The Importance of a Logistics Supply Chain Plan

• Larry Dooley• VP, Group Purchasing• ROi (An Operating Division of Sisters of Mercy Health System)

• St Louis, MO

Date: September 2008



• Logistics Planning:

There is more to cost reduction then best price. Effectively addressing logistics (a business-planning framework for sourcing, storing and consuming materials) can provide strategic opportunities for cost containment.


• Today’s Overview:• Importance of Supply Chain Plan/Logistics• Current Environment• Logistics Planning• Logistics to the Next Level• Conclusions• Questions


Logistics Implemented Logistics Implemented Correctly DeliversCorrectly Delivers

Logistics Implemented Logistics Implemented Correctly DeliversCorrectly Delivers

CompetitiveCompetitiveEdgeEdge

Operational Operational EfficienciesEfficiencies

Enhanced ValueEnhanced Value


Key Element for Successful Implementation of Logistics Planning -

Requires

Supply Supply Chain Chain

Management Management Strategic Strategic

PlanPlan

Supply Supply Chain Chain

Management Management Strategic Strategic

PlanPlan

The Plan is theThe Plan is theRoadmap for Roadmap for economic and economic and operational operational success!!!success!!!


• What is Logistics

• There are numerous definitions of Logistics. The following definitions are examples that can best apply to the provider side of the Healthcare Industry


Definitions of LogisticsDefinitions of Logistics

Logistics - The science of planning, organizing and managing activities that provides goods or services. -- (MDC, LogLink / LogisticsWorld, 1997)

Logistics - (business definition) Logistics is defined as a business-planning framework for the management of material, service, information and capital flows. It includes the increasingly complex information, communication and control systems required in today's business environment. -- (Logistix Partners Oy, Helsinki, FI, 1996).


Logistics – The procurement, maintenance, distribution, and replacement of personnel and materiel. -- (Webster's Dictionary)

**Logistics – The process of planning, implementing and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to the point of consumption for the purpose of conforming to customer requirements (from the Council of Logistics Management).

Definitions of LogisticsDefinitions of Logistics


• Supply Chain Management Strategic Plan with a foundation built on Logistics will provide a healthcare organization with the ability to− Procure, receive, warehouse, and move all key supplies

through an entity at the lowest total delivered cost while ensuring the clinicians have the right product at the right time to deliver the highest quality healthcare in the markets they serve

Healthcare Spend Data

Total Healthcare Costs

Supply

Other

0%

10%

20%

30%

40%

Logistics Cost

% Logistics Costs Per Industry Segment

Retail

Electronics

Healthcare

*DATA SOURCE - EHCR STUDY

30%70%

38%

5% 2%

Supply Chain Logistics Current Environment

Maturation of IDNs:- Initial focus on labor - Second largest cost after labor is supplies 20-25% of Net Patient Revenue (NPR)

Primary focus on cost reduction of supplies is product priceUp to 2006+ - 20+ year deflationary product price reduction – commodities – GPO Driven

To meet the demands of the HCOs and GPOs:Manufacturers – Supply Chain Techniques to reduce costs:

Offshore / Outsourcing

Commodities products – price reduction for years now Inflation!!

PPI – Surgical products - RX – unchecked consistent price escalation No real checks and balances in place to control sky-rocketing costs

HCOs – turning to SCM strategies to reduce costs and drive operational efficiencies – mimicking other industries i.e., retail, grocery, electronic, automotive

Retail, grocery, automotive, high-tech, and electronics industries drive substantial collaboration throughout their SC’s

30% cost reductions

Healthcare industry does not have same cultural alignment among the links of the healthcare supply chain

No cultural alignment – cost reductions not available

Supply Chain Logistics Planning

Logistics Planning

Desired OutcomesDesired Outcomes

Direct Sourcing from a Direct Sourcing from a Manufacturer/ DistributorManufacturer/ Distributor

Product Availability and DeliveryProduct Availability and Delivery

Improved Customer ServiceImproved Customer ServiceImproved Asset EfficiencyImproved Asset Efficiency

Increased Cash FlowIncreased Cash FlowCollaboration with Key Service ProvidersCollaboration with Key Service ProvidersFavorable Management Inventory FlowsFavorable Management Inventory Flows

Product Handling Cost ReductionProduct Handling Cost ReductionImproved Operational EfficienciesImproved Operational Efficiencies

Key Issues Materials Face EverydayKey Issues Materials Face Everyday


Logistics Planning

• Supply Chain Management and Logistics are very broad and deep in practice:

• Plan needs to be narrowed to help HCO’s understand the value in how having a specific Logistics Plan will bring value

• Focus on – procurement and receipt


• Logistics Planning – Key Elements

• Sourcing

• Procurement

• Ordering

• Order Management• Transportation (direct,

distributed, self)

• Receiving

• Warehousing

• Product Movement – Entities

• Accounts Payable


Two Types Products – Consume Majority of Materials Time for Sourcing – Procurement - Receipt

Consumable / Commodities

Physician / Clinical Preference

Why ? Materials Team – Greatest Impact

Two Primary for Delivery Distribution

Direct

Logistics PlanningLogistics Planning

Firm Logistics Plan for Procure/Receipt – Eliminates Inefficiencies Firm Logistics Plan for Procure/Receipt – Eliminates Inefficiencies


Logistics Planning• The average HCO according to the recent KPMG

Hospital Procurement study, buys from an average of • 1.5 medical – surgical distributors • Four hundred and forty-three manufacturers (443)

direct • A logistics plan pre-determines how each product(s)

are:• Procured• Delivered • Saves the materials team:

• resource time• actual cost for delivery and / or freight

Med/Surg Dist.

Lab Mfg.

Pharma Mfg.

Dietary Dist.

Film Mfg.

Lab Dist.

Radiology Dist.

Pharma Dist.

Med/Surg Mfg.

Member Hospital

Member Clinics

Other Hospitals

Other Clinics

Retail Pharmacy

Home Health

Retail

Mass Merc.

Linen Service

Dietary Mfg.

Linen Mfg.

Other???

Traditional Supply Chain Model

Direct

Manufacturers

443


Logistics Planning

Process for Procurement Process for Procurement AndAnd

Receipt of Product(s)Receipt of Product(s)

Materials Team Needs to Pre-DetermineMaterials Team Needs to Pre-DetermineHow Each Product(s) Will be Procured How Each Product(s) Will be Procured

AndAndReceivedReceived

Follow a Phased Assessment ProcessFollow a Phased Assessment Process

Phase IPhase IComplete Analysis of Both Current and Future Needs for All Facilities / Entities within HCComplete Analysis of Both Current and Future Needs for All Facilities / Entities within HC1) Receiving Dock / Space1) Receiving Dock / Space2)2) Warehouse / Central StoresWarehouse / Central Stores3)3) Materials Team ResourcesMaterials Team Resources4)4) Physical / Geographical Locations – whether self-contained or spread over multiple statesPhysical / Geographical Locations – whether self-contained or spread over multiple states


Logistics PlanningPhase IIPhase II

Materials Team Now CanMaterials Team Now CanDetermine by Product(s) Determine by Product(s)

OrOrProduct Category best way Product Category best way

ToToProcure and ReceiveProcure and Receive

Factors for Consideration:Factors for Consideration:Commodities – Traditionally DistributedCommodities – Traditionally DistributedThousands of CommoditiesThousands of CommoditiesLow in Value / High in UseLow in Value / High in UseHigh in Value / High in UseHigh in Value / High in Use

Materials Team Determines Most Cost Effective Means Materials Team Determines Most Cost Effective Means For For

Procuring and Receiving These ProductsProcuring and Receiving These Products


Logistics Planning

Phase IIPhase IIContinuedContinued

Most Cost EffectiveMost Cost EffectiveFull ServiceFull ServiceAggregatorAggregator

(Med-Surg Dist.)(Med-Surg Dist.)

Med-Surg Business ModelMed-Surg Business ModelTraditional Cost+PlusTraditional Cost+PlusActivity Based CostingActivity Based Costing

Monthly Service ChargeMonthly Service ChargeGross Margin / Net Profit ModelGross Margin / Net Profit Model


Logistics Planning HCO’s Avoid Temptation Short-TermHCO’s Avoid Temptation Short-TermProduct Cost Reductions – Lead to Long-TermProduct Cost Reductions – Lead to Long-Term

Increases in Logistics CostsIncreases in Logistics Costs

20/80% Product Categories20/80% Product CategoriesDrives Volume Drives Volume

Med-Surg DistributorsMed-Surg Distributors Key Product Category for M/S DistributorsKey Product Category for M/S DistributorsSuture/EndoSuture/Endo

12-16% of Volume – 25%+ Margin12-16% of Volume – 25%+ Margin

Key ReasonsKey ReasonsEfficient to DistributeEfficient to Distribute

Low Cube/Low Weight/Low Cube/Low Weight/High Velocity/High ValueHigh Velocity/High Value

90% S / 65% E – PPI90% S / 65% E – PPIJ&J PhenomenonJ&J Phenomenon

Impacts Cost of Overall DistributionImpacts Cost of Overall DistributionHPIS 2003-2007 15%HPIS 2003-2007 15%

Distribution Business Model/EconomicsU.S. Hospital Supply Distribution Market – Estimated Size – Lehman Brothers(Private Companies Estimates Subject to Wide Variation)

Company 2008 Est. Distribution Revenues

% Share –

Distribution

% Share –

All In

% Share

“New” HIDA

Cardinal $7,513, 34.1% 9.3% 17.8%

O&M Total $6,800 30.9%

10.7%

20.5%

Medline $ 650 3.0% 1.1% 2.2%

PHS $ 500 2.3% 0.9% 1.7%

Burrows $ 450 2.0% 0.8% 1.5%

MMS $ 300 1.4% 0.5% 1.0%

Seneca $ 100 0.5% 0.2% 0.3%

Market Size (dist.) $22,000

Market Size (including “go” direct supplies)

$57,500

Market Size (HIDA - dist)

$30,000 100% 100%

HPIS Top 10GHX Market Intelligence™

Product Category 2007 Total Dollars

2006 Total Dollars

2005Total Dollars % Change 2005 - 2007

Change 2006 - 2007

Kits, Packs, and Trays – Custom

$1,663,440,891 1,588,473,532 1,529,889,544 8.7% 4.7%

Parenteral 1,609714,721 1,458,340,383 1,316,270,773 22.3% 10.4%

Wound Staples and Endosurgery

1,352,276,132 1,250,528,903 1,257,315,053 7.6% 8.1%

Woven and Nonwoven Goods

938,739,737 898,254,603 868,010,390 8.1% 4.5%

Respiratory 879,365,226 842,133,243 797,644,815 10.2% 4.4%

Gloves 860,059,232 788,597,565 715,646,912 20.2% 9.1%

Needles and Syringes 846,398,071 810,382,666 769,821,174 9.9% 4.4%

Wound Sutures *

(2003-2006 5thplace)

842,341,842 818,065,192 805,448,662 4.6% 3.0%

Adhesives, Bandages, Dressings and Sponges

611,854,456 592,894,514 572,184,458 6.9% 3.2%

Skin Care Products 590,947,470 537,546,992 478,967,530 23.4% 9.9%

Top 10 10,195,137,779 9,585,217,593 9,111,199,310 11.9% 6.4%

All Other 8,833,872,822 8,176,663,284 7,486,041,218 18.0% 8.0%

Total Hospital 19,029,010,601 17,761,880,877 16,597,240,528 14.7% 7.1%

HPIS 2006 GHX Market Intelligence™

Product

Category

2007

Market

Share

2006

Market

Share

2005

Market

Share

Kits, Packs, Trays – Custom 9.06% 9.28% 9.59%

Parenteral 8.50% 8.25% 7.90%

Wound Staples – Endo 7.20% 7.10% 8.54%

Woven / Nonwoven Goods 5.08% 5.23% 5.26%

Respiratory 4.61% 4.87% 5.05%

Gloves 4.75% 4.80% 4.87%

Needles / Syringes 4.57% 4.66% 4.71%

Wound Sutures 4.45% 4.50% 5.10%

Adhesives, Bandages, Dressings, and Sponges 3.50% 3.60% 3.75%

Skin Care Products 3.45% 3.35% 2.78%

Top 10 55.17% 55.64% 55.17%

All Other 44.83% 44.36% 44.83%

HPIS Data

• Major Changes 2006-2007

Glove Products Increased

9%

Skin Care ProductsIncreased

9%

Parenteral ProductsIncreased 10%

Total Hospital Distributed Sales$19 Billion+

Up 7.1% over 2006

Infection Control DrivesDistributor Sales


Logistics Planning

TemptationTemptationManufacturers Offer to Sell Manufacturers Offer to Sell

Traditionally Distributed Traditionally Distributed Products Direct vs. Going Products Direct vs. Going

ThroughThroughMed-Surg DistributionMed-Surg Distribution

HCO Enticement Save MoneyHCO Enticement Save MoneyGoing Direct on Cost+PlusGoing Direct on Cost+Plus

Mark-UpMark-Up

Benefits of Maximizing Distributors

Function Distributed Direct

Creating / placing orders

54 hrs. per $1M spend 119 hrs. per $1M spend

Receiving orders 56 hrs. per $1M 162 hrs. per $1M

Freight Cost $102,964 inbound freight $305,908 inbound freight

General order problem solving

51 hrs per $1M 204 hrs per $1M

Negotiating w/ suppliers

51.6 hrs. per $1M 259.4 hrs. per $1M

Source: KPMG Hospital Procurement Study


Logistics Planning

Logistics PlanningLong-Term Negative Impacts – Giving into Short-Term Temptations:

Increase in procurement costs – materials resource time for sourcingIncrease in number of POsIncrease in number of receipts at dockIncrease in physical inventory costsIncrease in inventory handling costsDecrease in cash flowIncrease in accounts payable resource timeIncrease time in order management and problem resolution


Logistics Planning

Rules of the Road – Traditionally Distributed Products – Stick To The Logistics Plan:-Avoid Short-Term Temptations-Use The Most Efficient Source for Procurement / Receipt-Use The Aggregator Where Appropriate-Work out of the Box – Engage Direct Manufacturers To Use the Aggregator – Let the Efficiencies Work for You!!!

Med/Surg Dist.

Lab Mfg.

Pharma Mfg.

Dietary Dist.

Film Mfg.

Lab Dist.

Radiology Dist.

Pharma Dist.

Med/Surg Mfg.

Member Hospital

Member Clinics

Other Hospitals

Other Clinics

Retail Pharmacy

Home Health

Retail

Mass Merc.

Linen Service

Dietary Mfg.

Linen Mfg.

Other???

Traditional Supply Chain ModelFocus on Direct Suppliers

Direct

Manufacturers

443

Why – Why – Manufacturer Manufacturer wants to control wants to control YOUR SUPPLY YOUR SUPPLY CHAINCHAIN

Why – Higher Why – Higher Prices, Higher Prices, Higher Margins – Less Margins – Less InformationInformation


Logistics PlanningMaterials Team – Focus on Suppler / Product Materials Team – Focus on Suppler / Product Standardization for Maximum Cost ReductionStandardization for Maximum Cost Reduction

ActivitiesActivities

Logistics Plan –Addresses All TypesLogistics Plan –Addresses All TypesOf ProductsOf Products

Value Proposition of Logistics PlanValue Proposition of Logistics PlanProvides Continual Focus on Cost Provides Continual Focus on Cost

Reduction and Operational EfficienciesReduction and Operational EfficienciesAnd Reduces Time Needed to DealAnd Reduces Time Needed to Deal

With 443 SuppliersWith 443 Suppliers

Advantage – Shifts Control of Supply Advantage – Shifts Control of Supply Chain from Manufacturer to Chain from Manufacturer to

YOU!!!YOU!!!


Logistics Planning Additional Direct Additional Direct ManufacturerManufacturer

FocusFocus

Cost ReductionCost ReductionPPI ProductsPPI Products

Inbound Freight Inbound Freight ManagementManagement

PPI Manufacturers Have PPI Manufacturers Have Deep Discounts WithDeep Discounts With

UPS/FEDEXUPS/FEDEXThey Charge Retail To The They Charge Retail To The

HCO’sHCO’s

PPI ManufacturersPPI ManufacturersDon’t Pass On Their Deep Don’t Pass On Their Deep

Discounted Rates Discounted Rates Use it for Margin Use it for Margin

EnhancementsEnhancements


Logistics Planning Additional Direct Manufacturer FocusAdditional Direct Manufacturer FocusInbound Freight ManagementInbound Freight Management

All HCO’s contracts with direct ship manufacturers need to include the following terms for shipping the product to the HOC/IDN

F.O.B. DESTINATION, FREIGHT PREPAID AND ABSORB Seller owns goods in transit and bears risk of loss. Seller solely responsible for freight charges.

Terms – F.O.B. Destination / Bill Third PartyThe reason these terms are needed if F.O.B. DESTINATION, FREIGHT PREPAID AND ABSORB can’t be agreed these terms will enable the Health Care Organization to achieve the following:


Logistics PlanningValue of Inbound Freight Value of Inbound Freight

Management Management ProgramProgram

Inbound Freight Management Company will:

Provide Mode OptimizationShipping the least costly way (i.e., Ground vs. Air)

Provides full visibility to freight chargesIdentifies those suppliers who are not following

the F.O.B. Destination / Bill Third PartyMaterials Team can focus

Supplier Negotiation time on these Suppliers

Self managed or outsourcedDrive cost reductions on inbound freight

by up to 40%HCOs that maximize their M/S Dist.

Spend $102,964 vs. $305,908frt. charges

Supply Chain Logistics

Conclusions• Supply Chain Management can be a key driver of

permanent cost reductions and increases in financially sound operational efficiencies

• Wal-Mart, Target and the other large mass merchandisers• Use logistics as a competitive advantage

• The Health Care industry is trying to emulate other industries to become more cost effective

• Each HCO/IDN needs to develop and implement a Supply Chain Management Strategic Plan with a significant focus on Logistics


Conclusions

There are Six Levels of Supply Chain Excellence as explained by Dr. Jim Tompkins, Tompkins Associates:


Level 1 – Business as Usual This is when an organization works hard at doing their individual functions well – Each organizational element (Finance, IT, HR, Clinical, and Materials, etc.) attempts to function well within their individual silo

Level 2 – Link Excellence Before an organization can begin thinking about Supply Chain excellence they need to evolve their individual links to make it the most efficient, effective, responsive and holistic that it can be. Only after one’s links achieve performance excellence can they begin to pursue Supply Chain excellence.

Level 3 – Visibility The first step to achieving Supply Chain excellence is to provide visibility among the links of the Supply Chain. Visibility provides the information so that the links understand the ongoing order status and thus minimizes supply chain surprises. Level 3 is primarily a Technology plan – through technology synchronizing the links demands with their suppliers.


Level 4 – Collaboration Once Visibility is achieved, then the process of collaboration to understand how to best meet the demands of the marketplace can be pursued. Collaboration will allow the Supply Chain to work as a whole to maximize customer satisfaction – clinical supremacy while minimizing inventories.

Level 5 – Synthesis When Collaboration is achieved, then the continuous improvement process of synthesis should be pursued to allow the Supply Chain the ability to harness the energy of change. It is from synthesis that true Supply Chain Excellence is achieved.

Level 6 - Velocity The last step to achieving Supply Chain Excellence is to continue with synthesis, and to do it with speed Synthesis with speed is the process that will achieve not only Supply Chain Excellence, but also ongoing Supply Chain Excellence.


• To achieve Supply Chain Excellence each HCO/IDN must have the following core competencies:

Understanding Change (harnessing the energy of change)

Understanding Peak to Peak (sustaining performance)

Understanding Customer Satisfaction (one size fits “one”)

Understanding Total Operations (having a Total Supply Chain Strategy/Logistics Plan)

Understanding Manufacturers Synthesis (having manufacturers be responsive to the HCO/IDN needs)

Understanding Distribution Synthesis (having distributors be responsive to the HCO/IDN needs)

Understanding Supply Chain Partnerships (relationships to be need to evolve & flex for success)

Understanding Supply Chain Communications (All partners have same view of Supply Chain – same plans, same goals, same strategies)


ConclusionFor Supply Chain SuccessFor Supply Chain Success

Needs to SynchronizationNeeds to Synchronization&&

AgilityAgilityDriversDrivers

Follow Six Levels Follow Six Levels Of Of

Successful Supply Chain LevelsSuccessful Supply Chain Levels

Need To DevelopNeed To DevelopSupply Chain ManagementSupply Chain Management

StrategyStrategyKey Focus On LogisticsKey Focus On Logistics

ProceedProceed““Eyes Wide Open”Eyes Wide Open”

Thank You!Thank You!

Larry Dooley

(314) 628-3410

[email protected]

QuestionsQuestions

The Importance of a Logistics Supply Chain Plan

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