Supply Chain Cost Savings Strategies

1. Supply Chain Cost Savings Strategies Jean Sargent, CMRP, FAHRMM Director, Supply Chain University Kentucky Healthcare Vicki Smith-Daniels, Ph.D. Professor of Supply Chain Management Arizona State University

2. Agenda • Perspectives on Supply Chain Challenges • The UK Healthcare Story • Next Generating Benchmarking and Performance Improvement • Engaging Stakeholders in Supply Chain Improvements • Closing Comments

3. Perspectives on Supply Chain Challenges Industry Viewpoint

4. Supply Chain Perspectives • Revenue and Expense vs. Utilization • Charge capture – linking supply chain to revenue • Physician Preference Items – most costly • Processes to track new spend • Value Analysis/new technology processes • Capital expenses • Aligning with vendors for long term relationships • Inventory: turns, carrying costs, consignment, discounts, freight • E commerce • Benchmarking

5. Consumables Trend Spending • Consumable Products Expense • Increasing 64% faster than … • Salary Expense • Benefits Expense • Total Operating Costs Source: The Advisory Board Company, 2005 – Expense Growth Rates 2002-04

6. From A large Slice of the Pie Total Supply Chain Expense as a Percentage of Total Hospital Expense Supply Chain Management Expense 35% to 45% Other Hospital Operating Expense 55% to 70%

7. 15% Others 15% Logistics & Distribution 100% 25% Total Supplies 45% Supply Chain Management Clinical & General Labor, Other To a tipping point size slice: >50% of the budget Total Cost Incurred by Hospitals * 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.

8. Supply Chain Improves Bottom Line • Example: Average, private sector, not-for-profit hospital with margins <1% • Objective: Improve bottom line by $500K • Options: • Reduce supply chain expense by $500K • Increase revenue by $50 million Source: HFM Magazine, 2008

9. ’08: Improving Profitability By Supply Chain C-Suite SC Execs • APPROACHES CONSIDERED or TAKEN • to IMPROVE PROFITABILITY • Enhancing collaboration with physiciansin 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 1 1 2 5 3 6 7 2 6 3

10. Perspectives on Supply Chain Challenges Academic Perspectives

11. The Conditions are Right for a Perfect Storm Limited Cash & Credit Rising Oil Prices Changing Trade Policies Decreasing Product Integrity Weak Dollar

12. Forces and Supply Chain Complexity • Complexity • Loss of control • Little visibility • Reduced time to market • Quality risks • IP risks • Shortened product life cycles • SKU proliferation • System integration Relentless Pressure to Reduce Cost Product Innovation to Drive Revenue Growth Pursuit of New Markets Issues on the Minds of Manufacturing Supply Chain Executives

13. Risks and Pains Pain Points High • Supply Risks • Technology Risks • Demand Risks • Market Risks • Disruption Risks Severity Low Frequency of Occurrence Low High

14. Supply Chain Strategy Integration Supply Chain Redesign Performance Metric Alignment Responses to Pain and Complexity Responses

15. Return Return Source Deliver Return Return Return Return Return Return Integrated Supply Chain Plan Make Deliver Source Make Deliver Source Deliver Make Source Customer’sCustomer Your Company Supplier Customer Suppliers’Supplier Internal or External Internal or External Synchronizing material, information and financial flows both within and across organizational boundaries

16. Enterprise-Wide Supply Chain Management Planning Evaluating Selecting Purchasing/ Contracting Revenue Management Receiving/Accounts Payable Using Disposing SUPPLY CHAIN MANAGEMENT Managing Inventory Distributing Storing Warehousing Processing

17. The UK Healthcare Story

18. Physician leaders are deeply embedded in every aspect of UK Healthcare Operations • 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 services • Scope includes significant operational responsibilities Medical Directors (63) • Job description & clear expectations • Linked with administrator, outcomes and/or nurse manager (i.e. dyad/triad) • Creating management triad is an area of active development

19. Fundamental TenetImproving Our Quality, Safety & Efficiency“It is all about the System” • Efficient systems produce better outcomes at lower costs • Highest quality of care (best practices) is also the most cost effective – do it right the first time • Eliminate 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.

20. Lean Manufacturing • Philosophy focusing on reduction of the 7 wastes (all highly related to the supply chain) • Over-production • Waiting time • Transportation • Processing • Inventory • Motion • Scrap • 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

21. Reduce waste and reduce the burden on people and machines!

23. VAT & Capital ProcessesPhysician Perspective • Structured • Use of evidence reviewed by peers • Permits trials that requires an evaluation • Transparent • Open processes • Formula driven model to determine capital budgets • Processes are consistent with… • New physician responsibilities for operations • Lean/process improvement thinking • Long term strategy for UK Healthcare • Less discontent • A work in progress (not every one has bought on)

24. Chief Medical Officer Summary Reactions about our VAT Process • What works? • Forces more thought about the impact of new supplies (inventory, higher cost, increased practice variation). • Builds financial discipline into the purchasing process.  • Requires multi-disciplinary interchange. • Makes purchasing decisions more transparent (less backroom dealing). • What opportunities? • Get the small dollar low impact items out of VAT. • Get clinical leaders even more engaged in making it work. • Link more closely the capital equipment process when new equipment requires supplies.

25. UK Healthcare Supply Chain ProcessesInvolvement of All Stakeholders • VAT process • Members include: physicians, clinical staff, supply chain, finance • Submit electronic REW which contains: current item, new item information, CPT codes, usage, requestor • Capital process • Submit electronic request • Quarterly review by dollar amount up to $200,000 and over $200,000 • Decisions are based on analysis to include: • Contracted item • Reimbursement • FDA approved • Agreement by all physicians/users to standardize to new product

26. New Physicians Needs Process • Review of the physician preferences vs. currently in use • What manufacturer specific products are being requested • Are these on the formulary/on contract • Is this a new process that is part of the strategic plan • Is there capital being requested with new disposables? • Are the costs calculated against the VAT allowances

27. Standardization/Quality/Efficiency • Better care • Less costly • Team driven • Less variability in care

28. UK Healthcare Supply Chain • UK Healthcare recognized as a Top Performer by UHC (2008) • Managing the process • Department Chairs are involved • Limited $ = limited choices • Physician involvement • Better understanding • Less antagonism • Use of Benchmarking/Analytical Tools • SC Metrix

29. Benchmarking at UK Healthcare • Utilization of 3 different programs • Comparing other data to SCMetrix™ • Need for Industry standards and definitions • Comparing data to other facilities in the area • Filling the gaps

30. Next Generation Benchmarking

31. Driving Performance Improvement Operational Organizational SC Structure Supply Expense Practices & Capabilities

32. Adoption of the Industry Standard Standard Supply Expense Definition The net cost of all tangible items that are expensed including freight, standard distribution cost, and sales and use tax minus rebates. This would exclude labor, labor related expenses, and services as well as some tangible items that are frequently provided as part of service costs.

33. Practices and Capabilities Assessments Perceptual Assessments • Supply Chain Informants • Clinical Informants • 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

34. Case Study Pursuit of the Single Best Metric

35. Sun Devil Hospital • 175 Bed Hospital in Southwest U.S. • Facilities are 20 Years Old • 40% Revenue from Outpatient Services and Surgery • CMI • Other Top Revenue-Generating Service Lines • Cardiovascular • General Medicine • Orthopedics • Respiratory

36. 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

37. 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

38. Frequently Used Metric: Supply per Adjusted Patient Day CAUTION Reasonably good benchmark when peer group has a. similar bed size b. similar outpatient to inpatient revenue ratio c. 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

39. Sun Devil’s Issues • How to explain wide discrepancy in performance to c-suite? • Select a single metric? • Hold on…. what about looking at dept/service line metrics?

40. Low Labor Costs Impacting Performance Recall…….

41. And,…… Very likely Sun Devil has lower labor costs than the other hospitals in the peer benchmarking group

42. Supply in Line with Revenue Recall…….

43. Impact of Physician Preferences? Need to investigate Pharma utilization reports!!!

44. Impact of Patient Acuity Consider another benchmarking peer group with higher CMI??

45. Best Metric ?

46. Recommendations • Top Picks • Supply Expense per CMI Adjusted Patient Day • Supply Expense per CMI Adjusted Discharge • Serious Consideration • Pharma Supply % Total Supply Expense • Surgical Supply % Total Supply Expense • Supply Expense as a % of Revenue

47. Case Study Rightsizing Your Supply Chain Organization

48. Supply Chain FTEs Need more SC FTEs!! What type of FTEs? Where should they focus their attention?

49. Product Delivery FTEs Consider More Product Delivery FTEs! What about other areas?

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