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The Importance of a Logistics Supply Chain Plan


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The Importance of a Logistics Supply Chain Plan

  1. 1. The Importance of a Logistics Supply Chain Plan
  2. 2. <ul><li>Larry Dooley </li></ul><ul><ul><li>VP, Group Purchasing </li></ul></ul><ul><ul><li>RO i (An Operating Division of Sisters of Mercy Health System) </li></ul></ul><ul><ul><li>St Louis, MO </li></ul></ul>
  3. 3. Date: September 2008 The Importance of a Logistics Supply Chain Plan
  4. 4. The Importance of a Logistics Supply Chain Plan <ul><li>Logistics Planning : </li></ul><ul><li>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. </li></ul>
  5. 5. The Importance of a Logistics Supply Chain Plan <ul><li>Today’s Overview: </li></ul><ul><ul><li>Importance of Supply Chain Plan/Logistics </li></ul></ul><ul><ul><li>Current Environment </li></ul></ul><ul><ul><li>Logistics Planning </li></ul></ul><ul><ul><li>Logistics to the Next Level </li></ul></ul><ul><ul><li>Conclusions </li></ul></ul><ul><ul><li>Questions </li></ul></ul>
  6. 6. The Importance of a Logistics Supply Chain Plan Logistics Implemented Correctly Delivers Competitive Edge Operational Efficiencies Enhanced Value
  7. 7. The Importance of a Logistics Supply Chain Plan <ul><li>Key Element for Successful Implementation of Logistics Planning - Requires </li></ul>Supply Chain Management Strategic Plan The Plan is the Roadmap for economic and operational success!!!
  8. 8. The Importance of a Logistics Supply Chain Plan <ul><li>What is Logistics </li></ul><ul><li>There are numerous definitions of Logistics. The following definitions are examples that can best apply to the provider side of the Healthcare Industry </li></ul>
  9. 9. The Importance of a Logistics Supply Chain Plan Definitions of Logistics <ul><ul><li>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). </li></ul></ul><ul><ul><li>Logistics - The science of planning, organizing and managing activities that provides goods or services. -- (MDC, LogLink / LogisticsWorld, 1997) </li></ul></ul>
  10. 10. The Importance of a Logistics Supply Chain Plan Definitions of Logistics <ul><ul><li>**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). </li></ul></ul><ul><ul><li>Logistics – The procurement, maintenance, distribution, and replacement of personnel and materiel. -- (Webster's Dictionary) </li></ul></ul>
  11. 11. The Importance of a Logistics Supply Chain Plan <ul><li>Supply Chain Management Strategic Plan with a foundation built on Logistics will provide a healthcare organization with the ability to </li></ul><ul><ul><li>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 </li></ul></ul>
  12. 12. Healthcare Spend Data *DATA SOURCE - EHCR STUDY 30% 70% 38% 5% 2%
  13. 13. Supply Chain Logistics Current Environment <ul><li>Healthcare industry does not have same cultural alignment among the links of the healthcare supply chain </li></ul><ul><ul><li>No cultural alignment – cost reductions not available </li></ul></ul><ul><li>Retail, grocery, automotive, high-tech, and electronics industries drive substantial collaboration throughout their SC’s </li></ul><ul><ul><li>30% cost reductions </li></ul></ul>HCOs – turning to SCM strategies to reduce costs and drive operational efficiencies – mimicking other industries i.e., retail, grocery, electronic, automotive <ul><li>PPI – Surgical products - RX – unchecked consistent price escalation </li></ul><ul><ul><li>No real checks and balances in place to control sky-rocketing costs </li></ul></ul>Commodities products – price reduction for years now Inflation!! <ul><li>To meet the demands of the HCOs and GPOs: </li></ul><ul><ul><li>Manufacturers – Supply Chain Techniques to reduce costs: </li></ul></ul><ul><ul><ul><li>Offshore / Outsourcing </li></ul></ul></ul><ul><li>Primary focus on cost reduction of supplies is product price </li></ul><ul><ul><li>Up to 2006+ - 20+ year deflationary product price reduction – commodities – GPO Driven </li></ul></ul><ul><li>Maturation of IDNs: </li></ul><ul><ul><li>- Initial focus on labor </li></ul></ul><ul><ul><li>- Second largest cost after labor is supplies 20-25% of Net Patient Revenue (NPR) </li></ul></ul>
  14. 14. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul>Desired Outcomes Direct Sourcing from a Manufacturer/ Distributor Product Availability and Delivery Improved Customer Service Improved Asset Efficiency Increased Cash Flow Collaboration with Key Service Providers Favorable Management Inventory Flows Product Handling Cost Reduction Improved Operational Efficiencies Key Issues Materials Face Everyday
  15. 15. Supply Chain Logistics Planning <ul><li> </li></ul><ul><li>Logistics Planning </li></ul><ul><ul><li>Supply Chain Management and Logistics are very broad and deep in practice: </li></ul></ul><ul><ul><ul><li>Plan needs to be narrowed to help HCO’s understand the value in how having a specific Logistics Plan will bring value </li></ul></ul></ul><ul><ul><ul><li>Focus on – procurement and receipt </li></ul></ul></ul>
  16. 16. Supply Chain Logistics Planning <ul><li>Logistics Planning – Key Elements </li></ul><ul><li>Sourcing </li></ul><ul><li>Procurement </li></ul><ul><li>Ordering </li></ul><ul><li>Order Management </li></ul><ul><li>Transportation (direct, distributed, self) </li></ul><ul><li>Receiving </li></ul><ul><li>Warehousing </li></ul><ul><li>Product Movement – Entities </li></ul><ul><li>Accounts Payable </li></ul>
  17. 17. Supply Chain Logistics Planning Logistics Planning Firm Logistics Plan for Procure/Receipt – Eliminates Inefficiencies Distribution Direct Two Primary for Delivery Materials Team – Greatest Impact Why ? Consumable / Commodities Physician / Clinical Preference Two Types Products – Consume Majority of Materials Time for Sourcing – Procurement - Receipt
  18. 18. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul><ul><li>The average HCO according to the recent KPMG Hospital Procurement study, buys from an average of </li></ul><ul><ul><li>1.5 medical – surgical distributors </li></ul></ul><ul><ul><li>Four hundred and forty-three manufacturers (443) direct </li></ul></ul><ul><ul><li>A logistics plan pre-determines how each product(s) are: </li></ul></ul><ul><ul><ul><li>Procured </li></ul></ul></ul><ul><ul><ul><li>Delivered </li></ul></ul></ul><ul><ul><ul><li>Saves the materials team: </li></ul></ul></ul><ul><ul><ul><ul><li>resource time </li></ul></ul></ul></ul><ul><ul><ul><ul><li>actual cost for delivery and / or freight </li></ul></ul></ul></ul>
  19. 19. 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
  20. 20. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul>Process for Procurement And Receipt of Product(s) Materials Team Needs to Pre-Determine How Each Product(s) Will be Procured And Received Follow a Phased Assessment Process <ul><li>Phase I </li></ul><ul><li>Complete Analysis of Both Current and Future Needs for All Facilities / Entities within HC </li></ul><ul><li>1) Receiving Dock / Space </li></ul><ul><li>Warehouse / Central Stores </li></ul><ul><li>Materials Team Resources </li></ul><ul><li>Physical / Geographical Locations – whether self-contained or spread over multiple states </li></ul>
  21. 21. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul>Phase II Materials Team Now Can Determine by Product(s) Or Product Category best way To Procure and Receive Factors for Consideration: Commodities – Traditionally Distributed Thousands of Commodities Low in Value / High in Use High in Value / High in Use Materials Team Determines Most Cost Effective Means For Procuring and Receiving These Products
  22. 22. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul>Phase II Continued Most Cost Effective Full Service Aggregator (Med-Surg Dist.) Med-Surg Business Model Traditional Cost+Plus Activity Based Costing Monthly Service Charge Gross Margin / Net Profit Model
  23. 23. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul>HCO’s Avoid Temptation Short-Term Product Cost Reductions – Lead to Long-Term Increases in Logistics Costs 20/80% Product Categories Drives Volume Med-Surg Distributors Key Product Category for M/S Distributors Suture/Endo 12-16% of Volume – 25%+ Margin Key Reasons Efficient to Distribute Low Cube/Low Weight/ High Velocity/High Value 90% S / 65% E – PPI J&J Phenomenon Impacts Cost of Overall Distribution HPIS 2003-2007 15%
  24. 24. Distribution Business Model/Economics U.S. Hospital Supply Distribution Market – Estimated Size – Lehman Brothers (Private Companies Estimates Subject to Wide Variation) 100% 100% $30,000 Market Size (HIDA - dist) $57,500 Market Size (including “go” direct supplies) $22,000 Market Size (dist.) 0.3% 0.2% 0.5% $ 100 Seneca 1.0% 0.5% 1.4% $ 300 MMS 1.5% 0.8% 2.0% $ 450 Burrows 1.7% 0.9% 2.3% $ 500 PHS 2.2% 1.1% 3.0% $ 650 Medline 20.5% 10.7% 30.9% $6,800 O&M Total 17.8% 9.3% 34.1% $7,513, Cardinal % Share “ New” HIDA % Share – All In % Share – Distribution 2008 Est. Distribution Revenues Company
  25. 25. HPIS Top 10 GHX Market Intelligence ™ 7.1% 14.7% 16,597,240,528 17,761,880,877 19,029,010,601 Total Hospital 8.0% 18.0% 7,486,041,218 8,176,663,284 8,833,872,822 All Other 6.4% 11.9% 9,111,199,310 9,585,217,593 10,195,137,779 Top 10 9.9% 23.4% 478,967,530 537,546,992 590,947,470 Skin Care Products 3.2% 6.9% 572,184,458 592,894,514 611,854,456 Adhesives, Bandages, Dressings and Sponges 3.0% 4.6% 805,448,662 818,065,192 842,341,842 Wound Sutures * (2003-2006 5thplace) 4.4% 9.9% 769,821,174 810,382,666 846,398,071 Needles and Syringes 9.1% 20.2% 715,646,912 788,597,565 860,059,232 Gloves 4.4% 10.2% 797,644,815 842,133,243 879,365,226 Respiratory 4.5% 8.1% 868,010,390 898,254,603 938,739,737 Woven and Nonwoven Goods 8.1% 7.6% 1,257,315,053 1,250,528,903 1,352,276,132 Wound Staples and Endosurgery 10.4% 22.3% 1,316,270,773 1,458,340,383 1,609714,721 Parenteral 4.7% 8.7% 1,529,889,544 1,588,473,532 $1,663,440,891 Kits, Packs, and Trays – Custom Change 2006 - 2007 % Change 2005 - 2007 2005Total Dollars 2006 Total Dollars 2007 Total Dollars Product Category
  26. 26. HPIS 2006 GHX Market Intelligence ™ 55.17% 55.64% 55.17% Top 10 44.83% 44.36% 44.83% All Other 2.78% 3.35% 3.45% Skin Care Products 3.75% 3.60% 3.50% Adhesives, Bandages, Dressings, and Sponges 5.10% 4.50% 4.45% Wound Sutures 4.71% 4.66% 4.57% Needles / Syringes 4.87% 4.80% 4.75% Gloves 5.05% 4.87% 4.61% Respiratory 5.26% 5.23% 5.08% Woven / Nonwoven Goods 8.54% 7.10% 7.20% Wound Staples – Endo 7.90% 8.25% 8.50% Parenteral 9.59% 9.28% 9.06% Kits, Packs, Trays – Custom 2005 Market Share 2006 Market Share 2007 Market Share Product Category
  27. 27. HPIS Data <ul><li>Major Changes 2006-2007 </li></ul>Glove Products Increased 9% Skin Care Products Increased 9% Parenteral Products Increased 10% Total Hospital Distributed Sales $19 Billion+ Up 7.1% over 2006 Infection Control Drives Distributor Sales
  28. 28. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul>Temptation Manufacturers Offer to Sell Traditionally Distributed Products Direct vs. Going Through Med-Surg Distribution HCO Enticement Save Money Going Direct on Cost+Plus Mark-Up
  29. 29. Benefits of Maximizing Distributors <ul><ul><li>Source: KPMG Hospital Procurement Study </li></ul></ul>259.4 hrs. per $1M 51.6 hrs. per $1M Negotiating w/ suppliers 204 hrs per $1M 51 hrs per $1M General order problem solving $305,908 inbound freight $102,964 inbound freight Freight Cost 162 hrs. per $1M 56 hrs. per $1M Receiving orders 119 hrs. per $1M spend 54 hrs. per $1M spend Creating / placing orders Direct Distributed Function
  30. 30. Supply Chain Logistics Planning <ul><ul><li>Logistics Planning </li></ul></ul><ul><li>Logistics Planning </li></ul><ul><li>Long-Term Negative Impacts – Giving into Short-Term Temptations: </li></ul><ul><ul><li>Increase in procurement costs – materials resource time for sourcing </li></ul></ul><ul><ul><li>Increase in number of POs </li></ul></ul><ul><ul><li>Increase in number of receipts at dock </li></ul></ul><ul><ul><li>Increase in physical inventory costs </li></ul></ul><ul><ul><li>Increase in inventory handling costs </li></ul></ul><ul><ul><li>Decrease in cash flow </li></ul></ul><ul><ul><li>Increase in accounts payable resource time </li></ul></ul><ul><ul><li>Increase time in order management and problem resolution </li></ul></ul>
  31. 31. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul><ul><ul><li>Rules of the Road – Traditionally Distributed Products – </li></ul></ul><ul><ul><li>Stick To The Logistics Plan: </li></ul></ul><ul><ul><li>Avoid Short-Term Temptations </li></ul></ul><ul><ul><li>Use The Most Efficient Source for Procurement / Receipt </li></ul></ul><ul><ul><li>Use The Aggregator Where Appropriate </li></ul></ul><ul><ul><li>Work out of the Box – Engage Direct Manufacturers To Use the </li></ul></ul><ul><ul><li>Aggregator – Let the Efficiencies Work for You!!! </li></ul></ul>
  32. 32. 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 Focus on Direct Suppliers Direct Manufacturers 443 Why – Manufacturer wants to control YOUR SUPPLY CHAIN Why – Higher Prices, Higher Margins – Less Information
  33. 33. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul>Materials Team – Focus on Suppler / Product Standardization for Maximum Cost Reduction Activities Logistics Plan –Addresses All Types Of Products Value Proposition of Logistics Plan Provides Continual Focus on Cost Reduction and Operational Efficiencies And Reduces Time Needed to Deal With 443 Suppliers Advantage – Shifts Control of Supply Chain from Manufacturer to YOU!!!
  34. 34. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul>Additional Direct Manufacturer Focus Cost Reduction PPI Products Inbound Freight Management PPI Manufacturers Have Deep Discounts With UPS/FEDEX They Charge Retail To The HCO’s PPI Manufacturers Don’t Pass On Their Deep Discounted Rates Use it for Margin Enhancements
  35. 35. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul>Additional Direct Manufacturer Focus Inbound Freight Management <ul><ul><ul><li>Terms – F.O.B. Destination / Bill Third Party </li></ul></ul></ul><ul><ul><li>The reason these terms are needed if F.O.B. DESTINATION, FREIGHT PREPAID AND ABSORB c an’t be agreed these terms will enable the Health Care Organization to achieve the following: </li></ul></ul><ul><ul><li>F.O.B. DESTINATION, FREIGHT PREPAID AND ABSORB Seller owns goods in transit and bears risk of loss. Seller solely responsible for freight charges. </li></ul></ul><ul><ul><li>All HCO’s contracts with direct ship manufacturers need to include the following terms for shipping the product to the HOC/IDN </li></ul></ul>
  36. 36. Supply Chain Logistics Planning <ul><li>Logistics Planning </li></ul>Value of Inbound Freight Management Program <ul><li>Inbound Freight Management Company </li></ul><ul><li>will: </li></ul><ul><ul><li>Provide Mode Optimization </li></ul></ul><ul><ul><li>Shipping the least costly way (i.e., Ground vs. Air) </li></ul></ul><ul><ul><li>Provides full visibility to freight charges </li></ul></ul><ul><ul><li>Identifies those suppliers who are not following </li></ul></ul><ul><ul><li>the F.O.B. Destination / Bill Third Party </li></ul></ul><ul><ul><li>Materials Team can focus </li></ul></ul><ul><ul><li>Supplier Negotiation time on these Suppliers </li></ul></ul><ul><ul><li>Self managed or outsourced </li></ul></ul><ul><ul><li>Drive cost reductions on inbound freight </li></ul></ul><ul><ul><li>by up to 40% </li></ul></ul><ul><ul><li>HCOs that maximize their M/S Dist. </li></ul></ul><ul><ul><ul><li>Spend $102,964 vs. $305,908 </li></ul></ul></ul><ul><ul><ul><li>frt. charges </li></ul></ul></ul>
  37. 37. Supply Chain Logistics <ul><li>Conclusions </li></ul><ul><li>Supply Chain Management can be a key driver of permanent cost reductions and increases in financially sound operational efficiencies </li></ul><ul><li>Wal-Mart, Target and the other large mass merchandisers </li></ul><ul><ul><li>Use logistics as a competitive advantage </li></ul></ul><ul><li>The Health Care industry is trying to emulate other industries to become more cost effective </li></ul><ul><li>Each HCO/IDN needs to develop and implement a Supply Chain Management Strategic Plan with a significant focus on Logistics </li></ul>
  38. 38. Supply Chain Logistics <ul><li>Conclusions </li></ul><ul><li>There are Six Levels of Supply Chain Excellence as explained by Dr. Jim Tompkins, Tompkins Associates: </li></ul>
  39. 39. Supply Chain Logistics 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 3 – Visibility 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 2 – Link Excellence 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 1 – Business as Usual
  40. 40. Supply Chain Logistics 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. Level 6 - Velocity 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 5 – Synthesis 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 4 – Collaboration
  41. 41. Supply Chain Logistics <ul><li>To achieve Supply Chain Excellence each HCO/IDN must have the following core competencies: </li></ul><ul><ul><li>Understanding Supply Chain Communications (All partners have same view of Supply Chain – same plans, same goals, same strategies) </li></ul></ul><ul><ul><li>Understanding Supply Chain Partnerships (relationships to be need to evolve & flex for success) </li></ul></ul><ul><ul><li>Understanding Distribution Synthesis (having distributors be responsive to the HCO/IDN needs) </li></ul></ul><ul><ul><li>Understanding Manufacturers Synthesis (having manufacturers be responsive to the HCO/IDN needs) </li></ul></ul><ul><ul><li>Understanding Total Operations (having a Total Supply Chain Strategy/Logistics Plan) </li></ul></ul><ul><ul><li>Understanding Customer Satisfaction (one size fits “one”) </li></ul></ul><ul><ul><li>Understanding Peak to Peak (sustaining performance) </li></ul></ul><ul><ul><li>Understanding Change (harnessing the energy of change) </li></ul></ul>
  42. 42. Supply Chain Logistics Planning <ul><li>Conclusion </li></ul>For Supply Chain Success Needs to Synchronization & Agility Drivers Follow Six Levels Of Successful Supply Chain Levels Need To Develop Supply Chain Management Strategy Key Focus On Logistics Proceed “ Eyes Wide Open”
  43. 43. Thank You! Larry Dooley (314) 628-3410 [email_address] Questions