Based on the above criteria, the following options can be generated. I. The hospital can continue with the current scale of operations i. e. Maintaining Status Quo II. The hospital can plan to scale up the level of operations. This can be done in 3 different ways A. Start operating on Saturdays which increases the capacity by 20% B. Expand the hospital building by adding one more floor C. Open new hospital in the USA, and thereby expanding operations to new geographical locations III. Expand to other types of operations Evaluation of Options: Option I. Maintaining Status Quo:
Firstly, we shall analyze the present situation at Shouldice Hospital. Current Total Throughput • Average: 6,850 Operations/50 weeks = 137 operations/week • Peak : 165/week Throughput of each step:- The various steps in the process are explained in APPENDIX II – EXIBHIT 1. The Throughput of each step is explained below: Examination Rooms: (6 rooms x 3 hrs (1-4 PM) x 5 days x 60 min/hr) / (20 min / exam) = 270 patients /week Admitting Procedure: (2 people x 3. 5 hrs (1:20-4:50 PM ) x 5days/week x 60 min/hr) / (10min/patient) = 210 patients /week Nursing Station:
(2 stations x 3. 5 hrs (1:30-5 PM) x 5 days/week x 60min/hr)/(10 min/patient) = 210 patients /week Operating Rooms: (5 rooms x 8. 5 hrs/room/day x 1. 1 hrs/patient x 5 days/week)/ = 188 patients /week Surgeons: 12 surgeons x 4 operations /day x 5 days = 240 patients / week Hospital Beds: 89 beds *5days /3. 5 avg. stay = 127 patients / week 117 beds (including 14 rooms Clinic)*5 days/ 3. 5 avg. stay = 167 patients / week We can notice a bottle-neck in the number of beds and hence we are not utilizing other resources to full capacity. Also we have backlog of 1200 patients.
This could lead to loss of customers. Hence we can’t maintain Status Quo. We need to increase the number of beds. Option II. Expanding the Facility Option A. Operating on Saturdays: Currently the beds are not being utilized fully in the week-end, as there are no operations performed. This option will increase the number of patients by 20% and bring the operation close to the full load capacity . We can also meet the market demand clear the backlog of patients. The implementation of this option can increase the profit around $700,000 (APPENDIX I).
Also, this will not require any additional investment. But this option is opposed by the employees including the Chief Surgeon. It will affect the working relationship and in turn affect the experience of the patients. Hence it is not advisable to implement this option. Alternatively, the hospital can increase the number of staff and surgeons so that they can be rotated over the week. Some of them can be offered holidays in the weekday and work on the weekends. Additional incentive can be offered to the staff working on Weekends.
These benefits should be attractive to the staff. Since we earn additional profits of $700,000 by implementation of this option, surplus amount can be used for the additional compensation. Option B. Expanding the hospital by adding another floor: Adding a new floor will increase the hospital beds by 50% but the number of beds in the clinic will remain the same. The calculation in APPENDIX I shows that the number of patients increases by around 40% i. e. 54 patients/week. The entire backlog can be cleared in less than 6 months.
The operating cost of hospital shall also go up, as we might have to increase number of staff to maintain the same patients experience. The operations of the hospital may get disrupted temporarily during the construction. Also this option will require an investment of $2 million. But we can see an increase in the profit level by around $1. 4 million (APPENDIX I). So we can get back the investment in just 2 years. The staff will also be happy, as they would have to work on a week-end. Option C. Open new hospital in the USA We have to devise some assumption to quantitatively analyze the opening of new hospital.
Assumptions & methodology: 1. New building at US has similar capacity as the existing facility in Canada 2. The 14 rooms in the clinic are assumed to have two beds each 3. One Canadian Dollar = 0. 8 * US Dollars (given) 4. We calculate cost of construction for one level of the Hospital and then scale it to three levels 5. Cost of clinic is calculated as sum of cost of operating rooms and each level 6. Cost of Land = 50%*cost of construction If the cost incurred for setting up hospital in US and Canada are similar then, it costs $2.
5 million (adjusted for US dollars) for setting up a hospital. Hence assuming a linear increase in the costs with increase in the number of floors, it requires $7. 5 million for setting up three floors. Therefore the total cost for setting up a hospital and clinic will require an investment of $20,864,583 to set up in US. The hospital can bring additional profit of $1,906,629 and the investment can be recovered within 11 years APPENDIX I. Disadvantage: – This method requires a significant amount of investment and recovery period is high.
– It is difficult to maintain the same service quality as different culture prevails at different geographical locations. – The hospital has to do extensive marketing to create demand for the new facility. Advantage: – Though the investment is high, it would be a good strategy to expand to new location. – Since the travel cost of US patients are reduced, the hospital has as competitive advantage. – This could pave way for growth for existing employees. – The facility can be setup to achieve maximum operational efficiency. There would be less restrictions from employees as it is a new facility.
Option III. Enter to other types of operations: Shouldice has the expertise and specialisation in surgeries for Hernia. It has a unique methodology which leaves it far ahead of other competitors in this market. Entering into other types of operation will require Shouldice to build expertise and thereby diluting the brand image it has build over the years. It will also require large capital to establish new facilities required for other specializations. Though the surgeries are of same type attrition rate among the doctors is low.
Hence it would not be advisable to specialize in other surgeries. APPENDIX I: CALCULATIONS: Current operations: Revenue per patient= 450+ (. 49 x 60) + 111 x 4 = $ 923. 4 Total revenue = 923. 4 x6850 = $6,325,290 Total Cost= $2. 8+$2 Million = $4. 8 Million Profit per year = $6,325,290 – $4,800,000 = $1,525,290 Option II. Expanding the Facility Option A. Operating on Saturdays: If Saturday’s were also made to be working days for the doctors and the staff Average patients stay is 3 to 4 days per week We have 89 + 28 beds, 3. 5 average stay Total number of patients per week = 137*1.
2 =165 (20% increase) Working on Saturday operations: Increase in capacity by 20% Total revenue= 923. 4 x 6850 x1. 2 = $ 7,590,348 Total operating cost= $ 2. 8 *1. 2+2 = 5. 36 $Million Profit= $7,590,348 – $5,360,000 = $2,230,348 Increase in Profit= $2,230,348-$1,525,290 = $ 705,058 Option B. Expanding the hospital by adding another floor: Increase in capacity of beds by 50% Total number of patients per week (Avg. ) = (89+45)*5days/3. 5Avg. stay of patient=191 % Increase in Patient= 191-137/137=40% Total revenue = 923. 4 x 6850 x1. 4 = $ 8,855,406 Total Operating cost= $ 2.
8 *1. 4+2 = $5. 92 Million Profit (expect Year1) = $8,855,406-5,920,000 = $2,935,406 Increase in Profit= $2,935,406 -$1,525,290 = $ 1,410,116 Investment for 1 Floor= $2 Million Profit for 1st Year= $2,135,406 – $2 Million = $ 935,406 Option C. Open new hospital in the USA We calculate the time taken for the hospital to recover its fixed cost with the profits from the clinic. Cost of adding one level to the hospital= $2,000,000/0. 8 (Adjusted for US dollars) = $2,500,000 Cost of constructing a similar hospital (With 3 levels)= 3 * $2,500,000 = $7,500,000
Cost of adding one level of clinic= ($2,500,000) * (28 / 45) = $1,555,556 (Each hospital level has 45 beds – patient rooms are available only in 2 levels; Clinic has 28 beds) Cost of constructing a similar clinic= 4 * $1,555,556 + 5 * $30,000/0. 8 (The current clinic has 4 levels, 5 operating rooms) = $6,409,722 Total cost of construction= Cost of Hospital + clinic = $7,500,000+ $6,409,722 = $13,909,722 Cost of land= 50% of construction costs = $6,954,861 Total cost of hospital project= Cost of land + construction = $20,864,583 Operating cost (for Hospital and Clinic) =$2,000,000+$2,800,000 Adjusted to US dollars = $4,800,000/0.
8 =$6,000,000 Cost per patient admitted =$6,000,000/ (6,850) (6,850 operations per year) = $875. 91 Revenue per patient= $111*4+$450 +0. 49*$60 = $923. 4/0. 8 = $1154. 25 (Hospital stay at $111 per day for 4 days, $450 surgical fee, 49% of assistant fee towards revenue) Profit to clinic from each patient= $1154. 25 – $875. 91 = $278. 34 Total profit from new hospital per year= $278. 34 * 6,850 = $1,906,629 Time taken to recover cost= $20,864,583/ $1,906,629 = 11 years (approx. ) APPENDIX II: EXIBHIT 1: Day 0 [pic] EXIBHIT 2: Day 1 – 4 [pic] EXIBHIT 3: Operation.