Supply Chain Cost Savings Strategies

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Supply Chain Cost Savings Strategies Powered By Docstoc
					     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


                             1
                 Agenda

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




                               2
Perspectives on Supply Chain
         Challenges

      Industry Viewpoint




                           3
       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

                                       4
                      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




                                                                          5
Total Supply Chain Expense as a Percentage of Total
Hospital Expense



                                       Supply Chain
                                       Management
      Other                              Expense
Hospital Operating                      35% to
                                         45%
    Expense
 55% to
  70%




                                   6
To a tipping point size slice: >50% of
the budget
    Total Cost Incurred by Hospitals
                                                                                                     15%
                                                                               15%                     Others

                                                                            Logistics &
                                                         25%                Distribution                                 100%
                                                                                                                            Total
                                  45%                   Supplies
            Clinical &
            General
            Labor,                                                Supply Chain
            Other                                                 Management
* 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.



                                                                                                          7
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




                                   8
’08: Improving Profitability By
Supply Chain
APPROACHES CONSIDERED or TAKEN
to IMPROVE PROFITABILITY

• Enhancing collaboration with physicians in supply         1   1
  standardization and expense reduction

• Identifying appropriate metrics to benchmark the          2   5
  organization’s supply chain performance

• Decreasing direct/off-contract ordering                   3   6

• Initiating a value analysis process                       7   2

• Achieving minimum total expense for specialty/physician   6   3
  preference supplies (e.g., stents)


AHRMM Survey 2008



                                                     9
Perspectives on Supply Chain
         Challenges

    Academic Perspectives




                       10
The Conditions are Right for
     a Perfect Storm




                      11
           Forces and Supply Chain Complexity



                                                     Complexity
                                               •Loss of control
 Relentless Pressure to
      Reduce Cost                              •Little visibility

Product Innovation to Drive                    •Reduced time to market
     Revenue Growth                            •Quality risks

   Pursuit of New Markets                      •IP risks
                                               •Shortened product life
                                               cycles
                                               •SKU proliferation
                                               •System integration



   Issues on the Minds of Manufacturing Supply Chain Executives
                     Risks and Pains




                           High
• Supply Risks
• Technology Risks
                           Severity
• Demand Risks
• Market Risks
                            Low
• Disruption Risks
                                            Frequency of Occurrence
                                      Low                      High
Responses to Pain and Complexity



   Supply Chain        Supply Chain
Strategy Integration    Redesign
               Responses


              Performance
                 Metric
               Alignment
                              Integrated Supply Chain

                                                           Plan




       Deliver   Source      Make    Deliver   Source       Make       Deliver   Source   Make   Deliver   Source

       Return    Return              Return                                                      Return    Return
                                                                                 Return
                                               Return                  Return

                                                                                                           Customer’s
Suppliers’                Supplier                      Your Company                  Customer
                                                                                                            Customer
 Supplier
                  Internal or External                                           Internal or External



                    Synchronizing material, information and
                     financial flows both within and across
                           organizational boundaries
Enterprise-Wide Supply Chain Management


                                 Planning
                                 Evaluatin
                                     g            Purchasing/
                                 Selecting        Contracting
              Revenue
             Management



                                                                 Receiving/
                                                                 Accounts
                                                                  Payable
         Using
       Disposing          SUPPLY CHAIN
                          MANAGEMENT

                                                            Managing
                                                            Inventory

          Distributing



                                               Storing
                          Processing         Warehousing




                                                            16
The UK Healthcare Story




                  17
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



                                              18
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.



                                            19
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



                                         20
Reduce waste and reduce the burden on people and machines!


                                         21
22
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)


                                         23
     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.


                                             24
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


                                               25
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


                                   26
Better care
Less costly
Team driven
Less variability in care




                           27
      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


                               28
   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




                                   29
Next Generation Benchmarking




                     30
Driving Performance Improvement


  Operational




 Organizational




 SC Structure

                   Supply Expense
  Practices &
  Capabilities
   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.
                 Practices and Capabilities Assessments


     Perceptual Assessments
                                                  • Supply Chain Informants
• Supply Chain Integration
• Supply Chain Capabilities                       • Clinical Informants
• 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
         Case Study


Pursuit of the Single Best Metric
         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
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 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
        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?
Low Labor Costs Impacting Performance

Recall…….
And,……

          Very likely

      Sun Devil has lower
        labor costs than
            the other
         hospitals in the
    peer benchmarking group
    Supply in Line with Revenue

Recall…….
Impact of Physician Preferences?




Need to investigate Pharma utilization reports!!!
      Impact of Patient Acuity




Consider another benchmarking peer group with
                 higher CMI??
Best Metric ?
          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
        Case Study


Rightsizing Your Supply Chain
         Organization
  Supply Chain FTEs




Need more SC FTEs!! What type of FTEs?

Where should they focus their attention?
 Product Delivery FTEs




Consider More Product Delivery FTEs!

      What about other areas?
Contract Opportunities




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




Hire FTEs to formalize and centralize SC policies
          Recommendations
Hire additional FTEs
 Self-Managed Contracts
 Working with physicians
 Formalize SC policies
 Additional Product Delivery (consider options from
 distributor first)
 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

                                  53
                 Practices and Capabilities Assessments


     Perceptual Assessments
                                                  • Supply Chain Informants
• Supply Chain Integration
• Supply Chain Capabilities                       • Clinical Informants
• 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
              Move to Action




 Strategic                     Change
Integration                    Masters




  The New Measurement Paradigm