Strategic Alliances Are they for you?

Brent JohnsonVice President Supply ChainIntermountain Healthcare

ISM Utah – January 14, 2010

Topics of discussion

1. Intermountain Healthcare 2. Healthcare Reform3. Healthcare Supply Chain 4. Supply Chain Best Practices – Where does

Alliances fit? 5. Definition 6. When To Use & Benefits7. AMR Research findings 8. Performance Measurement9. Summary

Intermountain Healthcare

More and more U.S. leaders and national media see Intermountain

as a role model of high-quality, low-cost care

“We need to build on the examples of outstanding medicine at places like…Intermountain Healthcare in Salt Lake City, where high-quality care is being provide at a cost well below average. These are islands of excellence that we need to make the standard in our healthcare system”

President Barack Obama

June 15, 2009, Chicago Illinois

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.

Healthcare Reform

77

Environment – Healthcare Reform

Key Elements• Increase Access• Individual Mandate

• Insurance Mandates

• Healthcare Exchange

• Employer pay or play

• Public Plan / Co-ops

• Encourage Efficient Care

• Encourage Efficient Care• Bundled payments

• At risk quality payments

• Penalize readmissions

• Episode based payments

• IT incentives

• Comparative effectiveness research

• Straight rate cuts

• Reduce Demand• Accountable care

organizations

• Medical homes

• Disease management

• Capitation

Healthcare Supply Chain

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 Healthcare Supply Chain Model

Direct

Manufacturers

Major Supply Chain Organization (SCO)

developments in past four years

• Created a new SCO organization

• Hired 25 new people

• Developed rigorous but 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 & trust with key stakeholders

• Delivered on savings - $130 million so far

Lab Mfg.

Pharma Mfg.

Film Mfg.

Med/Surg Mfg. HospitalHospital

HospitalHospital

HospitalHospital

HospitalHospital

HospitalHospital

HospitalHospital

Medical GroupMedical Group

Home CareHome Care

Dietary Mfg.

Linen Mfg.

Other???Other???

IMAT

Mfg. Direct

Ancillary Services

Pharmacy

Packs &Kitting

3PL Services

Simplicity is Better:The Future IMAT Product Flow

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

Supply Chain Best Practices &

Strategic Alliances

12 Fundamental Best Practices of Supply Chain

Management

1. Develop the strategy

2. Align the supply chain

organization

3. Recruit supply chain

professionals

4. Be dedicated to

performance management

5. Establish strategic

sourcing strategy

6. Manage total cost of

ownership (TCO)

7. Establish key supplier

alliances

8. Develop supplier

management processes

9. Streamline the order-to-

payment process

10. Manage inventory

11. Manage distribution &

logistics

12. Establish & monitor controls

Supply Chain Management How it is different from past procurement

practices?

• Focuses on reducing Total Cost rather than just reducing the supplier’s margin

• Looks at procurement as a corporate-wide activity • Concentrates the company’s purchases with fewer suppliers• Negotiates purchases instead of using just the “lowest bid”

approach• Creates relationships with key suppliers to work joint cost

reductions• Holds suppliers responsible for TCO factors including metrics • Creates greater standardization within the company • Develops the most efficient process from procure-to-pay

Delivering Value via Strategic Sourcing

Step 1

Opportunity Assessment

Step 2

Category Analysis

Step 3

Market Analysis

Step 4

Strategy Development

Step 5

Supplier Selection

Step 6

Implemen-tation

Spend analysis

Category profiling

Finalize decision rights committee

Launch cross-functional sourcing team

Team charters

Project planning

Category analysis

ID demand drivers

“As-is" specs

“As-is" service levels

“As-is” processes

Current TCO

Benchmark TCO

Define specs

Define service levels

Define processes

ID suppliers

Supplier communication

RFI (optional)

Supplier interviews

Industry analysis

Market analysis

Benchmark best practices

Initial supplier assessment

Leverage analysis

Reconfirm scope

Reconfirm objectives

ID desired outcomes

Brainstorm processes

Finalize business requirements

Supplier selection criteria

Determine sourcing strategy

Finalize long list of suppliers

Executive approval

Supplier communication

Supplier calls

Supplier evaluation model

RFP/RFQ/Auction

Score proposals

Supplier presentations

Site visits

Other due diligence

Contract negotiations

Executive approval

Award business

Supplier communication

Goals and objectives

Launch implementation team

Implementation project planning

Communications planning

Supplier performance management planning

Implementation execution

Comprehensive, systematic business process whereby the optimal supply sources and/or solutions are selected, contracted and implemented at the lowest total cost of ownership.

Strategic Sourcing Definition:

AnalyzeSpend

Analyze Category

AnalyzeMarket

ImplementStrategy

ManageNegotiations

Award & Contract

DevelopStrategy

Traditional Contracting

Strategic Sourcing

Definition:

Comprehensive, systematic business process whereby the optimal supply sources and/or solutions are selected, contracted and implemented at the lowest total cost of ownership.

Contracting is a Subset of Strategic Sourcing

Defineneeds &opportunities

Select supplier and contract

Requisition and buy

Create goods or services (supplier)

Freight,receive, store, and distribute goods

Pay

Use and maintain

Dispose (goods)

Each Category Has Unique Supply Chain – Similar to a Business Unit

What if We Each Thought And Planned as the “CEO” of our Category?

Sourcing has Delivered Tremendous Value…What if Each Category Was Run as a Business Unit?

ContractingStrategic Sourcing

Category Management

Procurement Competence Over Time

Va

lue

-Ad

d“World-Class” Will Require Progression to Category Management

Price FocusPrice Focus TCO FocusTCO Focus Value Chain FocusValue Chain Focus

20

Purchase costs •How much do I pay at time of transaction?

Internal business costs•How much do my usage patterns and processes add to cost?

Joint supplier/ customer costs •How much does the way I work with my vendor affect my cost?

The total cost of ownership includes all these costs

Physician preference/ specifications

Damaged product

Freight

SCO administration

Inventory carrying costs

Expired product

Non-compliant utilization

Purchase price

Expediting/ special delivery

Payment terms

Easier To See

Early access to new technology

Alliances focus on total cost of ownership (TCO)

Harder To See

Transaction Costs

Strategic Alliances Definition

Partnership – DefinitionPartnership & Alliance are

synonymousA partnership is a tailored business relationship based on four key factors:

• mutual trust • openness • shared risk, and • shared rewards

A successful partnership results in business performance greater than would be achieved by two firms working together in the absence of partnership.

© The Global Supply Chain Forum, 2000

22

What type of alliance-type relationships do you have?

Strategic partnership example

Partners: Electric utility and transformer manufacturer

Relationship: Exclusive supplier ( $30M annual volume)

Key Components

a. Jointly designed the best transformer for the varied climates within the utility service territory (wet, cold, dry, etc.)

b. Eliminated quality control at utility end due to trust in manufacturer quality control

c. Utility shared complete visibility of inventory and utilization information to manufacturer who managed pipeline of supply chain completely and independently

d. Spent resources identifying redundant activities that could be eliminated within both companies

e. Customer paid off of monthly invoices – no purchase orders, no receiving…complete trust of supplier

1. Starbucks & Pepsico (USA)

a. Jointly created the popular coffee-flavored drink, Frappacino

b. The alliance moved Starbucks into the bottled-beverage market

c. Pepsico gained an innovative product with a well-branded partner

2. Eli Lilly & Takeda Chemical Industries (Japan)

a. Joined together to develop a drug for the treatment of type-2 diabietes

3. GlaxoSmithKline & Elbion (Germany)

a. Jointly developed products for sinus even though they are competitors

4. Kraft (Maxwell House) & Starbucks

a. Direct competitors but developed an alliance for Starbucks to place its coffee into supermarkets

b. Starbucks benefited from Maxwell House’s extensive network of shelf space in major chains

c. Starbucks benefited from customer desire for Starbucks-branded coffee

Other strategic partnership examples

Supplier quotes

• 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!

Strategic AlliancesWhen to use?

Types of Relationships

Arm’s Length Type I

Partnerships

Joint Ventures

VerticalIntegration

Type IIIType II

MANAGEDBUSINESS

RELATIONSHIPS

STRATEGICRELATIONSHIPS

GENERALPROCUREMENT

BULKPRODUCTSOURCING

Impact Potential

Common Values

Aligned Goals

Proper Environment

What categories are best suited for

alliance-type relationships?

VALUE / COST / CRITICALITY/ RISK

CO

MP

LEX

ITY

/IM

PA

CT

/DES

IGN

/ L

OG

ISTIC

S

29

Imp

ort

an

ce

Supply Market Complexity

BottleneckSeller Power

Strategic

Shared Power

CommodityDiluted Shared Power

LeverageBuyer Power

H

L H

Each supplier relationship varies with the dynamics of the category.

30

ANALYSIS 2 OVERVIEW – HOW MIGHT YOU COME ACROSS

TCO IN YOUR OWN LIFE?

• How much does your minivan cost you on a

monthly basis?

• You probably thought about . . .

• Your monthly car loan payment

• Your monthly insurance payment

• . . . but your total cost of ownership would also include

• The monthly gas payment• Repairs and spare parts• The mounted CD player you had to

purchase• Your minivan “racing gloves” and scarf• The extra $20,000 you spent on your

other car to offset the image of driving a minivan

Factoring in total cost may change your purchase decision

Alliances are not for every trading relationship

• It is too expensive to invest alliance resources into every relationship

• An alliance relationship requires resources from both sides to develop and maintain the alliance

• Alliances are generally reserved for the most critical, complex, high dollar and large scope categories

• Key factors:• What is the type of account and relationship?• What are the influencing factors?• Once an alliance is achieved, how is it best

managed and measured?

32

33

Benefits of alliance behavior

• Substantially improved communication channels• Greater honesty in our conversations • Increased understanding of the supplier/account’s operations• Clearer expectations of each party• Deeper understanding of the contracts • Jointly developed action plans• Mutually agreed upon performance metrics• Surfacing best practices• Both parties focused on seeking value for both sides

Objective: to work together to reduce costs and share in the benefits

• Reduction of supplier/accounts is a natural outcome of supply chain management

• Cut administrative costs by managing fewer supplier/accounts

• Find your best accounts and grow them

33

Strategic AlliancesAMR Research Findings

Is there a lack of trust with your trading partners?

21. The different industry segments in the healthcare value chain often do not trust each other. This has been a hindrance to information sharing and collaboration which could drive significant

cost or efficiency benefits in the healthcare value chain. Do you agree with this statement?n=All industries, n=240

80% 74%93%

20% 26%7%

2007 2008 2009

No

Yes

How can we collaborate to reduce costs without some level of trust?

Lack of Trust = Lack of Collaboration = Increased Costs & Inefficiencies

Linking Strategy to Value in the Healthcare Value Chain

Value in HealthcareHigh Quality Patient Care at Optimal Economic Cost

Shared Vision and Goals

Transparency

Aligned Metrics

Extension of Supply Chain Services

Business Process Governance

Understanding Demand

Inventory Management

Compliance

Communication

Timely and Accurate Data

Knowledge and Info Sharing

Sustainable Collaborative Relationships

Joint Value Creation

Demand-Driven Value-Network StrategySupporting the Business Strategy with Demand-Driven Capabilities

Consciously Executing Value-Based Trade-OffsOutside-In Focus Coupled with Inside-Out Excellence

Demand-Driven Value-Network StrategySupporting the Business Strategy with Demand-Driven Capabilities

Consciously Executing Value-Based Trade-OffsOutside-In Focus Coupled with Inside-Out Excellence

Three habits of highly collaborative value chains

• Invest in the Value Chain o Incentives to drive collaboration o Deep understanding of up- and down-stream partners o Educate and train trading partners

• Leverage Contento Share information with trading partnerso Leverage value internally, across functionso Allow content to support continuous improvement

• Build Trust o Relationships based on common goalso Drive performance with bi-directional scorecardso Focus on value, not just costs

Strategic AlliancesPerformance Measurement

Measuring Success

Developing a system for establishing metrics, monitoring performance, and taking appropriate action is the single most critical factor to ensure a successful alliance

39DRAFT - For SMI Team discussion only

Alliance relationship potential weaknesses

40DRAFT - For SMI Team discussion only

Establishing metrics and measurements

• Why was the supplier/account chosen in the first place…price, quality, service, other?

• How will we know when the supplier/account is failing to perform?

• What measurements does the supplier/account already accept and measures?

• Examples:• Savings – price, freight, packaging, labor efficiencies• Performance – surveys, delivery time, invoice errors, payment

terms• Technical support – training, on-site support, resolution time• Quality – rejected orders, damaged orders, backorders, recalls• Continuous improvement - # of new ideas & solutions

41

Establishing metrics and measurements

“Just as a race care driver cannot win a race by solely focusing on the speed of his car, a “supplier team” can never truly be successful without keeping their eye on a number of key performance measures and indicators.”

A dual approach:

Balanced measures•keep the dynamic tension of cost, service and quality performance measures.

Intangible measures:•focus on the intangible performance indicators of success, like customer satisfaction and changing technology.

42

Without performance measurement …

• Supplier is selected on total cost…pricing and much more• Not knowing how to measure total cost services, little, if anything is measured or reported• No one knows, for sure, if the existing alliance relationship is really what they intended• Suppliers’ competition doesn’t go away. They still hang around, waiting to talk to someone• Someone mentions “better deals” and the momentum shifts back to looking at others…with

better pricing• The preferred supplier becomes upset at lack of loyalty• The preferred supplier tries one last effort to hang on…reducing pricing or whatever• Company re-bids anyway• Cycle repeats itself

43

SCO’s Climb to Category Management

Camp 1 - Contracting

Camp 2 – Strategic Sourcing

Base Camp We left a long time ago!

Summit – Category Management

How far up the mountain are you?

Thank YouQ&A