What you should be telling your CFO about your role in the organization

2019 Healthcare Coalition ConferenceLouisville, Kentucky

Mike Stigler, CPA, FHFMAPresident, Alliant Purchasing, LLCSeptember 19, 2019

Supply Chain Maturity Model Review

Functional/Silo Focus

…with functional focus.Performance is

unplanned.Processes are

poorly controlled,and reactive.

Processes are vertically aligned/siloed

IntegrationFocus

…with integrated functionality,

intra-company collaboration, and cooperation with

clinicians andbusiness units.

Performance is defined at the organization level.Processes are controlled,

understood, and proactive

Extended Network Focus…as a market leader

through innovation and a culture of consumer-facing collaboration.

Processes are continuously adapted

and improved with new ideas, and capabilities

are predictive. A profitable delivery of patient outcomes through innovation

across clinical, payer, and supply networks

exists

ProcessFocus

…with a focus oninternal functions.

Performance is defined at the Supply Chain Organizational

(SCO) level.Processes are controlled,

yet often reactive

OutcomeFocus

…with cooperation from supply partners and

end-users.Performance is

measured from the point of manufacturing

to the point of care.Processes are value-

focused, proactive, and controlled using

quantitative techniques.Fully integrated supply

chain optimization technology exists

Supply Chain Maturity Model is Divided into Five Stages of Maturity

Supply Chain Maturity Model Review

Domains Functional Focus Process Focus Integration Focus Outcomes Focus Extended Network Focus

ClinicalIntegration

SC not included in clinical decision making and

reactive to the needs of clinical staff

SC included in clinical decision making as a support

versus stakeholder; New Product Committee in use

Fully functioning system Value Analysis program; SC works

collaboratively with clinicians (Lab, RX, RT) across the

system; clinical evidence is used in product and service

decision-making

SC is key stakeholder in systems cost, quality, and

outcome goals; SC supports procedural CQO modeling

used for payor related programs

SC partners with all alternate siteentities as a part of the

continuum of care (CoC) to manage costs while supporting

improved quality; SC performance metrics include CoC

Technology Disparate systems and SCO focused functionality and

application

Unifying some systems at POU and across individual

functions; some shared information and data sets

Fully integrated systems with cross-platform information

exchange; technology facilitates data analytics

Common ERP platform/machine-to-machine communications; connection

between Electronic Health Record (EHR) and ERP

Interoperability is patient-driven and enables real-time decisions; Real-time continuum of care data

aggregation across providers, payers and suppliers

Strategy and Governance

SC lacks strategic plan and is disconnected from

clinical groups and overall organizational goals

SC has distinct goals and ops plan and manages regulatory compliance; SC is connected with clinical and financial and department leads; strategy is

locally-focused

SC strategy is aligned to the integrated enterprise multi-yr

strategic plan; cross-functional decision making across internal SC; strategy may be regionally-focused

Organization has clear merger/affiliation strategy and balances mission and margin; organization has an expanded

regional and national focus

Supply chain strategic plan anticipates and operationalizes

future trends in care delivery

Financial Measures and Data Analytics

Metrics directed at basic operational and reporting requirements; business

analysts completing a- hoc requests

Comprehensive SC reporting and scorecards; awareness

of advanced analytics, collecting big data, and developing an analytics

roadmap

SC and enterprise-wide metrics are integrated;

centralized analytics business unit with clear goals to implement advanced

analytics;

Metrics linked with patient outcomes and extend across

care partners; analytics business unit targets high priority areas, normalized

analytics function collaborating across BUs

Metrics available real-time and shared across IDNs and supply

channels; full collaboration among BUs including analytics, models deployed in production

environment, continuously mining opportunities via predictive

modeling

Supply Management and

Operations

Basic inventory management; sizeable

spend outside SCO control; limited contract compliance

and MMIS integration

Established controls for inventory and purchasing in

SCO managed areas; significant spend outside

SCO control

Sophisticated inventory systems integrated with

clinical care; cross-functional contracting and sourcing

decisions; advanced integration of ERP and web-

enabled payment mechanisms

SCO integrated real-time w/Vendor Supply through

technology and information; mastery of regional

aggregation strategies; extending SCO activity beyond

acute setting

SCO incorporates predictive and precision modeling in real-time

Leapfrog Benefit by Advancing to the Next Maturity Level

Optimization of Supply Chain Operations

A strategic direction is vital to becoming a best in class Supply Chain Organization

• 4 Way Matching• 3 Way Matching• 2 Way Matching

Technology Enablement

ERP eProcurementContract Management

Dashboard Reporting

Operational

Contracting

Sourcing

Product Mgmt.

SupplierManagement

• Vendor Selection• Vendor Relationships• Vendor Management

• Contract Coverage• Pricing / Terms

• Value Analysis• Standardization• Formularies• Utilization• Monitoring• Continuous Improvement

Transactional

Distribution

Purchasing

Payment

• Data Capture• Automation• Contract Compliance• Customer Focus• Prime Distributors• Overnight Deliveries• Just in Time / Bulk

Strategic

Category

ForecastPlanningRequisitioning • Custom Templates

• Electronic Reqs

Inventory• PARs• Advanced Replenishment• Consignment

People

Technology

Productivity• Competency Evaluation• Job Functions / Span of Control• Labor Productivity

Op Excellence

Current work focus

• Supply/Usage Analysis• Data Mining• Opportunity Assessments

• Demand Planning• Scheduling

• Organizational Structure• Skill Assessment

• Data Strategy• Supply Chain Systems

Architecture

• Lean Six Sigma• Continuous Learning

Future work focus

Leading Practice KPI’s / MetricsKnow your numbers….

What do we see:• No reporting responsibility for KPI

to management

• Focus of Supply Chain is functional and process oriented versus utilization and strategic

• Need to augment personnel with subject matter expertise

• Silo management style

• Cycle of complacency with current operations

• Lack of investment in tools to improve processes

• No strategic goals for challenging current processes

• Policies and Procedures allow inefficiency in the management of Supply Chain

Global Supply Chain StatisticsHospital Actual

Hospital Goal Variance

Supply Exp as a % of Net RevSupply Exp as a % of Total Operating ExpSupply Exp per Adj Patient Day CMI AdjustedSupply Exp per Adj Discharge CMI Adjusted

Purchasing% of Manual Requisitions% of Electronic Requisitions

Purchase Order Lines% of Electronic Purchase Order Lines% of Non-Electronic Lines% of Special items

Contracting% of Contract Spend% of Non-Contract Spend

Where do you start ….Assess current state of operations:

Start with asking :“What does Management expect from S.C. function”• Maximize value of the GPO relationship• Maximize the savings from the direct contracting relationships

• Manage inventory and expirations

• Ensure adequate supply at all locations• Minimize and control costs of all purchases

Maximize value of GPO relationshipExample:

Case Study• Large teaching hospital • $150m annual GPO spend• Participates in GPO collaborative• Our role – maximize value of GPO and distributor

relationship• Develop an outreach program with primary care and non-

acute providers

Maximize value of GPO relationshipWhat we found:

• Opportunity to improve pricing tiers by participating in our aggregation group

• Audit of pricing revealed lack of pricing connectivity• Local contracts achieved additional savings opportunities• Review of distributor agreements resulted in incremental

savings• Identified “Amazon spend” due to lack of P&P• Employed physicians – significant opportunity for

consistency and spend management• Total opportunity achieved $1.6m with over $2m in process• Added four primary care hospital relationships that extend

collaborative benefits to their communities and strengthen relationships

Maximize value of GPO relationshipWhat we found:

ENDOMECHANICAL PROD -$396K MEDLINE INDUSTRIES -$407KCLINICAL REFERENCE LAB -$386K QUEST DIAGNOSTICS -$386K

EXAM GLOVES -$172K COVIDIEN SALES -$327KINCONTINENCE PROD -$96K JOHNSON & JOHNSON -$98K

DISP NON-STERILE PROTECTIVE -$61K GEORGIA PACIFIC -$61KPAPER TOWELS & TISSUE -$61K DART CONTAINER -$58K

FOODSERVICE DISPOSABLES -$58K AVANOS MEDICAL -$48KPATIENT BEDSIDE PROD -$40K BECTON, DICKINSON -$40K

ORAL CARE -$32K CARDINAL HEALTH 414 -$34KSURGICAL BLADES -$28K HILLROM HOLDINGS -$28K

SUTURE PROD -$25K SMITHS GROUP PLC -$27KPERFUSION PROD -$23K 3M COMPANY -$23K

CATHETER TUBE SECUREMENT -$22K LIVANOVA PLC -$23KCHG SKIN PREP PROD -$19K ACELL INC. -$21K

REGENERATIVE SKIN GRAFTING -$18K NOVOLEX HOLDINGS -$17KCAN LINERS -$17K ELECTRO MEDICAL EQUIP -$11K

SAFETY PHLEBOTOMY -$17K SMITH & NEPHEW -$10KSURGEON GLOVES -$16K BOSTON SCIENTIFIC -$7K

SAFETY HYPODERMIC PROD -$14K TELEFLEX INC -$6KARTHROSCOPY SUPPLIES -$14K GREINER BIO-ONE -$5K

Year 2 Achieved Savings

Cat

egor

y

Supp

lier

$1,682,117

Top Savings

Maximize the savings from the direct contracting Example – Cr. Card Processing

Case Study Facts:• 150 bed hospital• $7m processed through CC• 41 merchant accounts• 79,600 transactions• Total processing fees $352,208 (5%+)

MerchantAccounts

Findings: Fees

Issuing Banks

• Provide the plastic• Ex: Chase, Bank of

America

Acquiring Banks• Receive $ for businesses

• Ex: Wells Fargo, HSBC

CardBrands• Choreograph the network• Ex: Visa, Mastercard

Processors• Facilitate Acceptance,

Interface, Software, & Coordination

Processing Ecosystem

3 Cost Components

1. Interchange Fee

2. Assessments 3. Processing Cost

Non-Negotiable Negotiable

Which components can we affect?

Findings: Rate Reductions are your roadmap to Savings

Current Processor New

Per Transaction FeesRate Rate

SavingsAmEx $0.050 $0.150 -$0.100Other Credit/Debit $0.300 $0.150 $0.150Xtra Transaction Fee $0.300 $0.000 $0.300Transaction Network $0.034 $0.020 $0.015Batch Fee $0.030 $0.100 -$0.070Mastercard CVC2 Fee $0.003 $0.003AVS Fee $0.050 $0.050

High/Low RangeFees Based on $ Processed Rate Rate Savings Note Current New

Credit/Debit 2.94% 0.79% 2.15%Visa 3.13%* 1.42%* 1.71% Weighted Average 0.80% - 8.94% 0.00% - 2.16%MasterCard 3.08%* 1.49%* 1.58% Weighted Average 0.11% - 4.84% 0.00% - 2.16%Discover 2.64%* 1.85%* 0.79% Weighted Average 0.57% - 5.94% 0.00% - 2.16%MC Assmt Fee W/Lic 0.14% 0.13% 0.01%AmEx 2.55% 2.55%Visa Credit 0.13% 0.13%Visa Debit 0.13% 0.13%

Monthly Account Fees Per Month Per Month Savings/AccountProcessor $45.90 $9.95 $35.95MasterCard $1.25 $1.25Visa $4.00 $4.00

Rate Reductions Achieved:

Fee Type Annual Volume Current Processor New

Weighted AverageRate

AnnualExpense

Weighted AverageRate

Annual Expense

Fees Based on # Transactions 80K $0.356 $28,388 $0.185 $14,731

Weighted AverageRate

Weighted AverageRate

Fees Based on $ Processed $7M 4.19% $298,653 1.55% $110,524

MonthlyRate

MonthlyRate

Fees Based on # Accounts 41 $51.15 $25,166 $15.20 $7,478

Grand Total $352,208 $132,733

SAVINGS ACHIEVED

OVERALL COST TO PROCESS CREDIT CARDS DECREASES TO

1.86%

New lower Rates

Save $220K

If you Wrote a Strategic Plan for SC, What Would it Include:

Assess the operational characteristics of your Supply Chain across five domains of supply chain maturity and next steps to advancement

Supply Chain Administration

Value Analysis

Contracting

Item Master Management

Requisitioning

Purchasing

3rd Party Distribution

Receiving

Internal Distribution

Inventory Management

Supply ChainFunctional AreasMeasure

Foundational

Comprehensive

Operational

Directional

Understand your supply chain’s current state and next steps to advancement

Uncover “breakpoints” in your supply chain’s 10 functional areas

Identify opportunities to improve people, process and technology

Define specific areas to implement best practices for optimum impact

In Summary

How can I best demonstrate the value of the S.C. function in my organization:

• Develop a high-level operational KPI for reporting operational metrics• Communicate the strategic initiatives that S.C. is

investigating/working/implementing• Monitor GPO contract compliance and price connectivity• Develop a plan for determining savings opportunities in non-contracted

categories • Analyze opportunities for contract optimization through T&C

compliance• Collaboration with other health systems, providers and aggregation

groups will help identify opportunities and emerging issues that affect S.C. costs

• Don’t let complacency creep into the organization • Take time to think about the strategic versus the tactical