in Jackson, in Miami. So Rosa uh had some time off in the month of March and came home to over 4,500 emails in her inbox. So I have a lot of empathy for our supply chain leaders out there. They, how many of those were different requests for support, were different requests for process change, for people moving positions? Trying to perfect a new process in the midst of everything else that's going on can take two, three, four years. We found in working with organizations that it's quicker to gain visibility and control over the front of the pro the front of the existing process and then fix it with data and experience as you go.

SPEAKER_02 10:36

Yeah, that makes sense. It really does. I mean, I I'm thinking in the past where um, you know, the the worst thing of the every year free-for-all was that without a process, sometimes the physicians that had uh attended the best conference and came away with uh the best story and uh influenced the administration uh would get equipment that two years later was sitting in the hallway not being used. And and that means

Standards, Formularies, And M&A Reality

SPEAKER_02 11:05

you have no process at all. That that is uh that's a terrible thing. Um so does it does it matter if you have equipment standards?

SPEAKER_01 11:14

But tell us about that. Sure, I think it does. Of course it does. We only want it, we want our nurses trained on one infusion pump. Having one standard surface, one standard bed is better for training, it's better for clinical outcomes. Um but I wanted to share stats with you on standardization. So across the 50 plus health systems that we work with, one third of the capital in their hospitals is standardized, sole sourced. So monitors, pumps, beds, we all get the importance for being standardized in those areas. Another full third of your fleet is typically dual sourced. And then the final third of your fleet is more what I would call multi-source, where standards don't exist or you don't necessarily need them.

SPEAKER_02 12:15

Um I'm writing this down and I getting I'm thinking of a place like any large IDN that is out in the uh merger and acquisition business. Um I would argue then that that they immediately have a problem if they requ if they acquire uh a hospital, because I'm certain that that one third that is standardized is is in jeopardy automatically from whatever the other guys were using. And that caused the causes a planning process. Could you talk about that?

SPEAKER_01 12:47

Well, it it is what what we preach and what we work with organizations on is formulary management. You know, let's let's stay with your example there. The the larger organization, the acquiring organization, should have a formulary. They should have a catalog, an ability to point and say, these are our equipment standards, this is our monitor, this is our bed, this is our pump. Sharing that with the new organization you acquire is not as easy as sharing an Excel file. Fred. You've got to teach, you've got to train, you've got to put it into workflows. Um when you don't, you waste time and you introduce variants that can hurt patient care and certainly raise costs.

SPEAKER_02 13:40

Do you think that uh that when organizations are going through the process of perhaps wanting to merge, they even give uh this uh area any thought? Or do they just say, well, we'll acquire the place and figure it out after we get it?

SPEAKER_01 13:56

It's the latter. And I understand that because when you're talking about buying a new organization of that size, so many factors go into the strategic decisions. And if you trust your supply chain leadership, your clinical engineering leadership, they will figure it out. That's what we're here for. Um, and a good chief supply chain officer is gonna meet with their new counterparts, they're gonna try to understand you know, how do we get buy-in from your clinical leaders and administrators for our organizational standards? And go ahead. Oh, no, you go ahead. And I was gonna say I wanted to talk a little bit about buy-in from clinical leaders and admins.

SPEAKER_02 14:34

Okay.

SPEAKER_01 14:34

Uh there. And tell me again if you think I'm wrong on this, but can a chief supply chain officer drive clinical standardization or can they drive good equipment outcomes without that buy-in? No. You can't.

SPEAKER_02 14:49

And and that's been the bane of our existence. Exactly. And in the olden days, when there were a more standalone community hospitals where the physicians may be on the staff of three different hospitals in town, they owned you. And they got what they they got what they wanted, or they would go somewhere else. So uh and until or unless you can get buy-in, um, you're stuck without a process. And and getting back to the previous question, the area that our work is to uh St. Age's work is to help people optimize the performance of their supply chain. And so one of our areas of uh of expertise is in sterile processing. And I would argue that there is no sterile processing operation in this country that doesn't need some new capital equipment. Yeah. And I would also argue that because the equipment lasts for about 50 years beyond its uh the time that it uh gets depreciated, no one ever gets any until it breaks down. And the biggest opportunity they have is to develop a plan to uh centralize and optimize the function itself and then get the equipment accordingly. And I think that's probably true in other departments as well. Is that your uh observation?

SPEAKER_01 16:07

It is. And capital still, to your point there, capital is still an instrument of growth and recruiting. If there is a new procedure and a new doc in town and you want to recruit them to your organization, certainly capital is a part of that. Um if new sterile processing approaches are brought, or you frankly grow the OR, that's how you gain new equipment. The parts don't break, the parts are always available. Um, good clinical technicians can keep that stuff going for decades. Uh, you can gain buy-in from your clinical leaders and administrators by having great working equipment. Uh getting that buy-in, though, can also come in the form of customer support. I love it when I talk to our customers, who we think of primarily as supply chain, clinical engineering, and finance, their customers, that sterile processing manager, when they take that approach of I am supply chain, my customer is the clinic is the clinician, things always go smoother in the capital process. I mean, you've seen this where if supply chain is thought of as the controlling overlords, things don't usually go well, do they? No.

unknown 17:27

No.

SPEAKER_01 17:27

In capital, it's it's the same in capital. Supply chain doesn't necessarily need to be the boogeyman saying, well, don't, you know, you can only buy from this one vendor. But in capital, what we have found is that clinical end users are very thankful to a supply chain that builds a formulary of clinical preferences, gives them a starting point. Go Google sterile processing. What do you get? Tell me. First of all, you're gonna find 60 different companies that advertise there. You can probably find some used equipment. Maybe you'll find the St. Ange website somewhere in there. But it's not helpful to that sterile processing manager to go Google scrub sinks. When they need a replacement from it, they need easy customer support. Easy, easy support from their supply chain executives, from their supply chain team. That stuff is rewarded with buy-in for capital process improvements. It's rewarded for buy-in with seeding visibility to supply chain.

Sponsor Break

SPEAKER_00 18:37

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SPEAKER_02 19:04

Understood.

Why ERP Is Not Planning

SPEAKER_02 19:05

So what kind of capital planning support can an organization expect from its ERP?

SPEAKER_01 19:12

I mean, ERPs are super important, Fred, uh, but they're not designed for early stage equipment planning, alignment, standardization. If if if a supply chain team is relying upon their ERP to run the capital process, you're already too late. So we talked about sort of the front end of the process, the front door and the back door earlier. ERP is really the centerpiece there. It's in between them where procurement actually happens. ERPs are great for cutting a PO. They're not designed for capital planning. They're not designed for research of what items an individual can consider. They're not designed for formulary management. And they're also not designed for asset replacement on the back end.

SPEAKER_02 20:03

Okay. So here's a here's a uh question that I think I know the answer to. Um it seems to me that with with uh shrinking reimbursement, uh shrinking uh operating margins, that today more than ever, uh organizations can't afford to make mistakes in the capital budgeting and capital acquisition process. You just can't afford to buy something that a year later is gonna sit in your hallway unused. And uh and you have you have to explain uh to someone why you bought it in the first place. So when is and this is a this is a real softball, but when is the right time to include

Asset Replacement Planning Done Right

SPEAKER_02 20:48

asset replacement planning? And I should also say, and who should be involved?

SPEAKER_01 20:53

Yeah, you need to include it always, Fred. Um you know it it needs to be a part of the broader strategy. Um but it's no it's no substitute for proper vetting and justification of every request that comes in. Asset replacement will never cover everything that is bought at a health system, it won't. And so it needs to be really the part where years in advance, clinical engineering, supply chain, and finance meet together in a room, everybody brings their spreadsheets. Finance controls the dollars available. Your clinical engineering team needs to be the one, the guys that turn the wrench are so important to an asset replacement process. If you've got an A plus clinical engineering team that can record preventative maintenance and help understand when equipment is going to break, that information is crucial to future contracting. We recommend once a quarter. Twice a year, supply chain finance, and clinical engineering get together to rec you know to understand what will break and when. Make sure it's budgeted for, make sure the contracts are planned for. But that's still going to only, in a perfect world, touch 30, 40%, maybe 50% of your future capital spend. So that other 60, 50%, that's the risk of you buy something and it sits in the hallway. So let's go back to that doomsday example Fred had there. You buy a big piece of equipment, it either sits on the dock because it can't get in the door, or it sits in the hallway unused because you lost a doctor, or you bought the wrong stuff. The way you can control that, Fred, is giving supply chain, IT, clinical engineering all visibility at the front end of the procurement process.

SPEAKER_02 22:56

And and I I would I would say that uh the way we used to do it, because I've I've set I I've I'm real this is one of the things I really was passionate about. I would always get uh any equipment to be requirement driven so that the people who wanted or needed something could articulate the performance requirements of that equipment. Sure. And then and then we would take over the complete research process sort of um in a in a neutral, unbiased point of view. Because when someone wants something, they've got a biased point of view. Let's be clear.

SPEAKER_01 23:35

They do. And and there is a risk to the old school approach of everybody gathering in the auditorium to decide the capital budget, because the most charismatic, best presenting individuals tend to get the most money. And that's not always what's best for the organization. No, it's not. So uh think about it from a more democratic standpoint where capital requests come in through a front door mechanism with supply chain visibility, IT visibility, and certainly finance orchestrating

Scoring Requests To Prevent Waste

SPEAKER_01 24:10

the release of funds. We always see best performing organizations ask questions like what will be the net revenue impact of buying this equipment? Will this improve patient safety? What will this do to our customer satisfaction scores? Um, how will this increase uh procedures? Does this plug into the network? How you ask those questions can help make sure you don't buy equipment that will be unused.

SPEAKER_02 24:46

True. And and if I were on a facility side, how will buying this uh reduce uh uh facility costs? You know, what what what kind of an impact would it have there? There have to be, is what you're saying is there have to be measurable impacts of the addition of this equipment to the organization so that you can make uh informed decisions.

SPEAKER_01 25:12

Is that fair? It is fair. Um and the best performing organizations we work with not only have those measurable questions asked at the front end, but then they they score it. You get a score, one out of a hundred. How justified is this request? Uh certainly one of the trick questions I always encourage people to ask is is this a requirement from Joint Commission? Because if it is, you know that equipment is needed. We take that stuff very seriously. It needs to score high on a score one to a hundred. Um, but if a piece of equipment comes in with no impact on patient safety, no impact on revenue, um perhaps you can wait, no matter how charismatic the doc is that's asking for it. Uh so drawing a score and an algorithmic approach there makes a real difference for buying the right equipment at the right time.

SPEAKER_02 26:10

So you're you're uh advocating a collaborative uh process of uh decision makers from different points within the organization. Um do you yourself ever get to sit in on these processes? Sometimes. And and if so, if so, how how do they go?

SPEAKER_01 26:30

Well, so so it's not the same way that it was in the 70s, Fred. There is less often that big committee meeting with the brawls where people are horse trading. And and frankly, those were a lot of fun, right? Okay. Easy for you to say. Um what we sit front door to, though, uh Fred, and what we watch is the the piece-by-piece building. Um organizations that put together their the front end of their capital process through software. Um it's built over a period. Um now there's always the committee meeting where executives can decide what's what's funded or not, but there's a story when an organization has 300 people contributing to the capital planning. When you see who signs off when, who comments when, what scores higher. Um it comes together faster and easier when it's done collaboratively in a controlled, visible way.

SPEAKER_02 27:40

Yeah, that's my experience too, being in on those for years. Once the the various people from the various departments started to view each other as peers and as colleagues, they would listen to the other people's uh input. And once they started to listen, they could get they could get out of their own point of view and expand that. And we ended up with uh we ended up with uh a better process.

SPEAKER_01 28:05

That's no story about that. Um more regional health outside of uh Roger Larkin. Mr. Larkin. So uh they used to have the cattle call. You know, they years 10 plus years ago would have those drag out committee meetings, and what Roger told me was there was a relative lack of confidence in the capital process then. And people as a result would ask for everything under the sun, hoping that something would get approved. Yeah. You're throwing everything against the wall trying to find out what sticks. And when Roger and his CFO undertook a more visible, standardized process, what they found was that in year two of that process, their capital request dropped in half because people had more confidence in the administration of the capital approach, and it saved time for everybody.

SPEAKER_02 29:06

Absolutely. So, so from your observation, uh,

Banner Health’s Playbook

SPEAKER_02 29:10

who's doing capital the best?

SPEAKER_01 29:14

Uh that's a great question. Um, I think extremely highly of the team at Banner Health and what they're doing. So, what Banner Health has done, Banner Health's growing. You know, they 30 plus hospitals over four states. Uh they have created a system-wide formulary, starting first with their clinical medical equipment. Now it includes non-clinical equipment, including furniture, some facilities, and purchase services. And their end users, thousands and thousands of end users, instead of starting their capital research process on a phone call with a sales rep, they start on a formulary where they see what's approved, what's multi-source, what's dual source. And they're involving supply chain and clinical engineering in that very first step.

SPEAKER_02 30:07

Oh, that's good.

SPEAKER_01 30:10

Umance is able to approve capital the same way they always have. Financial workflows there are regional. So there's three primary regions across finance. It doesn't matter where the request is coming from, supply chain has visibility to it and has shepherded people to the right suppliers for the right products months before they're ever brought into the door.

SPEAKER_02 30:33

Great, great. Well, Tom, you know, that pretty much covers everything I had on my list of questions. Um, what did I miss? Tell me what, tell me what you'd like to uh give me three or

Aggregation Savings With Suppliers

SPEAKER_02 30:45

four minutes about.

SPEAKER_01 30:45

And uh you know, something that's been on my mind a lot lately is the power of aggregation. And so I got a cool story for you, Fred. Um supply chain folks always know when they aggregate, they can save more. We have we work with suppliers too all the time. One of my ones one of our supplier customers is Stryker, and they recently worked with an organization in San Angelo, Texas, called Shannon Health. Shannon's got a couple of uh other like-minded Texas hospitals that are part of the TPC, a regional aggregation group at a plano. And they have been able to successfully aggregate across five different hospitals all of their capital needs with Stryker. They've created a dashboard that shows who needs what from Stryker and when and where it is in the funding process. These supply chain executives out of Shannon and out of the TPC organization met with Stryker and figured out a five-hospital mini aggregation group that sped up the purchases for Stryker and brought in a nice cost savings of about four to six percent per purchase.

SPEAKER_02 32:06

That's cool. And of course, we all know that you never save any money in the capital budget because you have to spend it all every year. You can just buy more stuff.

SPEAKER_01 32:17

Yeah, I always say savings. The truth, you're right on that. It really is it's avoidance, you know. Um, it's being able to buy more stuff. Sure.

SPEAKER_02 32:26

That's a win. Yeah, yeah. Yeah. Keep the docs happy. Um, Tom, thanks so much. And

How To Connect And Wrap Up

SPEAKER_02 32:35

uh this is uh, you know, the the purpose of this podcast is not to be a sales call, but uh if people were to want to learn more about open markets, how would they get in touch with you?

SPEAKER_01 32:46

Yeah, you can go to openmarketshealth.com. You can reach out to me at Tderek, D-E-R-R-I-C-K at openmarketshelp.com, find me on LinkedIn, uh, or talk to any of our customers. Uh certainly if you're passionate about creating visibility in your capital approach, we'd love to hear from you. Uh it's all we do, Fred, um, and we're passionate about it.

SPEAKER_02 33:13

Okay. Well, Tom, thanks again. It's great to have you on, and uh good to see you again. It was great, great running into you a few months ago, and I'm glad you've come on the podcast.

SPEAKER_01 33:22

Fred, look forward to it. Take care. Cheers.

SPEAKER_02 33:24

Take care.

SPEAKER_00 33:28

Well, that's all for today. Thanks so much for joining us. And don't forget to hit that subscribe button and connect with us online so you'll never miss an episode and can catch up on all the ones you might have missed. Got a topic you're fired up about, or maybe you want to be a guest on the show? Fred would love to hear from you. Just reach out at F C R A N S at S T O N G E.com. We'll see you next time.