the value of distribution philips medical systems ck
DESCRIPTION
Value of medical product distribution vs direct sales to HospitalsTRANSCRIPT
Charlie KnightPhilips MedicalNational Distribution ManagerJanuary 27, 2009
The Value of Distribution•Who, What, Where, Why
•Statistics and Considerations
2Philips Medical Charlie Knight January 27, 2009
Philips Medical Systems Supply Distributors
•Cardinal Health•Owens & Minor•American Medical Depot•Professional Hospital Supply•Seneca•Shared Services
3Philips Medical Charlie Knight January 27, 2009
82% Distribution18% Direct (Manufacturer)
General StoresGeneral Stores
SPDSPD
Operating Room
Operating Room
Specialty Departments
Specialty Departments
LabLab
Off-siteFacilities
Off-siteFacilitiesNursingFloorsNursingFloors
21% Distribution 79% Direct (Manufacturer)
Total Hospital34% Distribution66% Direct (Manufacturer)
Source: Fredonia, IMS
Hospital Procurement and Material Flow
4Philips Medical Charlie Knight January 27, 2009
Staff Cost Drivers in Procurement Process
On average requires 19,620 staff hours at salary expense of
$425,401
6.4%
20.9%
13.5%
29.7%
24.5%
5.0%
Direct = $9.56/line staff exp
Dist = $1.97/line staff expDirect = $1.48/line staff
exp
Dist = $.30/line staff exp
Direct = $5.43/line staff exp
Dist = $1.31/line staff exp
Source: HIDA Hospital Procurement Study
Meeting with Suppliers
Creating & Placing PO’s
PaymentDelivery & Returns
ProblemSolving
Receiving
5Philips Medical Charlie Knight January 27, 2009
Inventory Management Activities
Inventory Management Process
Supply Chain Costs
$47/line – Direct
$29/line – Distributed
Inventory Expense
77% less w/distribution
Freight Costs
87% less w/distribution
Cost of Capital
76% less w/distribution
Source: CAH OptiSource Model
Receiving Put awayObsolete & Expired
Stocking Schematics
Par LevelMgmt
Delivery & Returns
6Philips Medical Charlie Knight January 27, 2009
Delivery to Departments
Source: HIDA Hospital Procurement Study
Orders from distributor go to one stock location versus direct orders that go to multiple departments
$10.00
$8.00
$4.00
$2.00
0
$1.28
$0.30
$1.97
$0.75
$6.37
$0.96
Stock Departmental
Accounts Payable
Purchasing
Clinical
$9.56
$6.00
$0.13
$0.26
$1.48Receiving
Orders Delivered to Departments Cost 4.9 TimesAs Much As Cost of Delivering to Stock (per line on PO)
7Philips Medical Charlie Knight January 27, 2009
Most Efficient Hospitals
•Send more orders through distributor (average 19,000/yr) than direct (average 10,000/yr)
•Enjoy 41% cost advantage •Spend 300% less on freight costs•Use 1/3 the staff time in med-surg procurement
Source: HIDA Hospital Procurement Study
8Philips Medical Charlie Knight January 27, 2009
Channel Decision
Source: HIDA Hospital Procurement Study
HIGH
Order from
Distributor
Order from
Distributor
Order from Manufactur
er
Order from Manufactur
er
Str
ate
gic
Channel C
hoic
e
Channel Decision
Clinical Preference
Ord
er
Fre
qu
en
cy
HIGH
LOW
LOW
Cost of PO can drive supply channel decision
9Philips Medical Charlie Knight January 27, 2009
EDI Statistics
Statistic Source
Manual purchase order cost = $75 Gartner
Manual purchase order cost per line = $13.17
HIDA Procurement Study
Fully automated purchase order cost = $10-$30
Gartner
Automated purchase order cost per line = $3.00
HIDA Procurement Study
CRP purchase order cost = $1-$4 GHX, Neoforma
Vendor EDI Connection Costs = $5,000-$30,000
GHX
10Philips Medical Charlie Knight January 27, 2009
EDI Costs
Source: HIDA Hospital Procurement Study
$15.00
$12.00
$9.00
$6.00
$3.00
0
$1.59
$1.28
$0.13
$3.00
$6.05
$6.37
Electronic Manual
$ 0.75$13.17
Clinical
Purchasing
Management
Phone/Fax Orders Cost the Hospital 4.4 Times As Much As EDI/Internet Orders (per line)
11Philips Medical Charlie Knight January 27, 2009
Purchase Order Statistics
Statistic Source
More than 75% of a hospital’s purchase orders are direct
Freedonia, IMS
Average staff cost per purchase order with distributor = $12.27
HIDA Procurement Study
Average staff cost per line on purchase order with distributor = $1.31
HIDA Procurement Study
Average staff cost per purchase order with direct mfr = $60.08
HIDA Procurement Study
Average staff cost per line on purchase order with direct mfr = $5.43
HIDA Procurement Study
12Philips Medical Charlie Knight January 27, 2009
Purchase Order Costs
Source: HIDA Hospital Procurement Study
Per line, Direct-to-Manufacturer OrdersCost 4.1 Times As Much As Distributor Orders
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
0$0.75
$0.46
$0.10
$1.31
$2.93
$1.90
$0.60
$5.43
Pay PO
Receive PO
Create PO
Distributor Manufacturer
13Philips Medical Charlie Knight January 27, 2009
Invoice Statistics
Statistic Source
Average invoice processing costs = $11-16/invoice
Can be as high as $50/invoice
HIDA
90% of a hospitals invoices are from direct vendors
CAH Optisource Model
50% of a hospital’s invoiced lines are from direct vendors
CAH benchmarking database
14Philips Medical Charlie Knight January 27, 2009
Inventory and Supply Chain Statistics
Statistic Source
34% of a hospital’s total spend is with distribution partner
Freedonia, IMS
80%+ of total inventory $’s can be outside of General Stores
AHRMM Benchmarking, Advisory Board
On average – 10 days of inventory is valued at $660,000
CAH Optisource Model
Hospitals pay different prices for the same product 40% of the time
Deloitte
Supply Chain Costs Direct = $47/lineSupply Chain Costs Dist = $29/line
Deloitte
15Philips Medical Charlie Knight January 27, 2009
General Statistics – Direct vs. Dist
Statistic Source
Costs are 24% less with distribution CAH Optisource Model – based on aggregate clinical labor study
Inventory expense is 77% less with distribution
CAH Optisource Model – based on aggregate clinical labor study
Freight costs are 87% less with distribution
CAH Optisource Model – based on aggregate clinical labor study
Cost of capital is 76% less with distribution
CAH Optisource Model – based on aggregate clinical labor study
16Philips Medical Charlie Knight January 27, 2009
Measuring the Value of Distribution
•Starts with customer goals•Effectiveness of managing costs associated with product procurement and inventory management
•Utilize meaningful indicators such as $/adjusted patient day
•Allow for adaptation to change in customer’s business model or goals
•Commit to review the metrics and take action on results- Business Reviews, CQI Meetings
17Philips Medical Charlie Knight January 27, 2009
Financials of Distribution
•Sell- Cost Plus example: cost + 5% per GPO agreement
•Charge service fees Monthly, Quarterly
•Incentive Money from Manufacturer “ Buy Margin
•Operate on Volume•Seek High Margin Opportunities, (Special Products, Non Contract Items) PHILIPS OPPORTUNITY!
18Philips Medical Charlie Knight January 27, 2009
WHY?What’s In IT for US?
•Increase Business thru Distributor Relationships
•Philips Products create Higher Margin for Distributors
•Distributor to convert competitive business to Philips in return for our existing Business.
•Leverage Philips Capital Business for SupplyBusiness thru preferred distributor