Supply Chain Cost Savings Strategies

Jean Sargent, CMRP, FAHRMMDirector, Supply Chain

University Kentucky Healthcare

Vicki Smith-Daniels, Ph.D.Professor of Supply Chain Management

Arizona State University

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Agenda

Perspectives on Supply Chain ChallengesThe UK Healthcare StoryNext Generating Benchmarking and Performance ImprovementEngaging Stakeholders in Supply Chain ImprovementsClosing Comments

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Perspectives on Supply Chain Challenges

Industry Viewpoint

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4

Supply Chain Perspectives

Revenue and Expense vs. UtilizationCharge capture – linking supply chain to revenue

Physician Preference Items – most costlyProcesses to track new spend

Value Analysis/new technology processesCapital expensesAligning with vendors for long term relationshipsInventory: turns, carrying costs, consignment, discounts, freightE commerceBenchmarking

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Consumable Products Expense Increasing 64% faster

than …

Salary ExpenseBenefits Expense

Total Operating Costs

Source: The Advisory Board Company, 2005 – Expense Growth Rates 2002-04

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OtherHospital Operating

Expense

55% to 70%

Supply Chain Management

Expense

35% to45%

Total Supply Chain Expense as a Percentage of Total Total Supply Chain Expense as a Percentage of Total Hospital ExpenseHospital Expense

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25%

Supplies

* Figures based on HFMA estimates. Labor cost includes salaries, wages and benefits based on average of leading hospitals in the U.S. and Others is inclusive of profits to the hospitals. Source: S&P Industry Surveys: Healthcare Facilities; HFMA; industry reporting; Pipal Research analysis.

Total

100%

Clinical &GeneralLabor, Other

45%

Others

15%

Logistics & Distribution

15%

Total Cost Incurred by Hospitals

Supply Chain Management

To a tipping point size slice: >50% of the budget

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Example: Average, private sector, not-for-profit hospital with margins <1%

Objective: Improve bottom line by $500K

Options:Reduce supply chain expense by $500KIncrease revenue by $50 million

Source: HFM Magazine, 2008

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APPROACHES CONSIDERED or TAKEN to IMPROVE PROFITABILITY

• Enhancing collaboration with physicians in supply standardization and expense reduction

• Identifying appropriate metrics to benchmark the organization’s supply chain performance

• Decreasing direct/off-contract ordering

• Initiating a value analysis process

• Achieving minimum total expense for specialty/physician preference supplies (e.g., stents)

AHRMM Survey 2008

’08: Improving Profitability By Supply Chain

C-Sui

te

C-Sui

te

SC Exe

cs

SC Exe

cs

11 11

22 55

33 6 6

7 7 22

6 6 33

Perspectives on Supply Chain Challenges

Academic Perspectives

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The Conditions are Right for a Perfect Storm

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Forces and Supply Chain ComplexityForces and Supply Chain Complexity

Relentless Pressure to Reduce Cost

Pursuit of New Markets

Product Innovation to Drive Revenue Growth

ComplexityComplexity

•Loss of control

•Little visibility

•Reduced time to market

•Quality risks

•IP risks

•Shortened product life cycles

•SKU proliferation

•System integration

Issues on the Minds of Manufacturing Supply Chain Executives

Risks and Pains

• Supply Risks

• Technology Risks

• Demand Risks

• Market Risks

• Disruption RisksFrequency of Occurrence

Severity

Low

Low

High

High

Pain Points

Responses to Pain and ComplexityResponses to Pain and Complexity

Supply ChainSupply ChainRedesignRedesign

PerformancePerformanceMetricMetric

AlignmentAlignment

Supply ChainSupply ChainStrategy IntegrationStrategy Integration

Responses

Supplier

Plan

Customer Customer’sCustomer

Suppliers’Supplier

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver

Internal or External Internal or External

Your Company

Source

Return Return ReturnReturn Return Return Return Return

Integrated Supply Chain

Synchronizing material, Synchronizing material, information and financial flows information and financial flows

both within and across both within and across organizational boundariesorganizational boundaries

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Enterprise-Wide Supply Chain Management

SUPPLY CHAINMANAGEMENTSUPPLY CHAINMANAGEMENT

PlanningEvaluatingSelecting Purchasing/

ContractingRevenue

Management

UsingDisposing

Distributing

ProcessingStoring

Warehousing

ManagingInventory

Receiving/Accounts Payable

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The UK Healthcare Story

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Engaged at all levels (Inpatient & outpatient settings)

CMO & Associate CMOs (5)Specialized areas – quality, medical informatics, inpatient services, throughput, peri-op services, medical affairs and ambulatory servicesScope includes significant operational responsibilities

Medical Directors (63)Job description & clear expectationsLinked with administrator, outcomes and/or nurse manager (i.e. dyad/triad)

Creating management triad is an area of active development

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Efficient systems produce better outcomes at lower costsHighest quality of care (best practices) is also the most cost effective – do it right the first timeEliminate unnecessary variation and waste (read supply chain)Standardize the processes &Implement “best practices”

Wide adoption of the Lean philosophy and tools…a system in the relentless pursuit to eliminate waste and

non value added activities.

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Philosophy focusing on reduction of the 7 wastes (all highly related to the supply chain)

Over-productionWaiting timeTransportationProcessingInventoryMotionScrap

By eliminating waste (muda), quality is improved, production time is reduced and cost is reduced

If you adopt the Lean approach to improve quality then you very much care about the supply chain

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Reduce waste and reduce the burden on people and machines!

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StructuredUse of evidence reviewed by peersPermits trials that requires an evaluation

TransparentOpen processesFormula driven model to determine capital budgets

Processes are consistent with…New physician responsibilities for operationsLean/process improvement thinkingLong term strategy for UK Healthcare

Less discontentA work in progress (not every one has bought on)

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What works?1. Forces more thought about the impact of new supplies

(inventory, higher cost, increased practice variation).2. Builds financial discipline into the purchasing process. 3. Requires multi-disciplinary interchange.4. Makes purchasing decisions more transparent (less

backroom dealing).

What opportunities?1. Get the small dollar low impact items out of VAT.2. Get clinical leaders even more engaged in making it

work.3. Link more closely the capital equipment process when

new equipment requires supplies.

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VAT processMembers include: physicians, clinical staff, supply chain, financeSubmit electronic REW which contains: current item, new item information, CPT codes, usage, requestor

Capital processSubmit electronic requestQuarterly review by dollar amount up to $200,000 and over $200,000

Decisions are based on analysis to include:Contracted itemReimbursementFDA approvedAgreement by all physicians/users to standardize to new product

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Review of the physician preferences vs. currently in use What manufacturer specific products are being requested Are these on the formulary/on contractIs this a new process that is part of the strategic planIs there capital being requested with new disposables?Are the costs calculated against the VAT allowances

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Better careLess costlyTeam drivenLess variability in care

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UK Healthcare Supply Chain

UK Healthcare recognized as a Top Performer by UHC (2008)Managing the processDepartment Chairs are involvedLimited $ = limited choicesPhysician involvement

Better understandingLess antagonism

Use of Benchmarking/Analytical Tools SC Metrix

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Benchmarking at UK Healthcare

Utilization of 3 different programsComparing other data to SCMetrix™Need for Industry standards and definitionsComparing data to other facilities in the areaFilling the gaps

Next Generation Benchmarking

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Driving Performance ImprovementDriving Performance Improvement

Supply ExpensePractices & Capabilities

SC Structure

Organizational

Operational

Adoption of the Industry StandardAdoption of the Industry Standard

Standard Supply Expense DefinitionStandard Supply Expense Definition

The net cost of all tangible items that are expensed including freight, The net cost of all tangible items that are expensed including freight, standard distribution cost, and sales and use tax minus rebates. This standard distribution cost, and sales and use tax minus rebates. This

would exclude labor, labor related expenses, and services as well as some would exclude labor, labor related expenses, and services as well as some tangible items that are frequently provided as part of service costs. tangible items that are frequently provided as part of service costs.

Practices and Capabilities AssessmentsPractices and Capabilities Assessments

Perceptual Assessments

• Supply Chain Integration

• Supply Chain Capabilities

• Product/Supply Governance

• Physician Supply Incentives

• Process Improvement

• Performance Measurement

• Contract Management

• Supply/Supplier Management

• SCM Information Quality

• SCM IS Integration

• Process Automation

• Electronic Ordering

• Trading Partner Relationship

• Supply Chain Informants

• Clinical Informants

Case Study

Pursuit of the Single Best Metric

Sun Devil Hospital

175 Bed Hospital in Southwest U.S.Facilities are 20 Years Old40% Revenue from Outpatient Services and SurgeryCMI Other Top Revenue-Generating Service Lines

CardiovascularGeneral MedicineOrthopedicsRespiratory

Frequently Used Metric: Supply % OE

Assessment

• Often Used for Budgeting • Can Be Used to Detect Changes• Need Detailed Information on Peers

Common Reasons for Poor Performance

• Higher Physician Preference Items• Higher Patient Acuity• Lower Labor Costs• Supply Chain Needs Improvement

Sometimes Used Metric: Supply % Rev

Assessment

• Often Used for Budgeting • Can Be Used to Detect Changes• Need Detailed Information on Peers• Talks the C-Suite’s Language

Common Reasons for Poor Performance

• Poor Reimbursement Levels• Higher Inpatient Services than Outpatient Services• Higher Physician Preference Items• Supply Chain Needs Improvement

Frequently Used Metric: Supply per Adjusted Patient Day

CAUTION

Reasonably good benchmark when peer group hasa. similar bed sizeb. similar outpatient to inpatient revenue ratioc. similar output of high supply intensity services

Common Reasons for Poor Performance

• Higher Physician Preference Items• Higher Patient Acuity• Wrong Benchmarking Peer Group• Supply Chain Needs Improvement

Sun Devil’s Issues

• How to explain wide discrepancy in How to explain wide discrepancy in performance to c-suite?performance to c-suite?

• Select a single metric?Select a single metric?

• Hold on…. what about looking at dept/service Hold on…. what about looking at dept/service line metrics?line metrics?

Low Labor Costs Impacting Performance

Recall…….

And,……And,……

Very likely

Sun Devil has lowerlabor costs than

the otherhospitals in the

peer benchmarking group

Supply in Line with Revenue

Recall…….

Impact of Physician Preferences?Impact of Physician Preferences?

Need to investigate Pharma utilization reports!!!

Impact of Patient AcuityImpact of Patient Acuity

Consider another benchmarking peer group with higher CMI??

Best Metric ?Best Metric ?

Recommendations

Top PicksSupply Expense per CMI Adjusted Patient DaySupply Expense per CMI Adjusted Discharge

Serious ConsiderationPharma Supply % Total Supply ExpenseSurgical Supply % Total Supply ExpenseSupply Expense as a % of Revenue

Case StudyCase Study

Rightsizing Your Supply Chain Rightsizing Your Supply Chain OrganizationOrganization

Supply Chain FTEsSupply Chain FTEs

Need more SC FTEs!! What type of FTEs?Need more SC FTEs!! What type of FTEs?

Where should they focus their attention? Where should they focus their attention?

Product Delivery FTEsProduct Delivery FTEs

Consider More Product Delivery FTEs!Consider More Product Delivery FTEs!

What about other areas?What about other areas?

Contract OpportunitiesContract Opportunities

Hire Additional Contract Personnel to Focus Hire Additional Contract Personnel to Focus on Self-Managed Contracts?on Self-Managed Contracts?

Building SC CapabilitiesBuilding SC Capabilities

Hire FTEs to formalize and centralize SC policies

Recommendations

Hire additional FTEsSelf-Managed ContractsWorking with physiciansFormalize SC policiesAdditional Product Delivery (consider options from distributor first)

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Engaging Stakeholders in Supply Chain Improvements

Supply chain is strategic aspect of providers’ business, successSupply chain optimization imperativeSC Leader must facilitate future vision, strategic plan, education, communication, metrics SC Leader must ensure it is achievedExecutives recognize, understand, promote supply chain opportunity, impact, roleUse of standardsUse of benchmarking tools

Practices and Capabilities AssessmentsPractices and Capabilities Assessments

Perceptual Assessments

• Supply Chain Integration

• Supply Chain Capabilities

• Product/Supply Governance

• Physician Supply Incentives

• Process Improvement

• Performance Measurement

• Contract Management

• Supply/Supplier Management

• SCM Information Quality

• SCM IS Integration

• Process Automation

• Electronic Ordering

• Trading Partner Relationship

• Supply Chain Informants

• Clinical Informants

Move to ActionMove to Action

The New Measurement ParadigmThe New Measurement Paradigm

StrategicIntegration

ChangeMasters