Supply Chain Cost Savings Strategies

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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

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Agenda

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

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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
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To a tipping point size slice gt50 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 SP Industry Surveys Healthcare
Facilities HFMA industry reporting Pipal
Research analysis.
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Supply Chain Improves Bottom Line

• Example Average, private sector, not-for-profit
  hospital with margins lt1
• Objective Improve bottom line by 500K
• Options
• Reduce supply chain expense by 500K
• Increase revenue by 50 million

Source HFM Magazine, 2008
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08 Improving Profitability By Supply Chain
C-Suite
SC Execs

• APPROACHES CONSIDERED or TAKEN
• to IMPROVE PROFITABILITY
• Enhancing collaboration with physicians in supply
  standardization and expense reduction
• Identifying appropriate metrics to benchmark
  the organizations 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
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Perspectives on Supply Chain Challenges

• Academic Perspectives

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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
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Risks and Pains
Pain Points
High

• Supply Risks
• Technology Risks
• Demand Risks
• Market Risks
• Disruption Risks

Severity
Low
Frequency of Occurrence
Low
High
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Responses to Pain and Complexity
Responses
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Integrated Supply Chain
Plan
Deliver
Make
Deliver
Make
Source
Source
Make
Deliver
Source
CustomersCustomer
Your Company
Supplier
Customer
SuppliersSupplier
Internal or External
Internal or External
Synchronizing material, information and financial
flows both within and across organizational
boundaries
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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
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The UK Healthcare Story
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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

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Fundamental TenetImproving Our Quality, Safety
EfficiencyIt 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.

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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

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Reduce waste and reduce the burden on people and
machines!
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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)

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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.

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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

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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

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Standardization/Quality/Efficiency

• Better care
• Less costly
• Team driven
• Less variability in care

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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

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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

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Next Generation Benchmarking
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Driving Performance Improvement
Operational
Organizational
SC Structure
Supply Expense
Practices Capabilities
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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.
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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

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Case Study

• Pursuit of the Single Best Metric

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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

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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

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Sometimes Used Metric Supply Rev

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

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

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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

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Sun Devils 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?

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Low Labor Costs Impacting Performance
Recall.
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And,
Very likely Sun Devil has lower labor costs than
the other hospitals in the peer benchmarking
group
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Supply in Line with Revenue
Recall.
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Impact of Physician Preferences?
Need to investigate Pharma utilization reports!!!
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Impact of Patient Acuity
Consider another benchmarking peer group with
higher CMI??
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Best Metric ?
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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

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Case Study

• Rightsizing Your Supply Chain Organization

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Supply Chain FTEs
Need more SC FTEs!! What type of FTEs? Where
should they focus their attention?
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Product Delivery FTEs
Consider More Product Delivery FTEs! What about
other areas?
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Contract Opportunities
Hire Additional Contract Personnel to Focus on
Self-Managed Contracts?
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Building SC Capabilities
Hire FTEs to formalize and centralize SC policies
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Recommendations

• Hire additional FTEs
• Self-Managed Contracts
• Working with physicians
• Formalize SC policies
• Additional 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, success
• Supply chain optimization imperative
• SC Leader must facilitate future vision,
  strategic plan, education, communication, metrics
  
• SC Leader must ensure it is achieved
• Executives recognize, understand, promote supply
  chain opportunity, impact, role
• Use of standards
• Use of benchmarking tools

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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

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Move to Action
Strategic Integration
Change Masters
The New Measurement Paradigm