April 2009

Speaker: Michael Bernhard Senior Hospital Supply Chain Business

Process Consultant, specialized in: Inventory Management, Procurement & eCommerce Lawson Procurement Suite

18 years experience across industries Healthcare, Manufacturing, High Tech, Military

100% focus=hospital supply chain since 2001 Have worked with dozens of hospitals

Former employers: GHX, CSC, Stryker, U.S. Navy

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Agenda Trends in Healthcare What does it mean to hospital SC leadership? What can we do? Some real life examples What else can we do to add value?

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Networking Hospital MM/SC folks – stand up Introduce yourself to someone

name, position, location

Do you have a SC management strategic plan?

What 2 projects are you working on now and most passionate about as strategically important?

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This slide came from Washington Hospital Association web site April 15, 2009

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This slide came from Washington Hospital Association web site April 15, 2009

Washington hospital total margins- declining trend; negative in the Q4 2008.

Data Source: DATABANK Quarterly Financial Reporting System unaudited data, as of March 6, 2009.

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Comparison of Total Margin TrendsJuly 2007 - December 2008

(8.5)

(1.0)

(12)

(10)

(8)

(6)

(4)

(2)

0

2

4

6

8

10

2007Third Quarter

2007Fourth Quarter

2008First Quarter

2008Second Quarter

2008Third Quarter

2008Fourth Quarter

Percent

U.S. Washington

This slide came from Washington Hospital Association web site April 15, 2009

Trends in Healthcare The overall result

Project budgets are being trimmed Jobs are being cut Hospitals are closing Pressure to reduce non-labor costs! Increased cost controls

Supply chain leadership is having to redefine their role!

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What does it all mean? Increased pressure to cut costs & improve efficiency Increased focus on improved information

management and decision support Projects designed to improve processes and operations

are taking a back seat Increased requirement to justify services and staffing

levels Less money to make this happen?

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What does it all mean?

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Why pressure Supply Chain? Supply costs account for 20-30% of operating budget A 5-10% cost reduction is SIGNIFICANT!!

(1-3% increase in net profit)

If a hospital has 2% net profits, this opportunity equates to doubling your net profits

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Why pressure Supply Chain? Or, said another way:

Assuming an operating margin of 2% $1 of cost savings is worth $50 in gross revenue

$100k in SC savings = $5M in gross revenue

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What does it all mean? The projects that will be approved are those that have a

POSITIVE, NEAR TERM IMPACT on cash flow and/or profits

Also, projects of strategic importance will be funded, although not nearly as much $$ will be available as in past years

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A manufacturer states that inaccurate product data requires 1 out of 5 orders to be manually processed, at a cost 7 times higher than an electronic order.

- McKinsey & Co.

More than 24% of time spent by supply management personnel at hospital and distributor sites is spent correcting non-conformance errors.

- Concepts in Healthcare

70-80% of all product errors are directly related to inaccurate product information.

- Healthcare e-Business Collaborative

The estimated cost to research and correct a single order exception ranges from $15 to $50 per error.

- Healthcare Distribution Management Association

Healthcare Data is problematic

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Healthcare Data is problematic Challenging to synchronize data with suppliers Unable to track items throughout their life cycle Difficult to optimize operations (quoting, ordering,

receiving, inventory management, returns) Software providers are unable to programmatically

integrate best practices

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Anything good out there? Automation is getting better:

Data Management, Procure-to-Pay, Document Management

Collaborative Networking – AHRMM, LinkedIn.com Best Practices are being shared and implemented (see

recent article MM in Healthcare, April 2009 pg 20-24) Data Standards – GS1 gaining industry-wide support

Hospitals, Distributors, GPOs, Manufacturers

Continuous Process Improvement based culture Federal Funding

$19B of stimulus $$ for EHR, more $$ Omnibus Approp. Act

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What else is positive? “…this crisis is also creating an opportunity that was

not previously there – the BURNING PLATFORM…

…While we would all rather not be at this point, the burning platform unites our hospital staff with the organization, breaking down the silos and barriers that many could not overcome in good times.”

~ Supply Chain Strategies & Solutions, AHRMM publication, Mar/Apr 2009, pg 1

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A Roadmap for Success

Road Map for Success Know your mission Assess your situation Identify opportunities, aggregate into logical projects Prioritize projects into multi-year strategic plan Take Action Build a foundational culture of continuous process

improvement Build trust Measure, Report, Improve!

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Assess – 4 Categories Accountability Processes / Organization Data Infrastructure

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7 Guiding Principles Assign Accountability Manage Information Effectively Standardize – Items, Vendors, Processes, Everything Incorporate exception based management, where able Maximize existing tools and functionality Connect systems – end to end, across the entire SC Measure Performance

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The Value of C.P.I. “Indeed the very large gains in productivity in

manufacturing come from continuous implementation of discrete changes in processes that reduce the level of costs of production. To the degree that this happens, year after year, it is because of a management process that continually applies resources to search for additional opportunities to reduce the level of costs.”

~ High and Rising Healthcare Costs: Demystifying U.S. Healthcare Spending, Oct 2008

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Sample Strategic Assessment

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Sample Process Assessment

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Define opportunities Using your situational assessment, guiding principles,

and industry best practices -> make a list of opportunities that you want to pursue

Aggregate the opportunities into logical projects Assign values that quantify VALUE and EFFORT Prioritize based on Effort/Value

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Prioritize Projects

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Item Value Func Tech Data Lead Staff

Implement SC performancemanagement dashboard

Med 2 4

Automated Storeroom Replenishment-for Surgery

High 5 5

Mobile SC (handhelds) Low 4 2

Consolidated Distributor Agreement (RFP management)

Very High

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SAMPLE

Effort-Reward Matrix

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Planning for success Turn your analysis into a strategic plan Communicate to your management team Refine based on interaction with management Finalized plan to be shared with your staff and peers –

align your objectives with IT, HR, OR, Lab, SPD, your staff, etc

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Assign Accountability Measure everything Report on it Act on it -> continue to achieve “personal best” Celebrate successes!

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Sample Reporting

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Process: Inventory Mgmt Cycle Counting Migrate non-asset inventory to asset Cross-training of staff

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Cycle Counting Enhances accuracy – leads to increased customer

service Uncovers the root cause of process issues Provides foundation for reducing inventory levels,

which lower costs (less $$ on shelf, less space required) Reduces wasted time looking for supplies Possibility to eliminate physical inventory

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Non-Asset Inventory to Asset Improved management of high dollar inventory

OR, Cath Lab, Interventional Immediate, positive P/L impact Possibly able to use some of the $$ for other projects

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Non-Asset Inventory to Asset

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$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000M

onth

1M

onth

2M

onth

3M

onth

4M

onth

5M

onth

6M

onth

7M

onth

8M

onth

9M

onth

10M

onth

11M

onth

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Dept Net Profit

Dept Net Profit with inventory as asset

BEFORE Annual Profit=$4.8MAFTER Annual Profit=$5.6M

$800k inventory migration to Asset

Dept Net Profit by Month

Process: Customer Service New Product Introduction / Value Analysis Buyer serving as problem solver Customer support center / call center Cross-training of staff

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Process: Procure-to-Pay Improved eCommerce (EDI beyond the PO) PO confirmation exception management Improved returns processing Improved Supplier Relations PERFECT ORDER program Implement alternate payment options (e.g. P-Card) Cross-training of staff

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eCommerce Optimization Item readiness Increased utilization Data cleanup using operational reports

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eCommerce Item Readiness Obtain data readiness report from eComm provider

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Increase EDI Utilization

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Category Total EDI EDI % FAX FAX %

$ Volume $166M $28.8M 17% $74.5M 45%

# of Pos 78,111 36,559 47% 31,053 40%

# of Lines 325,471 216,352 67% 36,193 11%

EDI35%

Fax40%

Other25%

# of POs

EDI67%

Fax11%

Other22%

# of Lines

EDI17%

Fax45%

Other38%

$ Volume

Analyze PO Issue Method

Vendor Cat # cleanup Use Operational Report from eComm provider

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UOM Cleanup Use Operational Report from eComm provider

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PO Confirmation Exceptions Use Operational Report from eComm provider

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PO Confirmation Management Standardized Exception Management processes

Backorder Price exception Incorrect Catalog Number Incorrect UOM

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Does your staff know how to manage each exception type? Does everyone do this the same way?

The Case for P-Cards P-Cards provide an alternative option that can reduce the

workload for AP and Purchasing without increasing costs P-Card transactions cost less to process than “PO/PO

Invoice” transactions P-Cards provide a rebate to the organization (typically 1%)

Note: the vendor often passes back to the customer in the form of higher contract pricing

Significantly reduce the use of the petty cash Lawson P-Card module will print 1099’s at year end!

There is a WHITE PAPER on P-Cards at www.RPIC.com45

The Case for P-Cards Some expense codes are prime targets for P-Card (non-

contract, one-time vendor type transactions) Facilities-management supplies, Forms, Repairs, Education,

Freight, etc

The invoice amount for “Targeted expense codes” is often <$2000 for >90% of these invoices

Common concerns= loss of control (e.g. increased maverick buying and fraudulent use of the card for personal reasons); A properly implemented program will actually increase the

controls and visibility

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Example: Actual Data-Large IDN

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Threshold (per invoice) % of total invoices for the targeted expense codes

$100 53%

$250 72%

$500 82%

$1000 90%

$1500 92%

$2000 94%

The Case for P-CardsWhy are P-Cards less expensive to process? The transactions are typically interfaced directly from a file

from the bank into the AP system, eliminating the need for manual entry of POs and Invoices

This results in a reduction in the number of invoices Vendors are paid quickly

Reduces phone calls (e.g. where is my check?) Reduces credit holds

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The Case for P-CardsHow can P-Cards be controlled? Cards can be restricted to certain people (based on need) The types of purchases can also be restricted based on a

variety of business rules (e.g. dollar/commodity /vendor)

The P-Card program creates clear accountability Buying habits can be more easily monitored (using

pattern-based audits) This can be used to reduce risk of fraud and ensure that

cardholders are aware that their buying habits are monitored.

There is a great WHITE PAPER on P-Cards at www.RPIC.com

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The PERFECT ORDER Not every order is perfect every time Do you know where the biggest issues are for you? Pioneered by the Strategic Market place Initiative

(SMI), a Perfect Order is defined as:“a PO processed electronically from order to payment

without human intervention, which is delivered to the correct location, on time, undamaged, at the correct price, with the desired quantity, on the first attempt”

See white paper at www.smisupplychain.com

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The PERFECT ORDER Requires two willing trading partners (supplier,

customer) to engage in a long-term collaborative effort for the benefit of both partners.

The result is LOWER COSTS for the SC system and for BOTH trading partners

Actions to implement: Data synchronization (location, product, pricing) Decisions – how are each of the 10 elements graded? Data collection & root cause analysis Process/Software corrections

See white paper at www.smisupplychain.com 51

Process: Contract Management Enterprise-wide Contract Repository Cross-training of staff

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Centralized Contract Repository

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“ContractManagement”

Application(web browser

interface)

Contract Administrator(Data Entry)Enter contract details•Vendor•Effective Dates•Item Level Details•Price•Payment Terms•Contract Status•Location of original hard copy•Digital image of original contract•Digital photos

Contract ManagementReporting to support:•Compliance Tracking•Expiration Management•Signature Management

Management/StaffSelf Service:•Browsing•Search•Reporting

I.T.Administrator•Data Organization•User Registration•Data Backup / Restore•Develop Standard

Reporting Tools

Data Optimization Item/Agreement maintenance process re-design Reduce Number of Items without an agreement price GPO contract pricing synchronization GS1 Readiness Duplicate vendor cleanup Same Item, Different Price analysis Exception-Based Data Quality Reports & Queries Cross-training of staff

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GS1 data preparation Education – hospital MM/SC leadership should

become experts in GS1 by end of 2009 Industry goals:

to use standardized location codes (GLN) by end of 2010 to use standardized item numbers (GTIN) by end of 2012

Hospitals have a lot of work to complete to achieve these goals. Start now if you can!

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Same Item, Different Price Analysis

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Item # Item Desc Total Qty BUOM Type MinOfUnit Cost MaxOfUnit Cost AvgOfUnitCost Possible OverSpend219390 ICD BIVNT DDDR CONCERTO 30 EA N $21,500.00 $29,900.00 $26,639.03 $154,171243252 DEFIB PROMOTE RF 16 EA N $20,400.00 $28,475.00 $27,595.83 $115,133219391 ICD DC DDDR VIRTUOSO 23 EA N $16,000.00 $25,700.00 $20,753.08 $109,321107891 ADMIN SET IV PMP 20 GTT 104IN 510 CA I $216.50 $625.57 $399.34 $93,248242897 PACEMAKER ZEPHYR XL DR 39 EA N $4,250.00 $11,195.00 $6,234.27 $77,386219390 ICD BIVNT DDDR CONCERTO 15 EA I $22,700.00 $29,625.00 $27,316.67 $69,250168041 ADMIN SET IV PMP 15GTT 129IN 16238 EA N $3.64 $14.57 $7.43 $61,54335-2005 TRINITY 5CC ALLOGRAFT ID#T-07- 41 EA X $350.00 $2,000.00 $1,703.57 $55,496191158 CEMENT BONE SMPLX PRO TOBRA 40 42 BX N $2,475.00 $4,275.00 $3,617.65 $47,991192821 PACEMAKER INSIGNIA ULTRA DR 36 EA N $5,100.00 $7,495.00 $6,421.53 $47,575157034 ICD 2 CHMBR VITALITY II DR 15 EA N $15,000.00 $23,400.00 $18,063.00 $45,945219392 ICD DC VVIR VR VIRTUOSO 15 EA N $13,900.36 $22,630.00 $16,830.06 $43,946131896 PACK CABG 242 EA N $114.46 $762.30 $293.52 $43,333232517 DRAPE PK MINOR PROC 285 CA N $24.92 $182.10 $166.55 $40,366220429 PACEMAKER 2 CHMBR ADAPTA DR 42 EA N $5,000.00 $7,100.00 $5,915.19 $38,438246570 DEFIB CURRENT DR 13 EA N $17,680.00 $24,000.00 $20,525.71 $36,994224077 TROCAR ENDOPATH XCEL BLDELESS 61 BX N $88.25 $981.85 $671.65 $35,588232642 ICD ATLAS II PLUS DR 5 EA N $11,825.00 $24,000.00 $18,565.00 $33,700205874 LEAD ICD SPRNT QUATRO SECUR 65 37 EA N $4,371.00 $6,400.00 $5,269.49 $33,244216498 TY TIB MOD CEM COCR SZ 3 134 EA N $1,000.00 $2,426.76 $1,234.16 $31,378

Cost Savings Initiatives Re-negotiate implants &/ CRM contracts Master distributor initiative Cost recovery: Evaluate actual pricing versus contract Freight management initiatives-use your account!! Non-contract price stabilization Credit memo tracking Migrate non-asset inventory to asset Savings outside of SC areas – shine the light!!

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Master Distributor Initiative Expect to reduce operating expenses 4-9% annually Multi year guaranteed savings from distributor Plus deep-discounted technology offerings Drive Technology ROI by aligning strategy with vendor

to support full functionality of ERP system EDI, receiving, catalog and master file maintenance, AP

management, reporting Reduce costs by reducing channels

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Master Distributor Initiative PERCEPTION: Win / Lose

Providers win by consolidating distribution channels –reduce mark up and margin

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Master Distributor Initiative REALITY: Win / Win

Providers benefit by consolidating the vendor base Price reductions through increased purchasing volumes Lower processing costs Increased visibility into supply chain performance

Distributors benefit by increasing revenues and reducing costs Higher throughput of volume against a fixed asset Consolidated order management Information aggregation: improved visibility into procedure

volume and product mix Open channel for self-manufactured goods

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Creating the “Melting Iceberg”

Managing Change

Gaining support for initiatives Gain support by using SEE-FEEL-CHANGE model

versus ANALYSIS-THINK-CHANGE model

Example – Medical Gloves

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Cost controls Limit # of people who have authority to commit

hospital funds Ensure you are paying the correct contract price Measure and report savings routinely Hold dept mgrs accountable for their supply budgets

Including freight, rush charges, etc Limit vendor access Reprocess

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Taken from AHRMM’s Supply Chain Strategies & Solutions magazine, Mar/Apr 2009 pg 6-7

What else? Offer your Change Management expertise as a resource

to the hospital Get involved in “Going Green” initiatives Get involved in Electronic Health Records initiatives Get involved in clinical department cost reductions Get involved in professional societies (AHRMM, WSHMMA)

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Where can you play a supporting or guiding role?

Example: Clinical Staff Mgmt The greatest expense for any hospital is the cost of

labor Can your organization adequately measure the costs

associated with the provision of patient care? If not, how does your organization administer the

staffing processes associated with patient care?

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Example: Clinical Staff Mgmt Real-time labor usage information is critical to controlling

labor costs Innovative Clinical Staffing Management solutions are

becoming available that can: Provide dynamic information on a real-time, 24/7 basis Reduce overstaffing by monitoring patient census and

adjusting staff levels accordingly Direct Savings of 10% to 30%

Case study: $2.8M annually for a hospital with 100 active beds

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Will your hospital uncover this opportunity?Can you play a role by “shining a light”?

Education AHRMM (8 Educational tracks this year)

Distribution Finance Technology Solutions Purchasing Strategic Planning Clinical Resource Management Professional Development GS1 Standards

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Questions??

Michael Bernhardmbernhard@TridentEdge.com(443) 744-2204 (mobile)

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