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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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Presentation Roadmap

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Gold Miners and Value Leakage

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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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Why Price Management?




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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 Negotiations

-Lever 3rd party benchmark providers

-Spend analysis#1

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• 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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C.R. Bard example

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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



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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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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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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-Standardized process for

mitigating all proposed price

increases

#5

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• 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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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


• 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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Job Aid #1: For proposed price increases due to commodities, raw

materials, fuel, price index measures, taxes, government regulations or

inflation





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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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Questions?

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Cole Smith, MBA, CPSM

Strategic Sourcing Manager, Intermountain HealthcarePhone: 801.442.4634Email: [email protected]

Appendix

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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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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]

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