Medline Healthcare Executive MeetingJanuary 21, 2009

A Review of

Supply Chain Best Practices

in HealthcareBrent Johnson

VP Supply Chain

Intermountain Healthcare

Topic Overview

1. About Intermountain Healthcare

2. Intermountain’s Supply Chain Story

3. What is a Best Practice?

4. Supply Chain Best Practices

5. Best Practices application Health Care

6. Summary – Next steps

About Intermountain Healthcare

• 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 yearsـ 30,000 employees – largest company in Utah

• Hospital network

– 23 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

• $3.4 billion in Net Patient Services Revenue

$5.0 billion in Assets

• AA+ Standard & Poor’s Aa1 Moody’s

Only System to receive highest

ratings 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

More Intermountain Healthcare Facts

GE / Intermountain joint venture

for clinical information systems

Intermountain Healthcare Continues to

Receive National Recognition

Being Nationally Recognized Really Matters When

Life and Health are on the Line –

EXAMPLES of Using Evidence Based Medicine

• Better managing glucose levels during heart surgery, we’ve decreased morality rates eight fold for patients with levels over 300mg/dl

• We’ve pioneered a heart medication discharge process, reducing readmission rates

• We’ve reduced the average heart attack treatment time to 67 minutes beating the national goal by 23 minutes

• We’re working on hundreds of clinical processes in the areas of cancer, intensive medicine, women and newborns, pediatrics and other specialties

Intermountain’s

Supply Chain Story

Intermountain Supply Chain Organization

Developments – Last 4 Years

• Hired supply chain leader from outside of healthcare

• Created a new SCO organization

• Hired 25 new people

• Developed rigorous but open sourcing strategies

• Centralized the buyers

• Centralized the reporting relationships of the warehouses

• Added Couriers, Travel Services and Central Laundry – we are

now over 600 employees

• Developed relationships with key stakeholders…clinical

programs, regions, physicians, hospital administrators, etc.

• Delivered on savings - $130 Million

System Non-Labor Savings is Over

$130 M Since SCO Was Organized

SCO Validated Savings

YearOperating

(incld. avoidance) Capital Total

2005 7.1 2.0 9.1

2006 15.8 7.9 23.7

2007 26.5 13.7 40.2

2008 17.2 8.1 25.3

2009 20.7 10.8 31.5

Total 87.3 42.5 129.8

On-Going SCO Initiatives Drive Value

Beyond Just Sourcing Savings

1. Purchasing Policy – A corporate-wide purchasing policy

2. P-card program – 2,500 cards, 15,000 transactions/month, $3 M/mo

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

4. Intermountain Green Team – Leading Green Team

5. Energy strategy team – Lowering long-term facility ownership costs

6. Central Laundry improvements – Utilization & costs are down

7. Couriers – 10,000 miles, 1,200 stops every day with few problems

8. Small Facilities Warehouse – On Vine Street to support MG Clinics

9. Contract Management System – (Ideal) Must know & manage contracts

10. Lean/Change Management – Developed training for all SCO managers

11. Community friendly purchasing – Women, minority & small businesses

SCO in Three Years - Vision

• Continue to build a world class Supply Chain Organization – focused on (1) reducing costs,

(2) enabling increased care & charity, (3) improving patient care and (4) having a passion to find

best practices

• Simplify the Supply Chain by Taking out the complexity and cost

Leveraging technology

Eliminating variation from products and processes

Heavy use of self-contracting and self-distribution

• Embrace and adopt industry data synchronization

• Increase influence on “total” non-labor spend

• Have more control over more supply chains than med-surg - IT, clinical, nutrition, etc.

• Assist Intermountain in consolidating, standardizing and centralizing redundant ancillary

services

• Increased skills and results in linking high quality patient care to supply chain activities

• Do “joint contracting” with other hospital organizations

• Dedicate continuous emphasis applying TCO (Total Cost of Ownership) to long-term decisions

• Develop highly engaged employees with the right skill set, drive and known career paths

• Become a better community citizen

Current Healthcare Supply Chain is

Inherently Complex and CostlyThis drives the SCO Vision

National

GPO

Contracting

Manufacturer Distributor Provider

Tracing Fees

(3-4%)

Payment Term

Discount (2%)

Channel Fees

(4-6%)

Distribution

(4-12%)

Additional

Markup

(4-8%)

Volume Rebates (1-2%)

We Set Out To Save

$100 Million!Along The Way,

We Changed A Culture.

What is a Best Practice?

What’s a Best Practice?

Possible definitions:

• A technique, method, process, activity, incentive or reward that is more effective than any other

• Best method of operating a common process

• A process that produces the best benchmark

• Something to get the best ROI

The Greeks gave up frontal assaults on the Trojans and built the wooden

horse by being smarter, not working harder, and got better results

Best Practice Ideas

• Best practices need to demonstrate being fast, adaptable and

integrated

• Every practice tends to be situation, industry and customer specific

• Don’t reinvent - go study everyone else and steal the best and apply it

to your company

• Envision the best case scenario and start down that path

• Use benchmarking & gap analysis to identify best practice companies

What Is This Man Famous For???

Theory of Relativity

E=mc2

But His Best Work May Be His

Definition of Insanity:

“DOING THE SAME TASKS

OVER AND OVER AGAIN

AND EXPECTING

DIFFERENT RESULTS.”

ALBERT EINSTEIN

Supply Chain Best Practices

Supply Chain Management is Practiced by Most

Large Companies with Significant Financial Benefit

It is 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

Supply Chain Management

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

1. Develop the Strategy

How to develop a strategy without a “burning platform”

Senior management support is first and most critical

Scope – Total non-labor spend (at least 70-80%)

Total process, organization, strategy and culture evaluation is needed

This is about culture change - Change management principles will be required to succeed

Communication and branding is critical

Eight Dimensions of

Supply Chain Effectiveness

Work

Processes

Management

Processes

Direction

Setting

Strategic

Sourcing

Logistics

Management

Supplier

Development

Transactional

Procurement

Performance Management

Strategy Organization Culture

Significant Opportunities Exist in “Outside Services”

Throughout Most Industries – We Are No Exception

Procurement Involvement and Level of Challenge

82% 78% 78% 76%71%

53%

42%35%

14%

37%

24%

15%

26%

17%

25%

40%40%

28%

MRO Travel IT/Telecom Direct Spend Outsourced

Services

Consulting Marketing &

Advertising

HR Benefits Legal

Actively Supported

Significant Difficulty

Cost Savings Potential

12%11%

13%

11%12%

16%

14%

12%13%

10% 10%9%

8%9%

11%

9% 9%

11%

MRO Travel IT/Telecom Direct Spend Outsourced

Services

Consulting Marketing &

Advertising

HR Benefits Legal

Absolute Opportunity

Realistic Goal

Percent of Respondents

Estimated Savings as a % of Spend

Procurement Strategy Council – Survey Findings

2. Align the Supply Chain Organization

SCM must be properly organized in order to execute the plan

In a perfect world, the supply chain organization will have the functions of:

Purchasing

Sourcing

Contract Management

Materials Management

Logistics

Centralized or de-centralized? Answer depends and varies by company

Common Theme: Centralized with some decentralized execution

3. Recruit Supply Chain Professionals

Keep and develop the best of the existing employees

Keep A’s and potential B’s. Redirect C’s.

Recruit SCM professionals with the right mentality

More focus on strategic thinking

Less focus on measuring transactional activity

Different skill sets needed today vs. historically

Interpersonal communication

Strategic thinking

Technical Skills (analytical, subject matter expertise)

Project Management Skills

Relationship management skills

4. Be Dedicated to Performance Management

Spend analysis is the foundation

You must know what you are buying – corporate wide

Must be able to validate outcomes

Open, transparent validation of savings process

Savings reports – validated vs. realized savings

Utilization information is critical

Big barrier is inability to retrieve precise spend data

Clean item master data info

Best of class companies navigate the challenges of getting data

from multiple systems to retrieve meaningful data

5. Establish Strategic Sourcing Strategy

What is Strategic Sourcing?

It is a disciplined, systematic process of analyzing corporate expenditures and developing strategies to reduce the total costs of externally purchased materials and services

Strategic Sourcing is the Cornerstone of Supply Chain Management

Use the Sourcing Square – should a purchased solutions be a strategic alliance, long-term non-strategic partner, high transactional non-strategic supplier, or purchase order

And after Strategic Sourcing comes complete Category Management as an even more rigorous best practice

Strategic Sourcing is not a one time event, it is an on-going way of business

Post sourcing is a conscious effort

Price continues but not as strategic

Supplier’s accept shared responsibility for outcomes

Cost creep happens when interest and attention wane

COMMUNICATE

& CELEBRATE

SOURCING

STRATEGY

SELECTION

SOURCING

OPTION

DEVELOPMENT

AS-IS

ASSESSMENT

SAVINGS

OPPORTUNITY

IDENTIFICATION

I II III IV V

IMPLEMENTATION

VI

PERFORMANCE

MANAGEMENT

VII

A. Manage &

Monitor

Performance to

Predefined

Strategy

B. Incorporate New

Continuous

Improvement

Opportunities

C. Track & Report

Performance

D. Manage

Deviations

E. Sourcing Strategy

Review

A. Reassess Team

Composition

B. Conduct Kickoff

C. Manage

Stakeholder

Communication

D. Initiate

Implementation

A. Data Collection

B. Stakeholder Buy-in

C. Champion

Identification

D. Team Formation

E. Team Training

F. Stakeholder

Communication

Plan

A. Total Cost of

Ownership

B. Supplier

Identification

C. External

Assessment

D. SCE Internal

Assessment

A. Vision &

Assumptions

B. Sourcing Savings

Options

C. Executive Approval

• Vision

• Assumptions

• Options

D. First Supplier

Screening

E. Request For

Information (second

supplier screening)

A. Sourcing Strategy

Verification

B. Third Supplier

Screening

C. Develop

Implementation &

Performance Plans

D. Management

Participation &

Approval

E. Negotiation &

Supplier(s) Selection

F. Commitment to Long

Term Total Cost

Savings

A. Executive

Communication

B. Internal &

External

Communication

C. Celebration

The 7 Phase Strategic Sourcing Process

Examples of Non-Standard Products

that Needed Strategic Sourcing

Consolidated to 16 products, 1 supplier:

$53,000 savings

Consolidated:

$120,000 savings

Consolidated:

$670,000 savings

Coflex – wrap bandaging

37 products5 suppliers$316,000 spent

Plastic containers

157 products40 suppliers$613,000 spent

Orthopedic soft goods

5,500 products197 suppliers

$3,400,000 spent

And there are a thousand more just like these!

Our Roadmap to Success

As the SCO Matures, “World-Class” Will Require Progression to

Category Management

Procurement Competence Over Time

Va

lue-A

dd

Price Focus TCO Focus Value Chain Focus

2008/2009 20122005

Contracting Strategic Sourcing Category Management

6. Manage Total Cost of Ownership

THIS IS ABOUT:

Instill Total Cost of Ownership / Total System Cost Mindset

Your suppliers costs end up being your costs

Move away from looking at just lowest price

More focus on best value

Evaluation of all factors that make up the cost of goods and services

It’s Important to Remember the Scope of

Supply Chain Management

Defineneeds &opportunities

Select supplier and

contract

Requisitionand buy

Create goodsor services

(supplier)

Freight,receive, store,and distribute

goods

Pay

Useandmaintain

Dispose(goods)

• It’s more than just good purchasing practices

• It’s all of the non-labor spend in a company

• It’s also the processes to get it into the company

The Supply ChainSCM Benefits

• Reduce supply base

• Develop alliances

• Total cost reductions

• Team purchasing

• Integrated support

with logistics

• Strategic vs. tactical

• Increased skills

• Reduced inventory

• Improved customer

service

7. Establish Key Supplier Alliances

Long-term relationships based upon trust, cooperation, commitment and open communication

Objective is to work together to reduce costs and share in the benefits

Reduction of suppliers is a natural outcome of supply chain management

Leverage your buying power by consolidating purchases with fewer suppliers

Cut administrative costs by managing fewer suppliers

Find your best suppliers and grow them

8. Develop Supplier Management Processes

Supplier Management: the forgotten or ignored step in Strategic Sourcing Process

Outstanding suppliers are rarely discovered ready to be good partners, but rather are developed by their customers into what they need to be

We must view and manage our suppliers as extensions of our own business

If you don’t manage our suppliers, they will manage us!

Establish supplier teams that actively manage the largest suppliers Joint goals

Quarterly business reviews

Joint goals

Establish & monitor key supplier metrics and measurements

Make sure you manage the supplier according to the evaluation criteria that you chose them

Why was the supplier chosen in the first place…price, quality, service, other?

How will we know when the supplier is failing to perform?

9. Streamline Order-to-Payment Processes

Transaction efficiency should be a passion

All order-to-payment processes are added costs to the system

Streamline and simplify everywhere possible

Paperless, low-cost, user friendly

Maximize use of technology

10. Manage Inventory

Inventory is money. Ask any CFO!!

Utilize proactive strategies to minimize inventory maintained

JIT

VMI

Reducing lead times

Taking more risk

Leverage tools and technology

Effective demand and forecasting methodology

Intrinsic forecasting techniques

Supplier integration

11. Manage Distribution & Logistics

The best companies make the following a high priority:

Facility layout & design – flexible, cross-docking

Use of equipment & technology – automated, integrated

Warehouse procedures – documented, integrated

Material transportation & routing

Material handling & flow

Use of 3rd party providers

Supplier integration & value added services

12. Establish & Monitor Controls

Make policies and procedures simple and easy to understand

Controls should be adequate to deter fraud or ensure that improper decisions are not being made and doing so without adding unnecessary process steps

Simplify process and controls – then select correct technologies to complement

Contract Management is a focal point for best of class companies

How can you mange your company’s contracts if you can’t even find them?

Contract compliance for compliance monitoring – maverick spend

Standardizing terms & conditions mitigates risk

Automate – due dates, expiration dates, etc.

Analyze contract performance

Health Care Supply Chain

Best Practices

In Healthcare We Have Clinical &

Non-Clinical Products & Services

Commodities

Clinical

Commodities

High-preference

Items

High-cost

preference items

Clinical Categories Non-Clinical Categories

Administration

Construction

HR

Nutrition

IT & Telecom

Marketing

12 Healthcare Supply Chain Executives

Offer Best Practice Ideas

• Use of EDI• Monitor profitability of each

department/program • Optimize procure-to-pay

processes• Contract compliance• Link materials (item master) to

revenue cycle (charge master)• Self contracting • Value analysis• Supplier credentialing • Real-time pricing and charging

• Auto receipt & matching with real time credits, returns and rebills

• Standardize products working with clinical committees

• Efficient recall systems• Master data management –

standards• Internalizing equipment

maintenance • Self distribution• Nightly electronic reordering based

upon replenishment needs• Auto replenishment of inventory

How aggressive are these?

Brent’s Additions to Best Practices

in Healthcare

• Implement pcard

• PPI strategies

• Value analysis – Clinical TCO application of strategic sourcing

• 80% of all non-labor spend controlled by suply chain

• High % of item master under contract

• Touch-less purchasing

• Reverse auction – eProcurement

• Clinical products (OR & Cathlab) controlled by supply chain

• Performance measurement

• Sourcing strategies unique to healthcare such as PPI (endo, spinal,

CV, ortho) and reprocessing

Rigorous Supply Chain Practices are not as

Common in Healthcare

• Supply chain sophistication is lacking – healthcare is behind in rigorous best practice development

• Bidding is primary activity

• Price is primary focus

• Not-for-profit presence reduces business focus

• Clinical excellence is primary focus

• Personal preference (especially with physicians) prevent Purchasing influence and ability to develop business with large partners where appropriate

• Suppliers have never been rewarded for alliance behavior, hence have not developed or justified this activity within their organizations

• Openness, transparency and trust generally are not common characteristics of healthcare suppliers and providers

• Industry dependence upon GPOs & distributors makes the supply chain more complex and difficult to develop one-on-one relationships

DRAFT - For SMI Team discussion only

Analyze

Spend

Analyze

Category

Analyze

Market

Implement

Strategy

Manage

Negotiations

Award &

Contract

Develop

Strategy

Traditional Contracting

Strategic Sourcing

Here’s a Problem…GPOs do

Contracting…Not Strategic Sourcing

Without doing true strategic sourcing it’s mostly about

price with “their” suppliers

GPOs should be used as a

TOOLnot a

STRATEGY

Solution

Unfortunately, many use it as a strategy!

How Much Self-Contracting?

…Should Require Some Evaluation

of Costs vs. Benefits

Self

ContractUse

GPO

Another approach introduced by Stratcenter is

“Optimal Contracting Balance” (OCB)

between GPO and IDN agreements*

How Much Self-Contracting

Can Your Organization Afford?

• Intermountain Healthcare’s experience:

• Invested $2.5 million/year into a new supply chain organization

• Obtained $20 million additional savings/year

• 8 to 1 payback

• Is this why 78.3% of IDNs expect to increase the dollar amount they contract for locally vs. relying on it’s GPO

(StratCenter info)

There is Power and Huge Benefit

in Supply Chain Management in Healthcare

• A penny saved is a penny invested somewhere else in healthcare

• 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

• Personal preference shouldn’t be confused with clinical excellence

• Product variation does not make clinical excellence

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

Other Comments about

Supply Chain Management – Healthcare Industry

• One man’s waste is another man’s income

• Non-profit should not mean not-as-efficient

• 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

• Quality does not mean “spare no expense”

Span of Influence by Supply Chain

Organizations is a Best Practice

Med/Surg

Clinical Products

IT, nutrition, CE

Benefits, advertising, other

non-traditional categories

Not just sourcing

but also distribution

System Approach to Purchasing

Supply Chain Organization Created

to Standardize Purchasing Practices

StandardizeSupplies

Potential Savings of $12M through Clinical

Commodity Standardization and Utilization Initiatives

Appropriate Product

Utilization

Typical Supply Savings %

A Three Tiered

Approach to

Supply

Savings

From Purchase Cost to Standardized Supplies to

Managing Product Utilization

Summary – What Can We

Learn & Apply?

Why We Must do Something Beyond “Insanity” –

Doing the Same Things

• Largest industry in world - will double in next 10 years

• Big financial pressures are coming

Changing reimbursement

Patient choice – new behavior

New entrants – suppliers & providers

• Senior Leadership is recognizing the contributions of supply chain strategies

• Must look outside healthcare to understand best practice potential

• Skills required – either develop them or hire them

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

This Can’t Be Our Supply Chain Forever

National

GPO

Contracting

Manufacturer Distributor Provider

Tracing Fees

(3-4%)

Payment Term

Discount (2%)

Channel Fees

(4-6%)

Distribution

(4-12%)

Additional

Markup

(4-8%)

Volume Rebates (1-2%)

Transactions

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

The Economy Should Provide

OPPORTUNITY Not Challenges for a GPO

• Burning platforms are appearing

• You never want a serious crisis to

go to waste

We cannot wait for the storm to blow over.

We have to learn to work in the rain.

Speed, Agility and Value are More Important

Than Ever Before

“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

Thank You