FINANCIAL MANAGEMENT FOR MANAGING HOSPITAL LOGISTICS ... · The supplier responsible for maintaining inventory levels at Central DC. The supplier has access to the supplier’s inventory

© 2011 Cluster of Enhancing Competitive Advantage of Health Care Service in Thailand, Mahidol University

FINANCIAL MANAGEMENT FOR

MANAGING HOSPITAL LOGISTICS EFFICIENTLY

Jirapan Liangrokapart, Ph.D.Department of Industrial Engineering

Mahidol University, Thailand


Agenda

• Supply chain concept

• Hospital supply chain

• Inventory management

• KPI measurement


SUPPLY CHAIN CONCEPT


Supply Chain Concept

4

SuppliersEnd

Consumer(Customer)

Products/Services

Demand

1) Starting with unprocessed raw materials and ending with the final customer using the finished goods, the supply chain links many companies together

2) The material and informational interchanges in the logistical process stretching from acquisition of raw materials to delivery of finished products to the end user. All vendors, service providers and customers are links in the supply chain (CSCMP, 2010)

Supply Point of Consumption

Point of Origin

Material Flow

Financial Flow

Information Flow

Needs/Requirement


Type of Supply Chain

5

Retail SC(Trading)

Manuf. Customer

Service SC

Hotel, Restaurant,

Hospital

Maintenance Service

Supplier


Supply Chain Management

6

Suppliers Hospitals

Within OrganizationBetween Organization

Pharm. DeptPurchasing Dept

Between Department

OPD Dept

Within Department

Nurse

Doctor Patient


Mission of Supply Chain Mgmt

7

Information Flow

Material/Service

FlowFinancial Flow

Customers

Responsiveness

Efficiency

Suppliers

Right Product Right CostRight Condition

Right Time Right Place


Linkage the Supply Chain--Logistics Activity

8

Supplier Manuf. Distributor End Consumer

Products/Services

LogisticsLogistics Logistics Logistics

Logistics is defined as the integrated planning, realizing, usage and control of

– all kinds of transportation processes,

– the storage of goods and;

– the corresponding information processes

within organizations and between organizations.


Linkage the Supply Chain--Logistics Activity

9

Information Management

MovementStorage MovementStorage

Inventory (Healthcare Products)

Mgmt

Material Handling

Packaging

Location Selection

Reverse Logistics (Returns, Disposal)

Customer Service

Demand Forecasting

Order Processing (Prescription)

Part & Service Support (MSUs, Sterilize)

Core of Logistics

Supplementary of Logistics

Procurement

From: James A. Tompkins Facilities Planning 3rd ed. 2003


Bullwhip Effect

การแบงปนขอมูลสามารถกําจัด Bullwhip Effect ได

Supplier Manuf. Distributor End Consumer


Supply Chain’s Uncertainty

Stores/Shops

$

$

End Consumers

Manufacturers/Suppliers

Retail DCs

การสนับสนุนการไหลของขอมลูและการ

เกิดขึ้นของกิจกรรมตางๆวัตถุดิบอยูท่ีใด?

เมื่อไรสินคาจะ

มีอยูในราน?

เมื่อไรฉันจะ

ไดรับสินคา?

เมื่อไรจะมาสงถึง?

เรากระจายสินคาพรอมๆกับ

การสงผานขอมูลไดหรือไม

เพ่ือประหยัดเวลา?

Henry Bruce (1999)


Challenges in Managing Supply Chain

Storage Movement (Flow)

Information Exchange/Data Synchronization(Supply Chain)


HOSPITAL SUPPLY CHAIN


Challenges in Hospital Supply Chain

14

Healthcare Challenges

Counterfeits/Pedigree (Sub-Standards)

Product’s Traceability/Recalls

‘Cost Containment’ versus Delivering quality of ‘Clinical Care’

Government Regulations

Standards Compliance


Hospital

Supply Chain in Healthcare

15

Drugs

Medical Devices Patients

Medical Consumable

Foods

DistributorManuf.

Suppliers Products Customers


Service on Top of Manufacturing SC

16

Hospital

Drugs

Medical DevicesPatients

Medical Consumable

Foods

DistributorManuf. Clinical Care

Professionals

Professional Service

Service Supply ChainManufacturing Supply Chain

Payers


Service Supply Chain

Nature of Clinical care service• Intangibility -- บริการไมมีตัวตน ไมมีใครเปนเจาของถาวร

• Fluctuating Demand-- ความตองการท่ีไมแนนอน ลูกคาเปลีย่น เวลาเปลี่ยน ความตองการเปลี่ยน

• Variability-- ความแตกตางในการบริการแตละครั้ง


Manufacturing Supply Chain

18

PatientInbound

PatientOutbound

SuppliersProcurement of ClinicalConsumables•Medical/Surgical Items

•Pharmaceutical Drugs & Medications•Blood/Intravenous Products

Doctors & Nurses

• Hospital Stock• Consignment Stock

CentralWarehouse

IPD

Hospital

OPD

OperatingRoom

Health Plans/Insurers


Vendor Managed Inventory (VMI)

19

Refill Dispense

To optimize supply chain performance

The supplier responsible for maintaining inventory levels at Central DC.The supplier has access to the supplier’s inventory data and is generated purchased orders based on the movement of saline sol. and reaching inventory reorder levels

Supplier CustomerHospital

KPI Monitoring(% Stock out)


Replenishment Process

20

Various amounts (Qi) are ordered at regular time intervals (p) based on the quantity necessary to bring inventory up to target maximum

p p p

Q1 Q2

Q3

Q4

Target Maximum

Time

On-

Han

d In

vent

ory


Multi-Echelon Inventory Management

WardsHospitalSupplier Nurses


Logistics Improvement in Hospital

22

ExternalInternal

Reengineering

Supplier

Hospital

OrderingImprovement

Tracking and Traceability System

Purchasing Improvement VMI System

Replenishing Improvement

Advance Shipment Notice

System (ASN)

Web iPortal

BP RedesignBP Analysis

Data Synchronization Reconciliation System


Hospital Supply Chain


Product and Information flow


Types of Distribution


Distribution system


Distribution system


Product and Information flow


INVENTORY MANAGEMENT


Inventory Mgmt Risks


Distribution elements








Inventory Mgmt


Which are the important products?


Pareto Principle


Pareto Principle


Pareto Principle


Pareto Principle


How to manage each group?


How to manage each group?


When to order? How many?


When to order? How many?


Inventory mgmt


Inventory mgmt model










Cost


Cost


Inventory mgmt: goals


Inventory mgmt


Inventory mgmt


Inventory mgmt


Inventory mgmt


Inventory mgmt


Inventory mgmt


Inventory mgmt


Inventory mgmt


Inventory mgmt


Inventory mgmt


Inventory mgmt


Inventory mgmt


KPI MEASUREMENT


KPI Measurement


KPI Measurement


KPI Measurement


KPI Measurement


Financial issues in Hospital Logistics

PAPER “BENCHMARKING FINANCIAL PERFORMANCE INDICATORS OF PRIVATE HOSPITALS IN THAILAND: COST SAVINGS IN HEALTH CARE SUPPY CHAIN”

By Jirapan Liangrokapart, Ph.D.


Common Management questions?

• What is being done well?

• Where improvement is needed?

• How to improve it?

72

Introduction


Answer:

They need a well-designed set of performance indicators (KPIs). The continuous use of KPIs will help the organizations know their performance and find the ways for improvement with an ultimate aim for sustainable development.

(Liangrokapart and Leonard, 2002).

73

Introduction: Hospitals


• One of the player in the HC Supply chain.

• Distribute Pharmaceutical products, medical supplies, medical equipment, consumables, and others from the upstream players (the manufacturers) through vendors or distributors to its downstream players (the customers who are patients and their relatives)

• The ultimate aim for the service is for patient safety and satisfaction.

74

The role of Private hospitals


• Performance of hospitals will reflect on the overall efficiency in the supply chain.

• Cost savings in the hospitals will result in a decrease in the amount of the patient bills.

• Finally, the cost savings will be evidence for the overall health care figures of the country.

75

The role of Private hospitals


76

SET: Sale in 2009Total 6,024,643 M Baht

Resources45%

Finance8%

Property11%

Technology9%

Services11%

Agricultures and Food8%

Consumer products

1%

Raw materials7%


77

SET: Service Industry in 2009Total 719,718 M Baht

Commerce50%Logistics and

Transportation33%

Printing7%

Medical service7%

Tourism and Entertainment

3%

Sale of Medical service is 0.82% of overall listed companies in the SET.


Year Loss#companies

Net Profit

Sales Cost of Goods Sold

Operating profit margin

(%)

2005 0 3158 28949 18380 36.5

2006 1 3938 38394 23493 38.8

2007 0 4471 43792 26823 38.8

2008 2 4884 50206 30573 39.1

2009 1 5261 51723 32038 38.1

EGIE 513 78

Current situation in private hospital industry in Thailand

Financial Status of Private Hospital Industry (13 Listed companies)(M Baht)


Year Sale Growth (%)

EBITDA D/E

2005 35.4 6612 0.96

2006 31.46 9156 1.11

2007 13.47 10785 0.98

2008 12.79 11819 0.89

2009 3.03 12411 0.77

79

Current situation in private hospital industry in Thailand

Financial Status of Private Hospital Industry (13 Listed companies)(M Baht)


• THIP (Thailand Hospital Indicator Project): 75 KPIs on hospital quality1. Products and services

2. Patient-focus

3. Financial and Marketing

4. HR and learning

5. Efficiency

6. Leading and CSR

7. Health promotion 80

Current performance measurement


• Current Ratio

• Quick Ratio

• Fixed Asset Turnover

• Days in Account Receivable

• Operating Margin

• Return on Asset (ROA)

(Kunaviktikul 2006, Hennel 2001, Cuthbertson and Poptrowixz 2008, Jana et.al 2007)

81

THIP: Financial and Marketing (6KPIs)


• Profitability

• Liquidity

• Capital structure

• Revenue

• Cost

• Utilization

82

Financial Performance Dimensions of CAH(Critical Access Hospitals)

(20 KPIs)


1. Profitability Definition

1. Total margin Net income/total revenue

2.Cash Flow margin ((Net income − (contributions, investments, and appropriations)) + depreciation expense + interest expense)/(net patient revenue + other income – (contributions, investments, and appropriations)

3. Return on equity Net income / Fund balance

83

KPIs of CAH and its Definitions

Source: Pink, et.al 2006


2. Liquidity Definition

4. Current Ratio Current assets / Current liabilities

5.Days cash on hand (Cash + marketable securities + unrestricted investments)/[(total expenses-depreciation)/days in period]

6. Net days revenue in account receivable

(Net patient accounts receivable)/(net patient servicerevenue/days in period)

84




3. Capital Structure Definition

7. Equity Financing Fund balance/total assets

8. Debt service coverage (Net income + depreciation expense+ interest expense)/((current portion of long-term debt * Days in period/365) + interest expense))

9. Long Term debt to capitalization

Long-term debt/(Long-term debt + fund balance)

85




4. Revenue Definition

10. Outpatient revenue to total revenue

Total out patient revenue/total patient revenue

11. Patient deductions (Contractual allowances + discounts)/gross total patient revenue

12. Medicare Inpatient payer mix

Medicare inpatient days/(total inpatient days − nurserybed days − NF swing bed days)

13. Medicare outpatient payer mix

Outpatient Medicare charges / Total outpatient charges

14. Medicare outpatient cost to charge

Outpatient Medicare costs/outpatient Medicare charges

15. Medicare revenue per day

Medicare revenue/(Medicare days − SNF swing bed days)

86



5.Cost Definition

16. Salaries to total expenses

Salary expense/total expenses

17. Average age of plant Accumulated depreciation/(annual depreciation expense•365/Days in period)

18. FTEs per adjusted occupied bed

(Number of FTEs / [((Inpatient days − NF swing days − nursery days) * (total patient revenue/(total inpatient revenue − inpatient NF revenue − other LTC revenue)))/days in period]

87




6. Utilization Definition

19. Average daily census swing SNF beds

Inpatient swing bed SNF days/days in period

20. Average daily census acute beds

Inpatient acute care bed days/days in period

88




89

In Thailand: SET Annual Report

• 1. Detailed operations of the listed companies

• 2. Certified accuracy of the information

• Accounting statements and Financial Ratios are included in the report of each company.


90

SET Annual Report: Financial ratios and definitions

1. Profitability Ratio Unit DefinitionGross Profit Margin % Gross Profit / Net sales

Operating Profit Margin % Operating Profit / Net sales

Net Profit Margin % Net Profit / Net sales

Return on Equity % Net Income / Avg. Equity


91


2. Liquidity Ratio Unit DefinitionCurrent Ratio Times Current Assets / Current Liabilities

Acid Test Ratio (Quick Ratio) Times(Cash+Investment+Recievable) / Current Liabilities

Receivable Turnover Times Net credit sales / Avg. Acc. receivbles

Collection Periods Days Accts receivable / Avg. day sales

Inventory Turnover Times Total purchase / Avg. Inventory

Average Day Sales Days 360 / Inventory turnover

Account Payable Turnover Times Total purchase / Avg. Acc Payables

Average Payment Periods (APP) Days 360 / Acc. Payable Turnover


92


3. Efficiency Ratio Unit DefinitionReturn on Asset % Net income after taxes / Total assets

Return on Fixed Asset %(Net income after taxes+Depreciations) / Fixed assets

Asset Turnover Ratio Times Net sales / Total Assets


93


4. Financial Policy Ratio Unit DefinitionDebt to Equity Ratio Times Long Term Debt / Total Equity

Interest Coverage Ratio TimesEarnings before interest and taxes (EBIT) / Interest

Dividend Payout Ratio % Dividend / Net Income


94

Performance ComparisonThailand and USA

Financial ratios USA Thailand

1. Profitability Ratio

Net Profit Margin 2.33 10.05

Return on Equity 5.72 11.87

2. Liquidity Ratio

Current Ratio 1.9 1.11

Collection Period 59.31 23.83

3. Financial Policy Ratio

Debt to Equity Ratio 20.65 0.77


95

Methodology and its application

Step 1• From Literature, KPIs used by CAH and Financial ratio

of SET has been reviewed and integrated.

Step 2• Develop a set of Financial Performance Indicators (FPIs)

Step 3• Collect performance figures of each private hospital

based on each FPI.

Step 4

Step 5

Identify industry average and best value

For each FPI, private hospitals can benchmark their performance with the best and find a way to make improvement.


96

FPIs

1.Profitability

• % Cost of goods sold

• % Net Profit

2.Utilization

• % Utilization OPD

• % Utilization IPD

3.Other financial dimensions

• Liquidity ratio• Efficiency ratio• Financial Policy


97

13 Hospitals in the SET

AHC Aikchol Hospital Center

BGH Bangkok General Hospital

BH Bumrungrad Hospital

CMR Chiengmai Ram Medical Center

KDH Kungdhon Hospital

KH Kasemraj Hospital

M-Chai Mahachai Hospital

NEW North-Eastern Wattana Hospital

NTV Nontavej Hospital

RAM Ramkamhaeng Hospital

SKR Sikarin Hospital

SVH Samitivej Hospital

VIBHA Vibhavadi Hospital


98

1. Hypothesis Testing

Large private hospitals Smaller-sized private hospitals

Total income>2000 M Baht

Total income< 2000 M Baht

(190-1200)

BGH VIBHA

BH SKR

SVH NTV

KDH M-chai

KH AHC

RAM CMR

KDH

NEW


99

1. Hypothesis testing

Financial PerformanceFPIs

Large private hospitals

Smaller-sized private hospitals

1. Profitability

% Cost of goods sold 62.04(57-70)

72.23*(65-82)

% Net Profit 11.71(8-14.3)

8.43*(0-13.4)

2. Utilization

% Utilization OPD 64.16(59.49-69.00)

71.40**(52.92-78.94)

% Utilization IPD 49.36(30.00-67.79)

64.16**(41.13-82.78)

* Significant at 95% Confidence

**Not significant


100





3. Other financial dimensions: Liquidity Ratio

Current Ratio 0.84 1.24

Acid Test Ratio 0.40 1.14

Receivable Turnover 15.50 16.46

Collection periods 24.04 23.71

Inventory turnover 30.57 23.88

Average days sales 15.83 17.17

Account payable turnover 11.97 12.70

Payment periods 30.19 47.57

* Significant at 95% Confidence**Not significant


101





Efficiency Ratio

Return on Asset 12.56 5.28

Return on Fixed Asset 31.37 9.49

Asset Turnover Ratio 0.95 0.84

Financial Policy

Debt to Equity Ratio 0.63 0.41

Interest Coverage Ratio 19.39 417.03

Dividend Payout Ratio 46.61 39.99

* Significant at 95% Confidence

**Not significant


102

2. Best Value for Benchmarking

FPIs AHC BGH BH CMR KDH KH M-Chai

…

1. Profitability

2. Utilization

3. Other financial dimensions

Financial performance of each hospital


103

Analysis

Low performance

value

Average value (Industry average)

Best performance value (benchmark)

For each FPI


104

Best value for each FPI

Financial Performance Best Value BenchmarkingHospital

1. Profitability

% Cost of goods sold 57 BGH

% Net profit 14.27 KH

2. Utilization

% Utilization OPD 78.94 VIBHA

% Utilization IPD 82.78 CMR


105


3. Other financial dimensions: Liquidity Ratio

Current Ratio 4.46 KDH

Acid Test Ratio 4.22 KDH

Receivable Turnover 22.4 AHC

Collection periods 17.16 RAM

Inventory turnover 53.28 SVH

Average days sales 6.76 SVH

Account payable turnover 19.71 NTV

Payment periods 18.27 NTV



106


Efficiency Ratio

Return on Asset 24.8 KH

Return on Fixed Asset 32.3 BH

Asset Turnover Ratio 1.24 NTV

Financial Policy

Debt to Equity Ratio 0.15 NTV

Interest Coverage Ratio 2760.1 KDH

Dividend Payout Ratio 86.54 VIBHA



• Other private hospitals can use the benchmark values as targets for improving their performance.

• The overall performance improvement in the private hospitals will result in quantifiable savings in the Health care supply chain.

• For Example, SVH’s Inventory turnover of 53.28 times means that SVH can turn their inventory into sale 53.28 times a year or it means that SVH keeps very low inventory level (1 week). Hence, the inventory cost must be very low.

107

Findings


FINANCIAL MANAGEMENT FOR MANAGING HOSPITAL LOGISTICS ... · The supplier responsible for maintaining inventory levels at Central DC. The supplier has access to the supplier’s inventory

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