Brent Johnson's pres at Medline Summit (Jan 2010).

1. Medline Healthcare Executive Meeting
January 21, 2009
A Review of
Supply Chain Best Practices
in Healthcare
Brent Johnson
VP Supply Chain
Intermountain Healthcare

2. Topic Overview
1. About Intermountain Healthcare
2. Intermountain’s Supply Chain Story
3. What is a Best Practice?
4. Supply Chain Best Practices
5. Best Practices application Health Care
6. Summary – Next steps

3. About Intermountain Healthcare

4. Intermountain Healthcare Facts
• Headquarters: Salt Lake City, Utah
• Created in 1975 as LDS Church gifts its hospitals to the community
Nation’s top integrated system
• Modern Healthcare #1 or #2 for the last seven years
‫ 000,03 ـ‬employees – largest company in Utah
• Hospital network
– 23 Hospitals
– 2,500 Licensed Beds
• Clinic Group
– 800 Employed Physicians
– 120 Clinic Sites
– InstaCares
– ExpressCare
• SelectHealth – health plans
– Direct Enrollees – 520,000

5. More Intermountain Healthcare Facts
• $3.4 billion in Net Patient Services Revenue
$5.0 billion in Assets
• AA+ Standard & Poor’s Aa1 Moody’s
Only System to receive highest
ratings from both S&P and Moody’s
GE / Intermountain joint venture
for clinical information systems
Geographic Focus
• Strategic decision to limit expansion
• Focus on markets that “funnel” to Salt Lake City
• Clinical Integration in a defined area

7. Intermountain Healthcare Continues to
Receive National Recognition

8. Being Nationally Recognized Really Matters When
Life and Health are on the Line –
EXAMPLES of Using Evidence Based Medicine
• Better managing glucose levels during heart surgery, we’ve
decreased morality rates eight fold for patients with levels over
300mg/dl
• We’ve pioneered a heart medication discharge process,
reducing readmission rates
• We’ve reduced the average heart attack treatment time to 67
minutes beating the national goal by 23 minutes
• We’re working on hundreds of clinical processes in the areas
of cancer, intensive medicine, women and newborns, pediatrics
and other specialties

9. Intermountain’s
Supply Chain Story

10. Intermountain Supply Chain Organization
Developments – Last 4 Years
• Hired supply chain leader from outside of healthcare
• Created a new SCO organization
• Hired 25 new people
• Developed rigorous but open sourcing strategies
• Centralized the buyers
• Centralized the reporting relationships of the warehouses
• Added Couriers, Travel Services and Central Laundry – we are
now over 600 employees
• Developed relationships with key stakeholders…clinical
programs, regions, physicians, hospital administrators, etc.
• Delivered on savings - $130 Million

11. System Non-Labor Savings is Over
$130 M Since SCO Was Organized
SCO Validated Savings
Operating
Year (incld. avoidance) Capital Total
2005 7.1 2.0 9.1
2006 15.8 7.9 23.7
2007 26.5 13.7 40.2
2008 17.2 8.1 25.3
2009 20.7 10.8 31.5
Total 87.3 42.5 129.8

12. On-Going SCO Initiatives Drive Value
Beyond Just Sourcing Savings
1. Purchasing Policy – A corporate-wide purchasing policy
2. P-card program – 2,500 cards, 15,000 transactions/month, $3 M/mo
3. Vendor access – Utilizing 3rd party to do vendor credentialing
4. Intermountain Green Team – Leading Green Team
5. Energy strategy team – Lowering long-term facility ownership costs
6. Central Laundry improvements – Utilization & costs are down
7. Couriers – 10,000 miles, 1,200 stops every day with few problems
8. Small Facilities Warehouse – On Vine Street to support MG Clinics
9. Contract Management System – (Ideal) Must know & manage contracts
10. Lean/Change Management – Developed training for all SCO managers
11. Community friendly purchasing – Women, minority & small businesses

13. SCO in Three Years - Vision
• Continue to build a world class Supply Chain Organization – focused on (1) reducing costs,
(2) enabling increased care & charity, (3) improving patient care and (4) having a passion to find
best practices
• Simplify the Supply Chain by
 Taking out the complexity and cost
 Leveraging technology
 Eliminating variation from products and processes
 Heavy use of self-contracting and self-distribution
• Embrace and adopt industry data synchronization
• Increase influence on “total” non-labor spend
• Have more control over more supply chains than med-surg - IT, clinical, nutrition, etc.
• Assist Intermountain in consolidating, standardizing and centralizing redundant ancillary
services
• Increased skills and results in linking high quality patient care to supply chain activities
• Do “joint contracting” with other hospital organizations
• Dedicate continuous emphasis applying TCO (Total Cost of Ownership) to long-term decisions
• Develop highly engaged employees with the right skill set, drive and known career paths
• Become a better community citizen

14. Current Healthcare Supply Chain is
Inherently Complex and Costly
This drives the SCO Vision
National
GPO
Contracting
Tracing Fees Distribution
(3-4%) (4-12%)
Channel Fees
(4-6%)
Manufacturer Distributor Additional Provider
Payment Term Markup
Discount (2%) (4-8%)
Volume Rebates (1-2%)

15. We Set Out To Save
$100 Million!
Along The Way,
We Changed A Culture.

16. What is a Best Practice?

17. What’s a Best Practice?
The Greeks gave up frontal assaults on the Trojans and built the wooden
horse by being smarter, not working harder, and got better results
Possible definitions:
• A technique, method, process, activity, incentive or reward that is
more effective than any other
• Best method of operating a common process
• A process that produces the best benchmark
• Something to get the best ROI

18. Best Practice Ideas
• Best practices need to demonstrate being fast, adaptable and
integrated
• Every practice tends to be situation, industry and customer specific
• Don’t reinvent - go study everyone else and steal the best and apply it
to your company
• Envision the best case scenario and start down that path
• Use benchmarking & gap analysis to identify best practice companies

19. What Is This Man Famous For???
Theory of Relativity
E=mc2

20. But His Best Work May Be His
Definition of Insanity:
“DOING THE SAME TASKS
OVER AND OVER AGAIN
AND EXPECTING
DIFFERENT RESULTS.”
ALBERT EINSTEIN

21. Supply Chain Best Practices

22. Supply Chain Management is Practiced by Most
Large Companies with Significant Financial Benefit
It is a disciplined, systematic process of analyzing corporate
expenditures and developing strategies to reduce the total
costs of externally purchased materials and services
It involves:
• What we buy
• Who we buy from
• How we buy
• What we inventory
• How we use the products and services we buy
• How we can make those products and services better

23. Supply Chain Management
Yields Many Benefits
• Reduced number of suppliers
• And maybe some new ones
• Lower prices
• Consolidated buying
• Rigorous negotiation
• Standardized product specifications
• Stronger relationships with suppliers
• Better service levels
• Longer term contracts
• Elimination of redundancies
• Elimination of business processes
• Ideas for continuous improvement
• Formalized savings tracking system
…lower costs, higher quality and greater customer service

24. 12 Fundamental Best Practices of Supply
Chain Management
1. Develop the strategy 7. Establish key supplier alliances
2. Align the supply chain organization 8. Develop supplier management
3. Recruit supply chain professionals processes
4. Be dedicated to performance 9. Streamline the order-to-
management payment process
5. Establish strategic sourcing 10. Manage inventory
strategy 11. Manage distribution & logistics
6. Manage total cost of ownership 12. Establish & monitor controls
(TCO)

25. 1. Develop the Strategy
 How to develop a strategy without a “burning platform”
 Senior management support is first and most critical
 Scope – Total non-labor spend (at least 70-80%)
 Total process, organization, strategy and culture evaluation is needed
 This is about culture change - Change management principles will be
required to succeed
 Communication and branding is critical

26. Eight Dimensions of
Supply Chain Effectiveness
Work Strategic Logistics Supplier Transactional
Processes Sourcing Management Development Procurement
Management Performance Management
Processes
Direction
Strategy Organization Culture
Setting

27. Significant Opportunities Exist in “Outside Services”
Throughout Most Industries – We Are No Exception
Procurement Involvement and Level of Challenge
Percent of Respondents
82% 78% 78% 76%
71%
53%
42% Actively Supported
40% 40% 37%
35%
28% Significant Difficulty
25% 26% 24%
17% 15% 14%
MRO Travel IT/Telecom Direct Spend Outsourced Consulting Marketing & HR Benefits Legal
Services Advertising
Cost Savings Potential
Estimated Savings as a % of Spend
16%
14%
13% 13%
12% 12% 12%
11% 11% 11% 11%
10% 10%
9% 9% 9% 9% Absolute Opportunity
8%
Realistic Goal
MRO Travel IT/Telecom Direct Spend Outsourced Consulting Marketing & HR Benefits Legal
Services Advertising
Procurement Strategy Council – Survey Findings

28. 2. Align the Supply Chain Organization
 SCM must be properly organized in order to execute the plan
 In a perfect world, the supply chain organization will have the functions of:
 Purchasing
 Sourcing
 Contract Management
 Materials Management
 Logistics
 Centralized or de-centralized? Answer depends and varies by company
 Common Theme: Centralized with some decentralized execution

29. 3. Recruit Supply Chain Professionals
 Keep and develop the best of the existing employees
 Keep A’s and potential B’s. Redirect C’s.
 Recruit SCM professionals with the right mentality
 More focus on strategic thinking
 Less focus on measuring transactional activity
 Different skill sets needed today vs. historically
 Interpersonal communication
 Strategic thinking
 Technical Skills (analytical, subject matter expertise)
 Project Management Skills
 Relationship management skills

30. 4. Be Dedicated to Performance Management
 Spend analysis is the foundation
 You must know what you are buying – corporate wide
 Must be able to validate outcomes
 Open, transparent validation of savings process
 Savings reports – validated vs. realized savings
 Utilization information is critical
 Big barrier is inability to retrieve precise spend data
 Clean item master data info
 Best of class companies navigate the challenges of getting data
from multiple systems to retrieve meaningful data

31. 5. Establish Strategic Sourcing Strategy
 What is Strategic Sourcing?
 It is a disciplined, systematic process of analyzing corporate
expenditures and developing strategies to reduce the total costs of
externally purchased materials and services
 Strategic Sourcing is the Cornerstone of Supply Chain Management
 Use the Sourcing Square – should a purchased solutions be a strategic
alliance, long-term non-strategic partner, high transactional non-strategic
supplier, or purchase order
 And after Strategic Sourcing comes complete Category Management as an
even more rigorous best practice
 Strategic Sourcing is not a one time event, it is an on-going way of business
 Post sourcing is a conscious effort
 Price continues but not as strategic
 Supplier’s accept shared responsibility for outcomes
 Cost creep happens when interest and attention wane

32. The 7 Phase Strategic Sourcing Process
I II III IV V VI VII
SAVINGS SOURCING
AS-IS SOURCING
OPPORTUNITY OPTION COMMUNICATE PERFORMANCE
ASSESSMENT STRATEGY IMPLEMENTATION
IDENTIFICATION DEVELOPMENT & CELEBRATE MANAGEMENT
SELECTION
A. Data Collection A. Vision & A. Executive A. Manage &
B. Stakeholder Buy-in Assumptions Communication Monitor
C. Champion B. Sourcing Savings B. Internal & Performance to
Identification Options External Predefined
D. Team Formation C. Executive Approval Communication Strategy
E. Team Training • Vision C. Celebration B. Incorporate New
F. Stakeholder A. Total Cost of • Assumptions A. Sourcing Strategy A. Reassess Team Continuous
Communication Ownership • Options Verification Composition Improvement
Plan B. Supplier D. First Supplier B. Third Supplier B. Conduct Kickoff Opportunities
Identification Screening Screening C. Manage C. Track & Report
C. External E. Request For C. Develop Stakeholder Performance
Assessment Information (second Implementation & Communication D. Manage
D. SCE Internal supplier screening) Performance Plans D. Initiate Deviations
Assessment D. Management Implementation E. Sourcing Strategy
Participation & Review
Approval
E. Negotiation &
Supplier(s) Selection
F. Commitment to Long
Term Total Cost
Savings

33. Examples of Non-Standard Products
that Needed Strategic Sourcing
Coflex – wrap Plastic Orthopedic soft
bandaging containers goods
37 products 157 products 5,500 products
5 suppliers 40 suppliers 197 suppliers
$316,000 spent $613,000 spent $3,400,000 spent
Consolidated to 16 Consolidated: Consolidated:
products, 1 supplier: $670,000 savings
$120,000 savings
$53,000 savings
And there are a thousand more just like these!

34. Our Roadmap to Success
As the SCO Matures, “World-Class” Will Require Progression to
Value-Add Category Management
Price Focus TCO Focus Value Chain Focus
Contracting Strategic Sourcing Category Management
Procurement Competence Over Time
2005 2008/2009 2012

35. 6. Manage Total Cost of Ownership
THIS IS ABOUT:
Instill Total Cost of Ownership / Total System Cost Mindset
 Your suppliers costs end up being your costs
 Move away from looking at just lowest price
 More focus on best value
 Evaluation of all factors that make up the cost of goods and services

36. It’s Important to Remember the Scope of
Supply Chain Management
Dispose
(goods)
SCM Benefits The Supply Chain Use
• Reduce supply base and
• Develop alliances maintain
• Total cost reductions
• Team purchasing
Pay
• Integrated support
with logistics Freight,
• Strategic vs. tactical receive, store,
• Increased skills and distribute
• Reduced inventory goods
• Improved customer Create goods
service or services
(supplier)
Requisition
and buy
Select
supplier and • It’s more than just good purchasing practices
contract
Define • It’s all of the non-labor spend in a company
needs &
opportunities
• It’s also the processes to get it into the company

37. 7. Establish Key Supplier Alliances
 Long-term relationships based upon trust, cooperation,
commitment and open communication
 Objective is to work together to reduce costs and share in the
benefits
 Reduction of suppliers is a natural outcome of supply chain
management
 Leverage your buying power by consolidating purchases with
fewer suppliers
 Cut administrative costs by managing fewer suppliers
 Find your best suppliers and grow them

38. 8. Develop Supplier Management Processes
 Supplier Management: the forgotten or ignored step in Strategic Sourcing
Process
 Outstanding suppliers are rarely discovered ready to be good partners, but rather
are developed by their customers into what they need to be
 We must view and manage our suppliers as extensions of our own business
 If you don’t manage our suppliers, they will manage us!
 Establish supplier teams that actively manage the largest suppliers Joint goals
 Quarterly business reviews
 Joint goals
 Establish & monitor key supplier metrics and measurements
 Make sure you manage the supplier according to the evaluation criteria that you
chose them
 Why was the supplier chosen in the first place…price, quality, service,
other?
 How will we know when the supplier is failing to perform?

39. 9. Streamline Order-to-Payment Processes
 Transaction efficiency should be a passion
 All order-to-payment processes are added costs to the system
 Streamline and simplify everywhere possible
 Paperless, low-cost, user friendly
 Maximize use of technology

40. 10. Manage Inventory
 Inventory is money. Ask any CFO!!
 Utilize proactive strategies to minimize inventory maintained
 JIT
 VMI
 Reducing lead times
 Taking more risk
 Leverage tools and technology
 Effective demand and forecasting methodology
 Intrinsic forecasting techniques
 Supplier integration

41. 11. Manage Distribution & Logistics
The best companies make the following a high priority:
 Facility layout & design – flexible, cross-docking
 Use of equipment & technology – automated, integrated
 Warehouse procedures – documented, integrated
 Material transportation & routing
 Material handling & flow
 Use of 3rd party providers
 Supplier integration & value added services

42. 12. Establish & Monitor Controls
 Make policies and procedures simple and easy to understand
 Controls should be adequate to deter fraud or ensure that improper
decisions are not being made and doing so without adding unnecessary
process steps
 Simplify process and controls – then select correct technologies to
complement
 Contract Management is a focal point for best of class companies
 How can you mange your company’s contracts if you can’t even find
them?
 Contract compliance for compliance monitoring – maverick spend
 Standardizing terms & conditions mitigates risk
 Automate – due dates, expiration dates, etc.
 Analyze contract performance

43. Health Care Supply Chain
Best Practices

44. In Healthcare We Have Clinical &
Non-Clinical Products & Services
Clinical Categories Non-Clinical Categories
Administration
Commodities
Construction
Clinical
Commodities
HR
High-preference
Items Nutrition
IT & Telecom
High-cost
preference items
Marketing

45. 12 Healthcare Supply Chain Executives
Offer Best Practice Ideas
• Use of EDI • Auto receipt & matching with real
time credits, returns and rebills
• Monitor profitability of each
department/program • Standardize products working with
clinical committees
• Optimize procure-to-pay
processes • Efficient recall systems
• Contract compliance • Master data management –
standards
• Link materials (item master) to
revenue cycle (charge master) • Internalizing equipment
maintenance
• Self contracting
• Self distribution
• Value analysis
• Nightly electronic reordering based
• Supplier credentialing upon replenishment needs
• Real-time pricing and charging • Auto replenishment of inventory
How aggressive are these?

46. Brent’s Additions to Best Practices
in Healthcare
• Implement pcard
• PPI strategies
• Value analysis – Clinical TCO application of strategic sourcing
• 80% of all non-labor spend controlled by suply chain
• High % of item master under contract
• Touch-less purchasing
• Reverse auction – eProcurement
• Clinical products (OR & Cathlab) controlled by supply chain
• Performance measurement
• Sourcing strategies unique to healthcare such as PPI (endo, spinal,
CV, ortho) and reprocessing

47. Rigorous Supply Chain Practices are not as
Common in Healthcare
• Supply chain sophistication is lacking – healthcare is behind in rigorous best
practice development
• Bidding is primary activity
• Price is primary focus
• Not-for-profit presence reduces business focus
• Clinical excellence is primary focus
• Personal preference (especially with physicians) prevent Purchasing influence
and ability to develop business with large partners where appropriate
• Suppliers have never been rewarded for alliance behavior, hence have not
developed or justified this activity within their organizations
• Openness, transparency and trust generally are not common characteristics of
healthcare suppliers and providers
• Industry dependence upon GPOs & distributors makes the supply chain more
complex and difficult to develop one-on-one relationships
DRAFT - For SMI Team discussion only

48. Here’s a Problem…GPOs do
Contracting…Not Strategic Sourcing
Traditional Contracting
Analyze Analyze Analyze Develop Manage Award & Implement
Spend Category Market Strategy Negotiations Contract Strategy
Strategic Sourcing
Without doing true strategic sourcing it’s mostly about
price with “their” suppliers

49. Solution
GPOs should be used as a
TOOL
not a
STRATEGY
Unfortunately, many use it as a strategy!

50. How Much Self-Contracting?
…Should Require Some Evaluation
of Costs vs. Benefits
Self
Use
Contract
GPO
Another approach introduced by Stratcenter is
“Optimal Contracting Balance” (OCB)
between GPO and IDN agreements*

51. How Much Self-Contracting
Can Your Organization Afford?
• Intermountain Healthcare’s experience:
• Invested $2.5 million/year into a new supply chain
organization
• Obtained $20 million additional savings/year
• 8 to 1 payback
• Is this why 78.3% of IDNs expect to increase the dollar
amount they contract for locally vs. relying on it’s GPO
(StratCenter info)

52. There is Power and Huge Benefit
in Supply Chain Management in Healthcare
• A penny saved is a penny invested somewhere else in healthcare
• When we allow personal preference guide decisions we pay more
• When we don’t have standards we pay more
• When we don’t leverage our company we pay more
• Personal preference shouldn’t be confused with clinical excellence
• Product variation does not make clinical excellence
“uncontrolled variation is the enemy of quality” (Deming)

53. Other Comments about
Supply Chain Management – Healthcare Industry
• One man’s waste is another man’s income
• Non-profit should not mean not-as-efficient
• We pay for every salesperson and every delivery truck
• We pay for the cost of a backorder, late delivery, invoice
problem, over-shipment, damaged product and a recall
• Quality does not mean “spare no expense”

54. Span of Influence by Supply Chain
Organizations is a Best Practice
Not just sourcing
but also distribution
Med/Surg
Clinical Products
IT, nutrition, CE
Benefits, advertising, other
non-traditional categories

55. From Purchase Cost to Standardized Supplies to
Managing Product Utilization
A Three Tiered
Approach to Standardize
System Approach Appropriate
Supply to Purchasing Supplies Product
Utilization
Savings Potential Savings of
Supply Chain
$12M through Clinical
Organization Created
Commodity
to Standardize
Standardization and
Purchasing Practices
Utilization Initiatives
Typical Supply Savings %

56. Summary – What Can We
Learn & Apply?

57. Why We Must do Something Beyond “Insanity” –
Doing the Same Things
• Largest industry in world - will double in next 10 years
• Big financial pressures are coming
 Changing reimbursement
 Patient choice – new behavior
 New entrants – suppliers & providers
• Senior Leadership is recognizing the contributions of supply chain strategies
• Must look outside healthcare to understand best practice potential
• Skills required – either develop them or hire them

58. How to Pick and Apply Best Practices
 Some people can’t even define a best practice, much less adopt one
 The trick might be to “when you find a best practice, adopt and adapt”
 Moving quickly on what you have learned is a “best practice”
 Maybe we should be more focused on not “best practices” but
eliminating “bad practices”

59. If Building a BIG Strategy is Too Much…
Start With Baby Steps
1. Know where you spend money
2. Understand total cost
3. Organize yourselves – act as one
4. Know who makes supplier decisions
5. Do a better job of negotiations
6. Take time to manage the biggest Practice
suppliers Supply Chain
7. Simplify your processes Management
8. Look at your warehouse and distribution
costs

60. This Can’t Be Our Supply Chain Forever
Transactions
National
GPO
Contracting
Tracing Fees Distribution
(3-4%) (4-12%)
Channel Fees
(4-6%)
Manufacturer Distributor Additional Provider
Payment Term Markup
Discount (2%) (4-8%)
Volume Rebates (1-2%)

61. Summary
 To expect different results, you may need updated roadmap
 No Two Companies operate the same way – but all have
guiding principles for success
 Best Practices are a benchmark and guide for effectiveness
and improvement
 You must be the change you wish to see in the world

62. The Economy Should Provide
OPPORTUNITY Not Challenges for a GPO
• Burning platforms are appearing
• You never want a serious crisis to
go to waste

63. Speed, Agility and Value are More Important
Than Ever Before
We cannot wait for the storm to blow over.
We have to learn to work in the rain.

64. Competition
“Every morning in Africa, a gazelle wakes up. It knows
it must run faster than the fastest lion, or it will be
killed. Every morning a lion wakes up. It knows it
must outrun the slowest gazelle or it will starve to
death. It does not matter if you are a lion or a gazelle.
When the sun comes up, you’d better be running.”
Juergen Bartels,
President & CEO
Carlson Hospitality Group, Inc.

65. Thank You