Supply Chain Cost Savings Strategies
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Transcript of Supply Chain Cost Savings Strategies
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
1
Agenda
Perspectives on Supply Chain ChallengesThe UK Healthcare StoryNext Generating Benchmarking and Performance ImprovementEngaging Stakeholders in Supply Chain ImprovementsClosing Comments
2
Perspectives on Supply Chain Challenges
Industry Viewpoint
3
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
5
Consumable Products Expense Increasing 64% faster
than …
Salary ExpenseBenefits Expense
Total Operating Costs
Source: The Advisory Board Company, 2005 – Expense Growth Rates 2002-04
6
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
7
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
8
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
9
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
10
The Conditions are Right for a Perfect Storm
11
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
16
Enterprise-Wide Supply Chain Management
SUPPLY CHAINMANAGEMENTSUPPLY CHAINMANAGEMENT
PlanningEvaluatingSelecting Purchasing/
ContractingRevenue
Management
UsingDisposing
Distributing
ProcessingStoring
Warehousing
ManagingInventory
Receiving/Accounts Payable
17
The UK Healthcare Story
18
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
19
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.
20
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
21
Reduce waste and reduce the burden on people and machines!
22
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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
27
Better careLess costlyTeam drivenLess variability in care
28
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
29
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