Supply Chain Management Best Practices

Brent JohnsonVice President Supply ChainIntermountain Healthcare

ISM Utah – February 12, 2009

Topics of discussion

1. Intermountain Healthcare

2. Uniqueness of the healthcare industry

3. The supply chain story at Intermountain Healthcare

4. Some best practices of supply chain management

5. Best practices – how to apply them where you are

• Headquarters: Salt Lake City, Utah• Created in 1975 as LDS Church gifts its hospitals to the community Nation’s top integrated system• Modern Healthcare #1 or #2 for the last seven years

employees – largest company in Utah 31,000 ـ• Hospital network

– 22 Hospitals– 2,500 Licensed Beds

• Clinic Group– 800 Employed Physicians– 120 Clinic Sites– InstaCares– ExpressCare

• SelectHealth – health plans– Direct Enrollees – 520,000

Intermountain Healthcare Facts

• $3.6 billion in Net Patient Services Revenue

$5.0 billion in Assets

• AA+ Standard & Poor’s Aa1 Moody’sOnly System to receive highestratings from both S&P and Moody’s

Geographic Focus• Strategic decision to limit expansion

• Focus on markets that “funnel” to Salt Lake City

• Clinical Integration in a defined area

Intermountain Healthcare Facts - More

GE / Intermountain joint venture for clinical information systems

Uniqueness of Supply Chain in Healthcare

Healthcare Industry Assessment From a “Newcomers” Viewpoint

• Noble industry, focused on good things – patient safety & excellence• Lots of sharing and networkingHowever…• Physicians, as key stakeholders, control much of the culture• Behind other industries

– Supply chain strategies and best practices– Use of technology for processes and data utilization– Little use of alliance-type relationships– Overall attention to cost containment and efficiencies

• Unique characteristics of Healthcare supply chains– Many supply chains with many participants that don’t collaborate – Extensive price sharing and transparency – Labor-intensive price-loading activities– Lack of data synchronization

Common practice by healthcare suppliers

“Physician Preferenced Item (PPI) suppliers receive extensive training

on how to develop and foster relationships with Physicians in

order to create a clinical preference for their products.”

Current Healthcare supply chain is complex and costly

NationalNationalGPOGPO

ContractingContracting

NationalNationalGPOGPO

ContractingContracting

ManufacturerManufacturer DistributorDistributor ProviderProvider

Admin

istra

tive F

ees (

2-4%

)

Admin

istra

tive F

ees (

2-4%

)

Patro

nage

Reb

ates

(9-1

2%)

Patro

nage

Reb

ates

(9-1

2%)

Mem

bership Dues

Mem

bership Dues

(0-2% )Rebate

(0-2% )Rebate

Ad

min

Fee

Ad

min

Fee

(1-4

%)

(1-4

%)

Tracing FeesTracing Fees(3-4%)(3-4%)

Payment TermPayment TermDiscount (2%)Discount (2%)

Channel FeesChannel Fees(4-6%)(4-6%)

DistributionDistribution(4-12%)(4-12%)

AdditionalAdditionalMarkupMarkup(4-8%)(4-8%)

Volume Rebates (1-2%)Volume Rebates (1-2%)

Transactions

Healthcare Spend Data

Total Healthcare Costs

Supply

Other

0%

10%

20%

30%

40%

Logistics Cost

% Logistics Costs Per Industry Segment

Retail

Electronics

Healthcare

*SOURCE - EHCR STUDY

38%

5% 2%

The supply chain story at Intermountain Healthcare

Intermountain Healthcare Spends $1.3 Billion Annually on Non-Labor

PurchasesBenefits $220

Pharmaceuticals 180

Surgical supplies

142

Medical supplies

118

Other expenses 102

Corporate services 75

Contract labor 71

Lab, blood & imaging 63

Facilities & utilities 58

Non-clinical hospital 54

HR & prof services 32

Clinical technology 22

IT/Telecom 13

TOTAL EXPENSES $1,160 Annual capital

$125

Supply Chain Developments at Intermountain Healthcare

• In 2005 - new emphasis on supply chain • Hired external supply chain leader

• Why?• $1.3 billion non-labor spend• 12,000 vendors • Negotiations spread throughout the company• Few corporate standards

• Expectations• Manage the non-labor spend from a corporate perspective• $20 million annual bottom-line savings• Merge supply chain quality with clinical quality

• Eliminating variation – “variation is an enemy to quality”

Intermountain’s Supply Chain Progress…

• Organization Optimization – Built robust Supply Chain Organization – Centralized buyers & reporting of warehouses and other shared services

• Customer Service Improvements – Service Level Agreements • Process Improvements – active goals

– 80% of all non-labor spend under Supply Chain control– 70% of products under contract with electronic ordering– Purchasing card program

• Streamlining & Controlling More of the Supply Chain– More purchasing direct from manufacturers – Standardizing product use and distribution throughout the company– Central warehouse & operations center – to open in 2011

• Leveraging Technology – contract mgt, eProcurement, ERP• $20 Million/Year Savings – $83M in past 3 ½ years

Organization ChartJanuary 2008

Brent Johnson VP of SC/CPO

Director of Purchasing &

Contract Admin.Wolfgang Peleschka

Director of Clinical SourcingLyn Bair

Director of Non-Clinical SourcingTodd Craghead

Director of Finance &

InformationTim Goates

Director of Equipment

Resource Mgmt Kim Hansen

Director of Materials

Management Richard Beach

Sr. Administrative Assistant

Jamie Dettloff

Manager Travel Services

Kathleen Goodliffe

ManagerCentral Laundry

Rich Bott

Sourcing Manager Pharmacy

Curtis Manager

Sourcing ManagerIT/Telecom

Richard Bagley

Sourcing/Implementation

ManagerJohn Ogden

Sourcing ManagerLab & Blood

Hyde Frederickson

Sourcing ManagerImaging

Mark Christensen

Equipment Planning Manager

Scott Schofield

Sourcing ManagerSurgical Services

Vince Oda

Implementation ManagerTrent Gee

Sourcing ManagerHR & Prof. Svcs

Brian Ganong

Sourcing Manager Environmental

Calvin Allen

Sourcing ManagerCorp. & Admin.Valerie Francis

Sourcing ManagerFacilities & Utilities

Scott Anderson

AnalyticsDeron Greenwood

Mato TaufaMichelle Taukiuvea

TBD

Information Tech. Manager

Cynthia Shumway

Facility Systems Support

Senior Contract Manager

Craig Webb

Senior BuyersMeagan NelsonPatty Rozinka

Jan BoyerScott McAlisterMarni Anderson

Buyers I & II

Customer Service SupervisorJan Logan

Inventory Manager

Gordon Slade

Courier ManagerScott Bryan

Regional Supply Chain DirectorsRandy HolmsteadSteve Bergstrom

John TaylorMark GehringDon Bradshaw

Sourcing ManagerSurgical Services

Sherm Curtis

EMMAApplicationsSteve Bench

Regional Clinical Engineer Directors

Purchasing CardManager

Peggy Lee

Publishing Services

Tami Reese

Logistic Manager Brent Wigington

Sourcing ManagerCV

Shane Stevenson

Sourcing ManagerCritical CareTrent West

Pharmacy Sourcing

Steffanee Wanlass

Laundry ServicesDaryl Jemmett Janice McNeesJeff BrothersenKeri Battochio

Michael B. Saunders

Travel ServicesGeni Wagner

Delinda GordonJulie Downs

Stephen RawlingsCheryl Fleming

Tami Harris

Purchasing Supervisor

Kim Anderson

Courier Services Supervisors

Steve GrudzinskiIsaac Snyder

Nathan CowanAdam DansiePaul Neuman

Andrew Valdez

Surplus Supervisor

Coby Hopkinson

Amerinet RelationsBryan Means

Contract ManagersDavid Tribe

Scott Palfreyman

Facility Materials Management

Equipment Logistics

S & I SupervisorsHeather Summers

Alan ShumwayDan Garn

Supply Chain Organization Has a Foundation of Savings, Customer Service &

Performance Measurement

Savings

Customer Service

Performance Metrics & System Support

Operations ExcellencePurchasing, Warehouses, Laundry, Couriers, Travel

Services, Surplus, Equip Logistics, Publishing Services

P-card Growth

Vendor Access

Equipment

Plng & Mgt

Energy Management

Green Strategies

Community

Friendly Purch

Lean &

Change Mgt

MMIS

IDOC Development

On-Going SCO Initiatives Drive Value beyond Just Sourcing

Savings

1. Pcard program – 2,000 cards in 10 months

2. T&E system – Eliminate manual employee reimbursements

3. Vendor access – Utilizing 3rd party to do vendor credentialing

4. Energy strategy team – Leading TCO benefits to facilities

5. Green team – Leading Intermountain Green Team

6. Community friendly purchasing – WMBE/small businesses

7. Contract Management System – Must know & manage contracts

8. E-Procurement system – Reverse auctions, ebid, analysis

10. Change management (lean program) – Applying to apply to all our work

We Set Out To Save

$100 Million!Along The Way,

We Changed A Culture.

Success Factors of the SCO at Intermountain

Healthcare

• Management Support

• Communication and Collaboration

• A Commitment to Customer Service

• Hiring Talented People – brightest & best

• Performance Measurements - Automated, transparent savings validation process

• Appropriate Use of Consulting

• Empowerment and Use of Teams

• Rigorous, Transparent Sourcing Process - We aren’t decision makers…we are internal consultants, process experts

“Some” best practices of supply chain management

Supply Chain Management is practiced by most large companies with significant financial success

A disciplined, systematic process of analyzing corporate expenditures and developing strategies to reduce the total costs

of externally purchased materials and services It involves:

• What we buy• Who we buy from • How we buy• What we inventory• How we use the products and services we buy• How we can make those products and services better

An important part of Supply Chain Management is Strategic Sourcing…

which yields many benefits

• Reduced number of suppliers

• And maybe some new ones• Lower prices

• Consolidated buying

• Rigorous negotiation• Standardized product specifications

• Stronger relationships with suppliers

• Better service levels

• Longer term contracts• Elimination of redundancies

• Elimination of business processes

• Ideas for continuous improvement

• Formalized savings tracking system

…lower costs, higher quality and greater customer service

12 Fundamental Best Practices of Supply Chain Management

1. Develop the strategy

2. Align the supply chain

organization

3. Recruit supply chain

professionals

4. Be dedicated to

performance management

5. Establish strategic

sourcing strategy

6. Manage total cost of

ownership (TCO)

7. Establish key supplier

alliances

8. Develop supplier

management processes

9. Streamline the order-to-

payment process

10. Manage inventory

11. Manage distribution &

logistics

12. Establish & monitor controls

Delivering Value via Strategic Sourcing

Step 1

Opportunity Assessment

Step 2

Category Analysis

Step 3

Market Analysis

Step 4

Strategy Development

Step 5

Supplier Selection

Step 6

Implemen-tation

Spend analysis

Category profiling

Finalize decision rights committee

Launch cross-functional sourcing team

Team charters

Project planning

Category analysis

ID demand drivers

“As-is" specs

“As-is" service levels

“As-is” processes

Current TCO

Benchmark TCO

Define specs

Define service levels

Define processes

ID suppliers

Supplier communication

RFI (optional)

Supplier interviews

Industry analysis

Market analysis

Benchmark best practices

Initial supplier assessment

Leverage analysis

Reconfirm scope

Reconfirm objectives

ID desired outcomes

Brainstorm processes

Finalize business requirements

Supplier selection criteria

Determine sourcing strategy

Finalize long list of suppliers

Executive approval

Supplier communication

Supplier calls

Supplier evaluation model

RFP/RFQ/Auction

Score proposals

Supplier presentations

Site visits

Other due diligence

Contract negotiations

Executive approval

Award business

Supplier communication

Goals and objectives

Launch implementation team

Implementation project planning

Communications planning

Supplier performance management planning

Implementation execution

Comprehensive, systematic business process whereby the optimal supply sources and/or solutions are selected, contracted and implemented at the lowest total cost of ownership.

Strategic Sourcing Definition:

Roadmap to SuccessProgression to Category Management

Procurement Competence Over Time

Val

ue-

Ad

d

Price FocusPrice Focus TCO FocusTCO Focus Value Chain FocusValue Chain Focus

2008/2009 20122005

Contracting Strategic Sourcing Category Management

Procurement Maturity Curve

Eight Dimensions of Supply Chain Effectiveness

Work

Processes

Management

Processes

Direction

Setting

StrategicSourcing

Logistics Management

SupplierDevelopment

TransactionalProcurement

Performance Management

Strategy Organization Culture

Leading companies are also taking a strategic view of the logistics process to drive additional

value from the supply chain

 

 

 

 

Logistic processes and practices

Qualitative Assessment

Key logistic costs Metrics Benchmarks

Quantitative Assessment

Facility Layout

& Design

Material Storage &

Preservation

Material Handling & Flow

PerformanceManagement

Material Transportation

& Routing

Organization & Culture

Use of 3rd Party Logistics Providers

Supplier Integration & Value Add Services

Use of Equipment

& Technology

Warehousing Processes

Facility Layout

& Design

Material Storage &

Preservation

Material Handling & Flow

PerformanceManagement

Material Transportation

& Routing

Organization & Culture

Use of 3rd Party Logistics Providers

Supplier Integration & Value Add Services

Use of Equipment

& Technology

Warehousing Processes

Ten Dimensions of Logistics Effectiveness

Another good strategy of supply chain management

Total Spend = $1B (5% inflation)

Success Factors Category Current Two Years Four Years

Percent Dollars Percent Dollars Percent DollarsCulture, management support, strategy, industry/supplier benchmarking

Spending addressed

8% $83M 50% $550M 80% $960M

Sourcing process, resources, skills

Savings obtained

14% $12M 10% $55M 10% $96M

Implementation, education, compliance, data monitoring, resources

ComplianceAt risk (60%)

? 75% $41M 86% $83M

Managing suppliers\supplier teams, continuous improvement

Year over year improvements

0% 0 3% $16M 3% $29M

Bottom-line impact

$12M (or $7.2M)

$57M $112M

1

2

3

4

Four FactorsIn the success of

Strategic sourcing

There is power and huge benefit

in supply chain management

• A penny saved is a penny invested somewhere else in healthcare…our your company

• We pay for every salesperson and every delivery truck.• We pay for the cost of a backorder, late delivery, invoice

problem, over-shipment, damaged product and a recall• When we allow personal preference guide decisions we

pay more.• When we don’t have standards we pay more.• When we don’t leverage our company we pay more. • Product variation does not make clinical excellence

“uncontrolled variation is the enemy of quality” (Deming)

Think strategically!

Best Practices - how to apply them where you are

What’s a supply chain best practice?

• Possible definition:• Best method of operating a common

process• A process that produces the best

benchmark or metric compared to others• Understanding your costs thoroughly,

getting the best ROI

• Best practices need to demonstrate being fast, adaptable and integrated

The Greeks gave up frontal assualts on the Trojans and built the wooden horse by being smarter, not working harder, and got

better results

How to Pick and Apply Best Practices

Some people can’t even define a best practice, much less adopt one

The trick might be to “when you find a best practice, adopt and adapt”

Moving quickly on what you have learned is a “best practice”

Maybe we should be more focused on not “best practices” but eliminating “bad practices”

If building a BIG strategy is too much…start with baby steps

1. Know where you spend money

2. Understand total cost

3. Organize yourselves – act as one

4. Know who makes supplier decisions

5. Do a better job of negotiations

6. Take time to manage the biggest suppliers

7. Simplify your processes

8. Look at your warehouse and distribution costs

Practice Supply Chain Management

Summary

To expect different results, you may need updated roadmap

No Two Companies operate the same way – but all have guiding principles for success

Best Practices are a benchmark and guide for effectiveness and improvement

You must be the change you wish to see in the world

“Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion, or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. It does not matter if you are a lion or a gazelle. When the sun comes up, you’d better be running.”

Juergen Bartels, President & CEO

Carlson Hospitality Group, Inc.

Competition