Building an activity-based costinghospital model using qualityfunction deployment and

benchmarkingMarvin E. Gonzalez, Gioconda Quesada and Rhonda Mack

School of Business and Economics, Marketing and Management Department,College of Charleston, Charleston, South Carolina, USA

Ignacio UrrutiaIESE Business School, University of Navarra, Madrid, Spain

Abstract

Purpose – To use quality function deployment (QFD)/benchmarking for building an optimalactivity-based costing (ABC) model using baseline information from five different Spanish hospitals.

Design/methodology/approach – The customer satisfaction benchmarking process in QFD isdiscussed along with the benefits of hierarchical benchmarks in specifying areas of strategiccompetition and the logically ensuing product/service strategic decision-making requirements. A casestudy is presented to illustrate the use of two methodological approaches: benchmarking and QFD toobtain the final product of the paper: an optimal ABC.

Findings – The resulting outcome from the QFD/benchmarking analysis is an ABC model, whichhas the customer expectations and the requirements that hospitals are looking for.

Research limitations/implications – Future research can benefit from this research by expandingthe scope from hospitals to other types of industries in order to comparatively analyze the applicabilityof the proposed tools, and applying the same methodology to other hospitals for developing a modelfor a standardized costing system in health care industry.

Practical implications – With the outcomes produced by the methodology applied in this paper,hospital strategic decision makers can now have specifics on which to base decisions regarding themost appropriate allocation of time, human and capital resources.

Originality/value – The paper presents a new approach for developing an optimal ABC forhealthcare by applying two important methodologies: benchmarking and QFD. The use andmodification of these methodologies in healthcare are new to research for achieving a final ABC modelthat will easily identify any performance improvements.

Keywords Benchmarking, Quality function deployment, Activity based costs, Quality, Health services,Spain

Paper type Research paper

IntroductionThe Spanish health care system has been set up as an integrated National HealthService which is publicly financed and provides universal health care free-of-charge atthe point of use. It is decentralized, with local organizations in each of the17 autonomous communities which make up the Spanish state (Urrutia de Hoyos,2002). The general principles of the National Health Service in Spain state that there isuniversal coverage with free access to health care for all citizens and that the differentservice networks under the National Health Service structure will be fully integrated.

The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at

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Benchmarking: An InternationalJournalVol. 12 No. 4, 2005pp. 310-329q Emerald Group Publishing Limited1463-5771DOI 10.1108/14635770510609006

These principles have resulted in far-reaching change, a process which is not yetcomplete. In addition to the standard system civil service component, another optionexist which is being protected by a separate, publicly funded insurance scheme.

Seven of the 17 autonomous communities in Spain currently have responsibility foroverall health care services within their territories, while the remaining ten have yet tocomplete the transition process; thus most health care services are still managed by acentral agency – the National Institute of Health (INSALUD). The Spanish NationalHealth Service presents a complex problem as it evolves away from its origins as acentralized system rooted in a social security scheme towards one of universalcoverage delivered through 17 autonomous communities (Urrutia de Hoyos, 2002).Difficulties remain in consolidating a stable system of financing, controlling theincrease in health expenditure, decentralizing services to all autonomous communitiesand coordinating and integrating the various services within the National HealthService.

There are almost 800 hospitals in Spain, slightly more than half of which are privatebut which account for only 30 percent of the country’s beds. The private hospitals tendto be smaller than the public facilities, they have fewer beds and they are run by thechurch, private charities or for-profit organizations. Nearly, two thirds of hospital bedsin Spain are in public hospitals providing 80 percent of all hospital care. As the17 autonomous communities begin their transition process, each of the regionalgovernments is allowed to organize the health system in their area to furtherdecentralize it as believes appropriate. With only seven of the 17 communities havingfully decentralized and the other ten having achieved partial decentralization, thecentral government in Madrid is now responsible for providing services for some 38percent of the Spanish population, with the remaining 62 percent still remains theresponsibility of the regional governments.

The purpose of this paper is the introduction of an application of quality functiondeployment (QFD)/benchmarking analysis as an analytical model for health carequality costing. Formulating from the QFD and benchmarking analysis, anactivity-based costing (ABC) model for hospitals is proposed. The model assures abetter understanding of patient needs and hospital administrative objectives. Thepaper begins with a review of the traditional cost approaches in the five Spanishhospitals targeted in this study. It then discusses the identification of customerrequirements (hospital requirements) and the deployment of service quality in thespecific cases under study. The research objectives are twofold:

(1) to develop a methodology of analysis in the health industry usingbenchmarking and the house of quality (HOQ) as baseline for the analysis ofvoice of customers (VOC); and

(2) to build an ABC model based on the technical requirements identified by theVOC analysis and the benchmark of five hospitals which can be used forstrategic decision making.

Literature reviewUnderstanding customer perceptions is essential to remaining competitive in today’smarket. To do this, a company must not only know the degree of customer satisfactionto its current product/service, but also know the degree of customer satisfaction of itscompetitors. Customer satisfaction degree to the current product is the customer

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perception showing how well the product meets the customer’ requirements.According to Camp (1992), customer satisfaction is one of the critical success factorsthat are candidates for benchmarking. As we will show in this paper, QFD canincorporate benchmarking information by extending the traditional matrix. QFD usesbenchmarking information primarily in the form of customer satisfactionbenchmarking in the planning matrix and technical performance benchmarkingin the technical matrix (Figure 1(a)). A typical form of customer satisfactionbenchmarking is shown in Figure 1(b).

Benchmarking, as another part of the total quality process, is the search for industrybest practices that lead to superior performance (Camp, 1992). It is a productivityimprovement tool that has received considerable attention by many companies helpingthem achieve and maintain competitive advantages by striving for world-classperformance.

By obtaining the information needed to support continuous improvement and gain acompetitive advantage, benchmarking can help QFD users make strategic decisionsboth from the marketing and technical viewpoints (i.e. customer satisfactionbenchmarking and technical benchmarking). The integration of benchmarking andQFD provides opportunities to identify key areas for improvement. In the literature,some research has been done along this line. For example, Vaziri (1992) suggestedusing competitive benchmarking to set goals and to achieve superior customersatisfaction. Swanson (1993) proposed the quality benchmarking deploymenttechnique, a variation of QFD, to help organizations logically select critical areas tobenchmark and understand the relationship between customer expectations andperformance drivers.

Lu et al. (1994) developed an integrative approach for strategic marketing by usingQFD, analytic hierarchy process (AHP), and benchmarking. The researchers not only

Figure 1.Components of the HOQ

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integrate QFD and benchmarking but also introduce ABC as an output of thisintegration. In the following section the researchers present a brief review ofbenchmarking and QFD application in service industries, followed by an overviewof the ABC.

Quality function developmentQFD is a systematic process for motivating a business to focus on its customers. It isused by cross-functional teams to identify and resolve issues involved in providingproducts, processes, services and strategies which will more than satisfy theircustomers (Gonzalez et al., 2003). According to Akao (1990), QFD is a method fordeveloping design quality aimed at satisfying the customer and then translating thecustomer requirements into design targets and major quality assurance points to beused throughout the production phase. Hauser and Clausing (1988) describe QFD witha different emphasis, “quality function deployment focuses and coordinates skillswithin an organization, first to design, then to manufacture and market goods thatcustomers want to purchase and will continue to purchase”. That is, they are concernedmore with teamwork and organization-wide communications. According to Gonzalez(2001), the use of QFD has two fundamental reasons:

(1) to improve the communication of customer requirements throughout theorganization; and

(2) to improve the completeness of specifications and to make them traceabledirectly to customer requirements and needs.

QFD requires that representatives of the different organizations involved in producingthe product be integrated in its definition. Consequently, these representatives discussthe meaning of the customer requirements and work together to ensure that they cometo a common understanding. Communications throughout the organization is greatlyimproved. This process will also uncover many issues whose resolution will lead tomore complete specification.

BenchmarkingBenchmarking is a continuous quality improvement process by which an organizationcan assess its internal strengths and weaknesses, evaluate comparative advantages ofleading competitors, identify best practices of industry functional leaders, andincorporate these findings into a strategic action plan geared to gain a position ofsuperiority (Hokey et al., 1997).

Benchmarking has two distinctive approaches: competitive benchmarking andprocess benchmarking. According to the American Productivity and Quality Center,competitive benchmarking aims to measure organizational performance relative to theperformance of competing organizations and consists of an ordered sequence of steps(Hokey et al., 1997).

According to Ogilvie (1993) benchmarks which are truly strategic in nature alwaysaccount for the impact on the customer. On the other hand, Zairi (1992) has emphasizedthe role of customer feedback in establishing performance gaps. The issues involved incollecting and interpreting consumer based comparative information have not beenspecifically addressed; although the benefits of benchmarking have been outlined bymany authors (Markin, 1992; Camp, 1992; Gable et al., 1993; Yasin et al., 1998;

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Whymark, 1998; Dorsch and Yasin, 1998) and supported by empirical studies ofpractitioner evaluation (Cooper and Kaplan, 1988; Rogers et al., 1995). These benefitsinclude reduced costs, higher productivity, improved customer service, quality andcompetitiveness.

Additionally, benchmarking facilitates strategic planning, providing a clearer focusfor strategic target and goal setting. While competitor benchmarking encourages anexternal focus, many authors emphasize the particular benefits of generic benchmarkingin providing targets and thus increasing competitiveness (Rogers et al., 1995; Andersenand Camp, 1995; Whymark, 1998; Woodburn, 1999). The shift in emphasis fromcomparison of direct competitor performance measures to one of learning about bestpractices and identifying what can be achieved (Rogers et al., 1995; Andersen and Camp,1995; Whymark, 1998; Woodburn, 1999) has further enhanced the role of benchmarkingin achieving sustainable competitive advantage and superior performance. Finally, thestimulus for change generated by benchmarking activities and the potential gains for allstakeholder groups are recognized (Porter, 1994); for example, the link amongbenchmarking and an increase in shareholder value has been examined (Schmidt, 1992).

The problems of benchmarking are similarly well documented and focus onresource constraints, particularly of time and personnel. Other problems include theselection of appropriate benchmarking partners, the willingness to divulge what maybe considered sensitive or confidential information and the value of that information interms of comprehensiveness, timeliness, etc. (Gable et al., 1993; Rogers et al., 1995;Waters et al., 2001). Others have focused on the problems of implementation or use ofbenchmarking information, once obtained (Ogilvie, 1993; Yasin et al., 1998).

The role of benchmarking in total quality management is well recognized, as is therole of quality in the competitiveness of service organizations. The relationshipsbetween service quality, customer satisfaction, and profitability have been examinedby many researchers (Zeithaml et al., 1996). Dorsch and Yasin (1998) have argued thatbenchmarking can be used as an essential element of a comprehensive TQM strategy.Indeed, although many examples of service benchmarking activity exist, for example,in financial services (Whymark, 1998), health services (Yasin et al., 1998; Yasin andYavas, 1999) and air travel (Porter, 1994; Hemmasi et al., 1994), some argue that serviceactivities do not lend themselves readily to benchmarking because of their inherentintangible nature. Typically, services are described as comprised of two elements, i.e.process and outcome, both of which impact consumers’ evaluation of quality. The highvisibility of many service processes may enhance the collection of competitor relateddata, for example, through mystery shoppers. The involvement of customers in theservice delivery process, however, and the well recognized need to define servicequality from the perspective of the consumer (Lewis and Booms, 1983; Gronroos, 1984;Parasuraman et al., 1994) highlights that customer perceptions must form a componentof a comprehensive benchmarking operation. Indeed, “only the customer can setservice standards” (Ballantyne et al., 1995).

Activity-based costABC shifts the focus from managing costs to (as the name implies) managing activitiesthat occur within R&D. Costs are assigned to products, services, and projects based onthe resources they consume. Direct costs of all activities are traced to the project forwhich they are performed; overhead costs are assigned to a particular project, rather

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than spread arbitrarily across all projects. In this way, managers are better able todetermine the way in which activities contribute to the cost of a project and howeffectively resources are being used. ABC is one part – and business processreengineering the other part – of activity-based management, which takes a processperspective rather than a functional or line perspective. Key processes in theorganization, such as R&D, are viewed as being composed of distinct activities, each(presumably) adding value to the final outcome of that process.

Streamlining processes to maximize customer value is the objective of businessprocess reengineering, and ABC can be an important tool for achieving that objective.Initially, ABC was applied to factory overhead (Berliner and Brimson, 1988). Managersrecognized that traditional methods for allocating overhead to products or services weretoo arbitrary and did not necessarily reflect the specific resources used in producingdiverse outputs (Cooper and Kaplan, 1988). The result was inaccurate product costinformation, costs of some products were too high and others were too low or simplyinaccurate. Consequently, decisions based on those costs, such as pricing or expandingor dropping product lines, were suboptimal. With evidence of the value of ABC,managers in other industries (including health care) began using this methodology.

The ABC methodologyABC, the next stage in this evolution, essentially operates in two ways. The first is avertical, cost assigning view, in which the costs of resources are traced to activities,which are then assigned to the cost objects (e.g. products, services, customers, orprojects) using those activities. The second is a horizontal, performance view, whichenables managers to analyze:

(1) what causes work to occur and what drives the costs; and

(2) how effectively and efficiently the work is performed.

It is the latter perspective that provides the platform for performance improvementsand benchmarking (Jørgensen and Edwards, 1998).

Overview of the ABC model based on QFD and benchmarkingThe ABC model presented in this paper comes from a strategic planning frameworkand consists of two major components: QFD planning matrix and benchmarkinganalysis that integrates customer requirements (hospital requirements) and technicalrequirements (ABC requirements) from the QFD matrix in a model is based onpractices in five different hospitals. A strategic planning framework is defined as aprocess of data collection consisting of an analysis of existing costs models in fivedifferent Spanish hospitals and the definition, analysis and measurement of customerrequirements. Data are acquired by using various research techniques to investigatecustomer responses and reactions to a hospital’s services; evaluating hospitals actionsand strategies used to deal with customer requirements; and evaluating how well anideal model can arise using all the information from the five hospitals analyzed. Theprocess of collecting information involves:

. listening to customers (hospital needs in a cost control system);

. listening to employees (users of the cost system); and

. benchmarking (analyzing the different cost systems in the five hospitals).

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The concept of a strategic planning framework policy is based on the premises that ahospital should have a long-term vision that is not only environmentally sensitive butalso nationally and worldwide oriented. Therefore, when an organization develops itsstrategic policy, it must go beyond its short- or midterm-goals and must integratefeedback from employees and customers to reach its goals and objectives; which willbenefit not only the organization, but also consumers and society at large. Figure 2shows the strategic planning framework used in this study.

Research methodologyWe used a survey of the hospital management to obtain the information for the study.The instrument development process was first done by interviewing with healthcarespecialists in the different hospitals and also by literature review. The questionnairewas developed and then, more interviews were performed to test for content validity.The five most important hospitals were selected to answer the questionnaire andprovide reliable information for the research. The questionnaire was structured in threesections (general information, customer requirements, and benchmarking questions).We obtained the participation of one administrative manager in each hospital to fill outthe questionnaire. If he/she had specific questions, we would answer them individually.

Figure 2.Strategic planningframework

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Then, if further clarification was required, we would perform a second interview. Afterthe data gathering process, the analysis of the information is a key factor in this study,and the methodology for this stage is briefly explained below. It is important toemphasize that hospitals are the customers in this application. Therefore, when theresearchers describe “customer expectations”, they are referring to “hospitalexpectations”.

The conventional four-phased, manufacturing-based QFD methodology (Hauserand Clausing, 1988) was modified slightly so that it could be applied to the healthindustry. Specifically, the four-phased methodology was transformed into athree-phased action-based methodology. These “phases” included;

(1) the HOQ (planning matrix);

(2) the critical part matrix; and

(3) the action matrix.

Conventional terminology also had to be modified to apply the methodology to thehealth service industry.

Phase I (planning matrix). This phase is known as the “House of Quality”. Activitiesin this phase center on understanding the customers (hospitals) and include thefollowing: identifying the customers, identifying customer requirements and theirimportance, analyzing customer requirements (WHAT’s), identifying current methodsand processes (HOW’s), ranking service elements, establishing correlations betweencustomer and service elements, developing and analyzing the HOQ (Gonzalez et al.,2004).

Phase II (critical part matrix). This phase corresponds to parts planning of the ABCmodel based on QFD/benchmarking analysis and links the service elements identifiedin phase I to service operations (ABC requirements).

Phase III (action plans matrix). In this phase, an action plan is developed based onthe information obtained in the previous two phases. The final action plan consists inan ideal ABC model. The following sections explain in detail how the above phaseswere developed.

Phase IUnderstanding the customers (hospitals requirements). This step plays an importantrole in the QFD/benchmarking analysis, because it is in this stage where theresearchers select the most critical variables (requirements) for the cost model. Asstated before, it is important to understand that in this study the customers are thehospitals, not the hospital patients. The design of an ABC model requires the detaileddescription of all the activities involved in a costing model. Therefore, the next tasksare to define customers and to understand their requirements.

Identifying the customers. The health industry is a complex area that involvesseveral factors considered polemic most of the time. For this research, the definition ofcustomers was the most difficult part, because usually, customers are perceived as thegroup of people that receive a good or service (users, in fact). In this case, the hospital isthe customer who wants to receive a service (cost control of their activities). The generaladministration of the hospital provides the requirements needed to control thehospitals costing system. All considerations for the design of the ABC model werebased on the hospital requirements and needs.

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Identifying customer requirements and importance. The initial input for the ABCmodel is the voice of the customer (VOC), which is translated into the HOQ as customerrequirements. Customer requirements were gathered by using survey instrumentsanswered by managers of the five hospitals, in addition to personal interviews withdifferent personnel. Several TQM tools such as the affinity diagram and the relationdiagrams were then used to group and summarize the customer requirements for theABC model. Statistical analyses, such as dynamic analysis and factor analysis, wereperformed in order to classify and rank the customer requirements. Through theseprocesses, individual customer requirements were grouped into common customerrequirement categories.

The data gathering process resulted in approximately 150 individual customerrequirements, which were grouped into 16 customer requirements using the affinitydiagram and the relation diagrams. However, further data reduction was needed, forbuilding the final HOQ. A definition of each customer requirement was provided inorder to have a better understanding of the needs.

The researchers used the customer window quadrant (CWQ), to summarizecustomer requirements (Figure 3). The CWQ is an analytical quality tool designed togroup and classify customer requirements based on level of importance andsatisfaction (Intel Corporation, 1997). There are four quadrants whose characteristicsand guidelines are described as follows:

. Quadrant A – Customer wants it and does not get it. High importance/lowsatisfaction. The critical quadrant. All customer requirements placed hererequire immediate action to be moved to quadrant B as soon as possible.

Figure 3.Customer windowquadrant (CWQ)

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. Quadrant B – Customer wants it and gets it. High importance/high satisfaction.It is the most desired quadrant. All important and critical customer requirementsshould be maintained here. The task is to continuously improve and monitor allquality characteristics placed in this quadrant.

. Quadrant C – Customer does not want it and gets it anyway. Lowimportance/high satisfaction. An action should be taken if the customerrequirement is expensive or represents any other type of risk to the organization.If the quality characteristic placed here is eliminated or reduced, perhaps thecustomer will not notice it.

. Quadrant D – Customer does not want it and does not get it. Low importance/lowsatisfaction. The quadrant with lowest importance and focus for now. Do nottake any action yet unless indicated by a change in market, service strategy orcustomer requirements.

The results of the application of the CWQ showed the following clustering based oncustomer weighting:

. Quadrant A. Five customer requirements were placed here (Figure 3). An actionplan should be set up to describe how to move these customer requirements toquadrant B.

. Quadrant B. Fourteen customer requirements were placed here (Figure 3).A special plan should be defined to maintain, improve and monitor thesecustomer requirements.

In addition, approximately 45 customer requirements were classified under quadrantsD and C; however, only those considered as critical were shown on quadrants A and B.

Analyzing the customer requirements (What’s). Using dynamic analysis, a level ofimportance was assigned to each requirement (Gonzalez and Eckelman, 1999). In thissection of the product planning stage, the number of complaints, the different goals(targets), and the evaluations of the different hospitals were considered. Otherinformation is summarized in the HOQ such as the sales point (the areas in which aspecific hospital has the ability to sell the product – in this case the costing systembased on how well each customer requirement is met, according to the ABC idealmodel), the improvement ratio (which relates the goal or target to the currentperformance measure in a specific requirement), and the overall importance (acomputed value relating the importance to customer, the improvement ratio, and thesales point). All of this information aids in determining what kind of actions must betaken in order to improve the hospital’s customer ratings in the different customerrequirements. In Figure 4, it can be seen that there is a difference between theimportance assigned by the customer and the importance assigned after the finalevaluation, i.e. after analyzing different criteria in the matrix (overall importance).For instance, cost per room, cost per group and detailed information of patients are thefactors rated highest in importance by the customers (hospitals). When we combinethe importance assigned by the customer, the improvement ratio, and the sales point,the highest factors in overall importance are cost per treatment and cost per group.In this case, the sales point does not differentiate among all requirements. Thedifference is determined by the importance of the What’s and the improvement ratio.

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Figure 4.Customer and technicalrequirements

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Identifying current methods and processes or service elements (How’s). Customerrequirements must first be translated into specific activities within the current methodsand processes of the organization where the methods and processes refer to how theABC model meets the requirements of its customers (hospitals). Unfortunately,customer requirements are not often stated in terms of the hospital’s current processesand methods. Therefore, the researchers translated customer requirements (called“What’s” in the QFD language) into service elements (called “How’s” in the QFDlanguage). The service elements are placed at the top of the HOQ and, in thisapplication they represent the activities of the ideal ABC model. In order to determinethe relationship between What’s and How’s, we asked the question, “This is what thecustomer requires in the ABC system; how can we do it and measure it in the model?”

In the critical matrix, these service elements are divided in to three sections,admission, diagnosis and treatment.

Ranking service elements. The tradeoffs, located in the “roof” of the HOQ, indicatethe synergistic or detrimental impacts of changes in the design measures. They areused to identify critical compromises in the design. Because these compromisesare almost always necessary, they should be examined as part of the QFD effort inorder to minimize design change expenses. The roof of the HOQ in Figure 5 shows therelationships among the service elements.

Establishing correlations between the customer and the service elements. An analysisof customer requirements in each hospital was developed in order to assess therelationship among customer requirements (hospital requirements) and serviceelements (ABC model requirements). Figure 5 shows evidence of a strong relationshipamong cost per treatment (6.7), detailed information of patients (5.4), special treatmentcost (6.1), cost per diagnosis (6.5) and cost per group (5.0). Notice that the value betweenparentheses represents the overall importance that defines the strength of therelationship between all the variables and relations in the matrix. This means that ifthe customers are looking for more detailed final cost when they use the ABC model,then satisfying the service elements mentioned above will satisfy part of the customerdetailed information requirement.

Developing and analyzing the house of quality. The HOQ matrix fully depicts all thecustomer requirements (What’s) and service elements (How’s) and providesinformation useful in determining which activities are important in meeting thedemands of the customers. As can be shown in Figure 5, the hospitals need to enhanceall ABC requirements because, in all cases, the customer evaluations are underthe average and behind of the ABC ideal model (performance gap).

The HOQ also provides information about the evaluation of the service elements.The following How’s were found to be the most important and need to be considered onthe final action plans: special treatment cost (550.2), labor cost (524), laboratoryservices cost (444.1) and materials cost (373).

Moreover, the HOQ shows that improvements are needed in the following customerrequirements: training cost (1.2), cost per room (1.0), and food cost (2.0). These customerrequirements received the lowest evaluations in the competitive analysis and should beaddressed in order to satisfy customer expectations.

Analysis of the house of quality from the benchmark perspective. This sectionprovides a summary of the benchmarking results by area. Based on the resultsshown in Figure 6 the best control system is in the Barci Clinic. Its average

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performance in the different activities in the area of administrative costs is 3.3,which is better than the other hospitals. In this area, the most important activity is“detailed info of patients”, which is evaluated with 3.5 for Barci Clinic andaccording to the QFD analysis is considered as the most important activity by thehospital requirements (What’s) with an importance of 4.5. The recommendationcoming from the benchmarking and QFD analysis is to improve the activity by aratio of 1.5, in order to satisfy the customer expectations and the generalperformance of the model. According to Figure 6, the performance of JimenezFoundation is the poorest and needs an improvement in all of the activities in theadministrative area in order to compete with the other hospitals and improve thecosting model.

In the treatment area, Puigve Foundation has the highest evaluation (3.9) onaverage, and Laredo the poorest (3.3), the activities with most weight for the customers

Figure 5.House of quality

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are cost per diagnosis and cost per treatment, evaluations on which Motril Gran (4.0)presents higher scores than Foundation Puigve (3.9). Using the information fromthe spider graph (Figure 7), Motril Gran is the hospital with lowest performance in allactivities in this area; therefore, its efforts need to be increased in order to satisfy themodel requirements. Room and service activities are the activities considered bythe customers as the least important in the model (2.9). In this case, Motrin Gran hasthe best performance (3.6) and Barci Clinic and Laredo are the hospitals with lowercompetitive evaluations (2.9). In general these activities need to be improved in eachhospital, because all the activities in the area are important for the final ABC model andare considered as low importance and therefore low control. Finally, in other costactivities, Motril Gran again has the best performance (3.9) in the set of activitiesconsidered by the customer (hospitals) as the most important area (6.4 overallimportances).

In summary, the hospital with the overall highest performance is Motril Gran (3.42),followed by Jimenez Foundation (3.25), Puigve Foundation (3.20), Barci Clinic (3.15),and Laredo Hospital (3.05). This information can be graphically observed for allcosting areas in Figure 7.

Figure 6.Benchmarking results

from QFD

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Phase IIDeveloping the critical part matrix. The critical part matrix is the second matrix in QFD.It is designed based on the “How’s” of the HOQ. These “How’s” become the “What’s” ofthe new matrix. As can be shown in Figure 8, the critical parts for each service elementare divided in to four sections: admission, diagnosis, treatment and other activities.Several indicators are shown in this matrix. For example, importance of serviceattributes and target values are two indicators which help to determine what thehospital needs to do in order to incorporate various elements into the control costsystem. In addition, the part matrix shows competitive information about the positionof the different hospitals relating to the ABC ideal model.

Interesting conclusions can be drawn form the critical matrix. For example, thefollowing service elements are considered vitally important: labor cost, laboratoryservices, and special treatments cost. Thus, special efforts must be made in thesecritical areas in order to satisfy the customer requirements shown in the HOQ matrix(Figure 5). The inclusion of a detailed activities process is an important requirement, inorder to satisfy the ABC model requirements.

Phase IIIDeveloping action plans. The present study of the five hospitals in Spain indicates thatthree major action plans should be implemented in order to satisfy customerrequirements, namely:

(1) invest in new information systems including equipment, software, training andprofessional personnel;

(2) increase the control of costing issues in order to avoid missing any importantcost to model (develop procedures and forms that will control better any activityin the ABC model); and

Figure 7.Performance by area andby hospital

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Figure 8.Critical part matrix

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(3) create continuous improvement teams that evaluate customer requirements andthe competitors’ performance (benchmarking).

A summary of recommended actions to be taken in the five hospitals are shown inFigure 9.

Conclusions and recommendationsThis research has several important contributions. First, it represents one of the firstempirical efforts to integrate the current literature on QFD, benchmarking and ABC.Second, it shows a real solution to the costing problem in healthcare organizations.

Figure 9.Action plan matrix

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Third, it opens the window to future research in the area to include innovative tools tosolve real problems.

The application of QFD and benchmarking as a joint analysis tool is a veryinteresting approach because the information is analyzed from different perspectivesat once. In addition to this advantage, the resulting outcome from theQFD/benchmarking analysis is an ABC model, which has the customer expectationsand the requirements that hospitals are looking for. The determination of a detailedcost is a very important concern not only for the hospitals, but also for the patients toknow the final cost for any treatment and medical service.

With the outcomes produced by this methodology, hospital strategic decisionmakers can now have specifics on which to base decisions regarding the mostappropriate allocation of time, human and capital resources. Areas designated ashighly important for performance standards improvements can easily be pinpointedand addressed. In addition, tradeoffs presented by competing projects requiringresource allocation can be evaluated fairly with customer satisfaction as the ultimateobjective.

In today’s competitive world, customer care in hospitals is a vital goal to beaccomplished at an affordable price. One important factor in the customer care is theeffective control of costs. This paper illustrates the use of an approach that takesadvantage of benchmarking/QFD analysis and ABC in five different Spanish hospitals.While this study demonstrates the effectiveness of the applications of these techniquesas applied to Spanish hospitals, the use of this approach can clearly be extended toother clinics, outpatient facilities and other medical clinics around the world.

Future research can benefit from this research by:

(1) expanding the scope from hospitals to other types of industries in order tocomparatively analyze the applicability of the proposed tools; and

(2) applying the same methodology to other hospitals for developing a model for astandardized costing system in health care industry.

References

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Berliner, C. and Brimson, J.A. (1988), Cost Management for Today’s Advanced Manufacturing,Harvard Business School Press, Boston, MA.

Camp, R.C. (1992), “Learning from the best leads to superior performance”, Journal of BusinessStrategy, Vol. 13 No. 3, pp. 3-6.

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Dorsch, J.J. and Yasin, M.M. (1998), “A framework for benchmarking in the public sector:literature review and directions for future research”, International Journal of Public SectorManagement, Vol. 11 Nos 2/3.

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Further reading

Bullivant, J.N. (1996), “Benchmarking in the UK national health service”, International Journal ofHealth Care Quality Assurance, Vol. 9 No. 2, pp. 9-14.

(Marvin E. Gonzalez, MIS, PhD is a Professor at the College of Charleston. He received his PhDfrom Purdue University; MIS from ITESM, Mexico; and BS in Industrial Engineering from ITCR,Costa Rica. He is the author of the book QFD: A Road for Listening the Customer Expectations.He is currently engaged as investigator on different projects related to advanced manufacturingtechnologies, e-health systems, supply chain management and quality management.

Gioconda Quesada, PhD is an Assistant Professor in Information Systems at the College ofCharleston. She is a PhD in Manufacturing Management and Engineering at the University ofToledo, received her master degree in Manufacturing Management from the University ofToledo and BS in Industrial Engineering from ITCR, Costa Rica. Her research interests are in theareas of electronic commerce, supply chain management and information technology.

Rhonda Mack, PhD, is a Professor of Marketing at the College of Charleston. She received herPhD from the University of Georgia, USA. Her major research interests include aspects of healthcare marketing, customer service delivery and satisfaction issues in various service industries,and direct-to-customer (DTC) pharmaceutical marketing.

Ignacio Urrutia, PhD, is a Professor in the Accounting and Control Department at IESEBusiness School. He is a PhD in Financial Economics and Accounting from UniversidadComplutense de Madrid; his areas of specialization include cost systems and decision theory,strategic implementation of management systems, strategic maps, pricing policies and productprofitability. During the last five years, Dr Urrutia had been working in consulting and researchin the Spanish health care sector.)

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