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Best-in-Class Procurement Using a Price
Management Strategy
Deal or No Deal:
Intermountain Healthcare
Cole SmithStrategic Sourcing Manager
sig.org/eval
Intermountain Healthcare Supply Chain
March 11, 2014
Deal or No Deal: Best-in-Class Procurement Using a Price Management
Strategy
Presented by:Cole Smith, MBA, CPSM
Strategic Sourcing Manager
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Cole SmithStrategic Sourcing Manager,
Intermountain Healthcare
Email: [email protected]
Phone: 801.442.4634
Cole works as a Strategic Sourcing Manager for Intermountain Healthcare in SLC, UT. Since 2013, Cole piloted a unique and successful price management program which utilizes a fresh and innovative approach to capture value throughout the contract lifecycle.
Prior to joining Intermountain, Cole worked as the director of global operations and procurement for True Science, a regional operations manager for Mondelez International, and as an account manager for Kraft Foods. He is a graduate of Weber State University and also has a master’s degree in business management and strategy from Western Governors University.
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About IntermountainA large, integrated health system with a tradition of innovation
Hospitals
• Since 1975• 22 hospitals• 2,700 beds
• Since 1983• SelectHealth• 750,000 members
Health Insurance
Medical Group
• Since 1994• 1,200 employed physicians• 4,000 affiliated physicians• 185 clinics
37,000 employees
$1.9B non-labor spend
AA+ Standard & Poors rating
Aa1 Moody’s rating
Based in Salt Lake City, Utah
Mission: “Helping people live the healthiest lives possible”
Continuum Care• TeleHealth• Home care• LifeFlight• Central lab• Central pharmacy
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2014 Gartner Top-Ten Healthcare Supply Chains
1. Cardinal Health2. Mayo Clinic3. Intermountain
Healthcare4. Owens & Minor5. CVS Caremark 6. Mercy7. Johnson & Johnson8. AmerisourceBergen9. McKesson10. Walgreens
Intermountain Supply Chain
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WERC Certified Distribution
Center
• Certification held by only
40 facilities worldwide
• Colgate-Palmolive
• DHL
• Ingersoll-Rand
• Starbucks
• Intermountain scored in
top 5 of all certified
facilities
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Presentation Roadmap and Objectives
Why a Price Management Program?
How the Program Works
What is in it for you?
Key Lessons and Learnings
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Polling Questions #1
• What % of your spend is being actively managed vs. simply transacted?
• How are you managing your spend between a sourcing event (contract creation) and the contract renewal?
• How effectively can your people manage allof a supplier’s spend?
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Price Management Niche
Strategic Sourcing opportunities tend to occur during supplier selection or contract
A/C/D processes
Price Management opportunities are
primarily identified between supplier
selection and contract expiration
Any conflicts with projects in-flight stays with Strategic Sourcing
Sourcing Initiatives and other in-flight initiatives are carved out of Price Management projects protecting project integrity while maximizing total value to the organization
Contract A/C/D’s
Supplier selection
Contract term
No one was looking for opportunities to add value
in-between!
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Take Away
• Are we focused on the right value levers that will ultimately drive more value and reduce leakage for your organization and stakeholders?
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Price Management, like Strategic Sourcing, levers robust processes
Opportunity Initiation
Internal Analysis
External Analysis
Strategy Development&
NegotiationOperationalize
However, Price Management does not duplicate the efforts of Strategic Sourcing
and works within the same supply base
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Strategic Sourcing begins projects by identifying an opportunity.
Strategic Sourcing
opportunity
Price Management team opportunity
The Price Management team identifies opportunities beyond the focus of Strategic Sourcing by using tools which have traditionally been underutilized.
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Price Management Niche
Strategic Sourcing
opportunity
Price Management team opportunity
Any conflicts with projects “in-flight” stay with Strategic
Sourcing
The Price Management team identifies opportunities beyond the focus of Strategic Sourcing by using tools which have traditionally been underutilized
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Price Management as a partner
Find the Value!
Spend Analysis & Business Planning
Negotiate the Value!
Strategic Sourcing
Document the Value!
Contract Management
Capture the Value!
Program Management
Grow the Value!
Supplier Management
Category
Management
Each team has their own way of identifying value
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Price Management Value Offerings
Our Mission: To Pursue World-Class Pricing
Price Negotiations
-Lever 3rd party benchmark providers
-Spend analysis
Emergent Value Opportunities-Additional opportunities are referred to existing teams
Contract Price Audits-Contracts on our paper-Contracts on supplier
paper-Contracts on GPO paper
Operational Efficiencies-Increasing On-Contract
spend-Utilization of self-
distribution model over other distributors
Price Increase Mitigation
-Standardized process for
mitigating all proposed price
increases
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Price Management Value Offerings
Our Mission: To Pursue World-Class Pricing
Price Negotiations
-Lever 3rd party benchmark providers
-Spend analysis#1
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Polling Questions #2
• How does your organization use benchmark data in your sourcing process?
Are you utilizing price benchmarks to increase supplier collaboration and accountability, or simply to drive towards a better price?
How do you measure what “good” really looks like?
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Price Benchmarks
DetailProvide detailed and accurate picture of
performance
ContextHow do you compare
to your peer organizations
EfficiencyDemonstrate what is
important and available
PermanenceCan lead to
sustainable results improvement
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Deliver against 4 key requirements
Source: Advisory.com (used with permission)
Price Negotiations
• 3rd party benchmarks helped identify over 900 potential projects • Across Intermountain’s top 60 suppliers, the data showed an
opportunity of $15M in potential savings
• Each project provides the opportunity to evaluate supplier-spend holistically or horizontally across all categories of spend.• Suppliers have been very complimentary of this approach:
• “We’ve really appreciated having Intermountain negotiate pricing across all of our divisions at the same time” C.R. Bard, Inc.
• “I think your approach in addressing contracts and spend is very innovative” Patterson Medical Company
• “We’ve never had buy-side organizations look at spend as thorough or detailed as what you’ve shown us” Masimo
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Price Negotiations example - C.R. Bard
Endo-GI supplies, Urology
products, Catheter trays
IV sets, Solutions, Thoracic
supplies, Needles
Sealants, Mesh, Patches, Grafts
Catheters, Balloons, CV
supplies
Stents, Central Lines
Price Management team looks at suppliers from a horizontal perspective across all categories
SI In-flight SI In-flight
Strategic Sourcing oversaw the master Bard agreement
Spend impacted by SI’s in-flight ~ 19% of total
Spend eligible for Price Mgmt. project ~ 80% of total
SI In-flight
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We like Variety
People consume an average of 43% more M&Ms when there are 10 colors in the bowl
instead of just 7
(source: Dan Ariely, Duke University, Psychology and Behavioral Economics expert)
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Price Negotiation Strategy
• Lever 3rd Party Benchmark data!
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Lever multiple data points to increase negotiating position!
Identify
Capture
Sustain
Price Management Value Offerings
Our Mission: To Pursue World-Class Pricing
Contract Price Audits-Contracts on our paper-Contracts on supplier
paper-Contracts on GPO paper
#2
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Contract price Audits
• Price Management audits the pricing of each contract associated with the suppliers we engage with
• Price Management periodically audits GPO contracts for price and tier accuracy
Why is this important? This part of the process ensures the organization is paying the right price at the right time – per the contractual terms of the agreement
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Price Management Value Offerings
Our Mission: To Pursue World-Class Pricing
Emergent Value Opportunities-Additional opportunities are referred to existing teams
#3
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Emergent Value Opportunities
Through a value-centric approach in evaluating opportunity from a horizontal perspective, the Price Management program identifies unforeseen opportunities for the organization, including:
• Reprocessing opportunity – Masimo pulse oximetry
• Post Contract Value Creation
• Cross-dock and pallet cube opportunity – Georgia Pacific
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Price Management Value Offerings
Our Mission: To Pursue World-Class Pricing
Operational Efficiencies-Increasing On-Contract
spend-Utilization of self-
distribution model over other distributors
#4
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Operational Efficiencies
• Eliminated 7 contracts through consolidation and via new Master Purchasing Agreements (MPA’s)
• Added 1,150 “off-contract” items to the appropriate contract
• Mitigated freight expense through renegotiation of Terms and Conditions with 4 suppliers
• Consolidated distribution to our central warehouse distribution center *
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Price Management Value Offerings
Our Mission: To Pursue World-Class Pricing
Price Increase Mitigation
-Standardized process for
mitigating all proposed price
increases
#5
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Polling Questions #3
• How much do price increases (whether contractually allowed or not) cost your organization each year?
How does your organization track price increases or decreases?
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Price Increase Mitigation
We studied a sampling of total
spend to measure the impact of price
increases on the organization
7.06% of spend within the sample
was affected by a price increase
6.91% was the average price
increase within the sample
Based on the data and applying these percentages to total spend, price increases are a big problem
What does this mean for my organization and for yours?• Price increases could literally be killing all of your realized savings
each year• Based on our small sample size, the impact of price increases
across all supplier spend could exceed $8,000,000/year
Price Increase Mitigation
• Our team has been developing and piloting this methodology, contributing nearly $1M in value since 2014
• Once the process is approved, value to the organization will include; Establishing a unified approach to address price increase mitigation
Providing scenario specific job-aids
Improve management of value-leakage throughout the life of the contract
Mitigate the gap, memorialize the value, and protect your organization from risk - which occurs between the sourcing event and before the contract renewal process begins
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Price Increase Mitigation
Job Aid #1: For proposed price increases due to commodities, raw
materials, fuel, price index measures, taxes, government regulations or
inflation
Value Delivered (2014/2015)
Grand total:$5,894,000
Validated Savings
Price Negotiations$3,088,000
Validated savings
Emergent Value Opportunities$1,020,000
Sum of potential annual savings identified for other teams
Contract Price Audits$966,000
Validated savings
Price Increase Mitigation$755,000
Validated savings
Since inception (August 2013) Price Management has brought value through every
Value Offering!
Operational Efficiencies
$64,000 Validated savings
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An Attractive ROI
What’s in it For You?
1. Labor/Benefits cost for two employees: $250,000/yr2. Incremental Savings delivered per year: $2.5 - $3.0
million3. ROI exceeded the targeted 10:1 payout
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Key Learnings and Lessons
• Sr. Leadership support
• Ability to carve out projects in-flight preventing duplication of efforts and feelings of territoriality
• Sound methodology and playbook, designed to be scalable
• Data supports a 1.67 multiplier effect for Price Management projects; $2 million opportunity equates to $3.3 million in validated savings
• The fresh, horizontal approach to every initiative contributes significantly to the success of the team
• Success has resulted from an unwavering focus on quality, coupled with efficiency and sustainability
• Though project began with products, scope could include software, hardware, equipment and purchased services
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Cole Smith, MBA, CPSM
Strategic Sourcing Manager, Intermountain HealthcarePhone: 801.442.4634Email: [email protected]
Software Dynamics
What do I own?
What contract terms do I own?
How much did I spend?
Did I get industry standard pricing?
Did I get industry standard contract terms?
Where is it?
Where is the software deployed?
─ Do I have data?
─ Is that data accurate / plausible?
Am I compliant?
Did I pay for everything installed?
Am I legally responsible for more vendor costs?
─ Is it too late due to an Audit Effective Date?
What must be done to become compliant?
─ Other than just write a check?
Am I efficient?
Did I purchase in a way that was cost efficient?
Did I deploy in a way that is cost efficient?
What can be done to be more efficient?
Am I effective?
How did the above decisions impact the bottom line?
─ Per Line of Business
o Per Application
» Per Transaction
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IT Procurement practices creates non-compliance
Hardware purchases are made independently of software considerations.
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Benefits of Benchmarking
Generates increased profit and funds innovation!
Saves TimeReduces repeated cycles negotiating
– best in class is now known
Reduces costsHarness the power of peer best in
class price points
Increases ValueGetting more for same or less –
suppliers will upgrade to save spend levels
Software will always be in a State of Audit
• Relaxed state Early in a contract Large revenue stream to vendor or long-term and growing revenue stream, Vendor 'in charge' of corporate software needs
• Pending Corporate Movement (Pre-Movement) Cost reduction plans, Downsizing, Virtualize, Software vendor change Anything that disrupts the revenue stream
• Pre Audit Post Movement
─ Vendor moving communications up the management chain─ Vendor Offering help on inventory, running "performance" reports─ Vendor doing Lots of contract T/C talk
Trend / Chatter / Rumors─ "Just an Audit, Nothing Personal"
• Audit Audit Announced
─ Audit Effective Date set Audit Engaged
─ External vendor (KPMG, DT) asking for data, etc. Audit Results Delivered
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Reconciliation is an Important and Complex Task
1. Collect hardware inventory
2. Map to hardware vendor inventory name
3. Reconcile hardware specifications
4. Validate hardware specifications
5. Collect software inventory
6. Map software vendor inventory name
7. Validate software licensing requirements
8. Determine software unit cost
9. Identify hardware deployment alternatives
10. Evaluate software effectiveness
If this is Complex ….. Virtualization is Exponentially more Complex
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Deal or No Deal: Best-in-Class Procurement
Using a Price Management Strategy
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Cole Smith, MBA, CPSM
Strategic Sourcing Manager, Intermountain Healthcare
Phone: 801.442.4634
Email: [email protected]