the value of distribution philips medical systems ck

Charlie KnightPhilips MedicalNational Distribution ManagerJanuary 27, 2009

The Value of Distribution•Who, What, Where, Why

•Statistics and Considerations

2Philips Medical Charlie Knight January 27, 2009

Philips Medical Systems Supply Distributors

•Cardinal Health•Owens & Minor•American Medical Depot•Professional Hospital Supply•Seneca•Shared Services


82% Distribution18% Direct (Manufacturer)

General StoresGeneral Stores

SPDSPD

Operating Room

Operating Room

Specialty Departments

Specialty Departments

LabLab

Off-siteFacilities

Off-siteFacilitiesNursingFloorsNursingFloors

21% Distribution 79% Direct (Manufacturer)

Total Hospital34% Distribution66% Direct (Manufacturer)

Source: Fredonia, IMS

Hospital Procurement and Material Flow


Staff Cost Drivers in Procurement Process

On average requires 19,620 staff hours at salary expense of

$425,401

6.4%

20.9%

13.5%

29.7%

24.5%

5.0%

Direct = $9.56/line staff exp

Dist = $1.97/line staff expDirect = $1.48/line staff

exp

Dist = $.30/line staff exp

Direct = $5.43/line staff exp

Dist = $1.31/line staff exp

Source: HIDA Hospital Procurement Study

Meeting with Suppliers

Creating & Placing PO’s

PaymentDelivery & Returns

ProblemSolving

Receiving


Inventory Management Activities

Inventory Management Process

Supply Chain Costs

$47/line – Direct

$29/line – Distributed

Inventory Expense

77% less w/distribution

Freight Costs


Cost of Capital


Source: CAH OptiSource Model

Receiving Put awayObsolete & Expired

Stocking Schematics

Par LevelMgmt

Delivery & Returns


Delivery to Departments


Orders from distributor go to one stock location versus direct orders that go to multiple departments

$10.00

$8.00

$4.00

$2.00

0

$1.28

$0.30

$1.97

$0.75

$6.37

$0.96

Stock Departmental

Accounts Payable

Purchasing

Clinical

$9.56

$6.00

$0.13

$0.26

$1.48Receiving

Orders Delivered to Departments Cost 4.9 TimesAs Much As Cost of Delivering to Stock (per line on PO)


Most Efficient Hospitals

•Send more orders through distributor (average 19,000/yr) than direct (average 10,000/yr)

•Enjoy 41% cost advantage •Spend 300% less on freight costs•Use 1/3 the staff time in med-surg procurement



Channel Decision


HIGH

Order from

Distributor

Order from

Distributor

Order from Manufactur

er

Order from Manufactur

er

Str

ate

gic

Channel C

hoic

e

Channel Decision

Clinical Preference

Ord

er

Fre

qu

en

cy

HIGH

LOW

LOW

Cost of PO can drive supply channel decision


EDI Statistics

Statistic Source

Manual purchase order cost = $75 Gartner

Manual purchase order cost per line = $13.17

HIDA Procurement Study

Fully automated purchase order cost = $10-$30

Gartner

Automated purchase order cost per line = $3.00


CRP purchase order cost = $1-$4 GHX, Neoforma

Vendor EDI Connection Costs = $5,000-$30,000

GHX


EDI Costs


$15.00

$12.00

$9.00

$6.00

$3.00

0

$1.59

$1.28

$0.13

$3.00

$6.05

$6.37

Electronic Manual

$ 0.75$13.17

Clinical

Purchasing

Management

Phone/Fax Orders Cost the Hospital 4.4 Times As Much As EDI/Internet Orders (per line)


Purchase Order Statistics

Statistic Source

More than 75% of a hospital’s purchase orders are direct

Freedonia, IMS

Average staff cost per purchase order with distributor = $12.27


Average staff cost per line on purchase order with distributor = $1.31


Average staff cost per purchase order with direct mfr = $60.08


Average staff cost per line on purchase order with direct mfr = $5.43



Purchase Order Costs


Per line, Direct-to-Manufacturer OrdersCost 4.1 Times As Much As Distributor Orders

$6.00

$5.00

$4.00

$3.00

$2.00

$1.00

0$0.75

$0.46

$0.10

$1.31

$2.93

$1.90

$0.60

$5.43

Pay PO

Receive PO

Create PO

Distributor Manufacturer


Invoice Statistics

Statistic Source

Average invoice processing costs = $11-16/invoice

Can be as high as $50/invoice

HIDA

90% of a hospitals invoices are from direct vendors

CAH Optisource Model

50% of a hospital’s invoiced lines are from direct vendors

CAH benchmarking database


Inventory and Supply Chain Statistics

Statistic Source

34% of a hospital’s total spend is with distribution partner

Freedonia, IMS

80%+ of total inventory $’s can be outside of General Stores

AHRMM Benchmarking, Advisory Board

On average – 10 days of inventory is valued at $660,000

CAH Optisource Model

Hospitals pay different prices for the same product 40% of the time

Deloitte

Supply Chain Costs Direct = $47/lineSupply Chain Costs Dist = $29/line

Deloitte


General Statistics – Direct vs. Dist

Statistic Source

Costs are 24% less with distribution CAH Optisource Model – based on aggregate clinical labor study

Inventory expense is 77% less with distribution

CAH Optisource Model – based on aggregate clinical labor study

Freight costs are 87% less with distribution


Cost of capital is 76% less with distribution



Measuring the Value of Distribution

•Starts with customer goals•Effectiveness of managing costs associated with product procurement and inventory management

•Utilize meaningful indicators such as $/adjusted patient day

•Allow for adaptation to change in customer’s business model or goals

•Commit to review the metrics and take action on results- Business Reviews, CQI Meetings


Financials of Distribution

•Sell- Cost Plus example: cost + 5% per GPO agreement

•Charge service fees Monthly, Quarterly

•Incentive Money from Manufacturer “ Buy Margin

•Operate on Volume•Seek High Margin Opportunities, (Special Products, Non Contract Items) PHILIPS OPPORTUNITY!


WHY?What’s In IT for US?

•Increase Business thru Distributor Relationships

•Philips Products create Higher Margin for Distributors

•Distributor to convert competitive business to Philips in return for our existing Business.

•Leverage Philips Capital Business for SupplyBusiness thru preferred distributor

the value of distribution philips medical systems ck

Documents

line direct

philips medical charlie

line staff exp direct

purchase order costs

direct average

line staff exp source

purchase order statistics

manufacturer orders