Supply Chain is a Strategy … Not a Department

Supply Chain is a Strategy … Not a Department

Gene KirtserPresident & CEO

Introduction & Background

Supply Chain as it relates to…

• Past: a Key Tactical Enabler

• Present: a Performance Optimizer

• Future: an Enabler of the Future Care Model, Industry Collaboration

Summary / Discussion

Agenda

31 Acute Care Hospitals4,400 Licensed Beds 38,000 Co-workers 200 Outpatient Facilities 1,500 Integrated Physicians600 Advanced Practitioners

Mercy Footprint

Introduction & Background

Supply Chain as it relates to…

• Past: a Key Tactical Enabler

• Present: a Performance Optimizer

• Future: an Enabler of the Future Care Model, Industry Collaboration

Summary / Discussion

Agenda

We began asa holding company in 1986

We have become anan operating company with extraordinary

competencies in execution

The cultural evolution began in 1999 withsupply chain as the “tip of the

spear.”

Mercy’s Transformational Journey

In 2000Supply Chain

became a strategic initiative for Mercy

Supply Chain Becomes Strategic

Supply Chain Touches Everyone

Future Customers(Physicians, IDN)• Value• Respect• Recognition

Corporate Senior Leadership (Corporate Staff)• “Systemness”• Relationship Management• Leadership (corporate)

SC Co-workers • Respect for individual input• Compensation/benefits• Tools to do the job

Industry Leaders (Influencers, Publishers)• Succinct Story• Advanced knowledge, involvement

understanding the model – New ideas• Reputable business model

Vendors• Partnership Relationships• Equal Opportunity• Profitability

Hospital/Clinic – Senior Leaders(C-Level, VP’s)• Accountability• Provider focused and based solutions – Assistance with

goals- respect, value, recognition• Leadership Collaboration

Facility - Mid-Managers(Supervisors, Dir., Mgrs., VP’s)• Harmonious with environment• Communication, be heard, access to information• Respect

Clinicians(Nurses, Pharmacists, Resp. – Lab tech)• Efficiency of product access• Involvement in product decision making• Quality of patient care delivery/ patient safety

Non-Integrated Physicians • Autonomy• Quality of life• Quality of care/ Patient Safety

GPO Distributor Provider

Traditional Supply Chain Model

Disintermediated Supply Chain

Waste

Waste

GPO Distributor Provider

Silos

Integrated Contracting

Integrated Logistics

Integrated Processes

GPO Distributor Provider

Waste

Waste

Waste

Large Commercial Silos

Direct Contracting

Internal Logistics

Integrated Supply Chain

Manufacturer

Integrated Processes

Waste

Manufacturer

Waste

Manufacturer

Many

Compressed

Total Business Process

Traditional Models are Broken

Med/Surg Dist.

Lab Mfg.

Pharma Mfg.

Dietary Dist.

Film Mfg.

Lab Dist.

Radiology Dist.

Pharma Dist.

Med/Surg Mfg. Mercy Hospital

Mercy Clinics

Other Hospitals

Other Clinics

Retail Pharmacy

Home Health

Retail

Mass Merc.

Linen Service

Dietary Mfg.

Linen Mfg.

Other???

ISSUE: Complexity Complexity of product and information flow within the traditional healthcare supply chain.

ISSUE: Geographical Match

More than 90% of Mercy’s volume is OUTSIDE of the traditional distributors hub distribution service area

Service Complexity & Inconsistency

Time Spent

Area of Focus Savings / Avoid Opportunity

Examples

75% Price 3% - 18% Suture Gloves Med/Surg

10% Volume 0% - 5% Service line expansion, new physician

10% Utilization 25% - 50% Tubing Lengths SCD Length Drape

Technique Generics

5% Technology Adoption 100% - 500%(cost avoidance)

CRM Spine Ortho Pharma

Time Spent

Area of Focus Savings / Avoid Opportunity

Examples

75% Price 3% - 18% Suture Gloves Med/Surg

10% Volume 0% - 5% Service line expansion, new physician

10% Utilization 25% - 50% Tubing Lengths SCD Length Drape

Technique Generics

5% Technology Adoption 100% - 500%(cost avoidance)

CRM Spine Ortho Pharma

Traditional Supply Chains Chase Pennies

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VISION CLINICAL: Good Patient Outcomes OPERATIONAL: Happy Caregivers FINANCIAL: Positive Bottom Line

Invest in Technology, Process Improvement, Talent Make/But/Partner Decisions What Works: Stakeholder Input, Leverage, Commitment, Compression, Metrics

FOUNDATION

Supply Chain is a Strategy … Not a Department

Introduction & Background

Supply Chain as it relates to…

• Past: a Key Tactical Enabler

• Present: a Performance Optimizer

• Future: an Enabler of the Future Care Model, Industry Collaboration

Summary / Discussion

Agenda

Facilities

Co-workers

• Corporate Office – St. Louis• Consolidated Services Center – Springfield, MO

• Consolidated Distribution Center – St. Louis, MO

315 FTEs from varied clinical and business disciplines (growing to 750+ FTEs with Unified Supply Chain)

Mission: We will transform the Clinical, Operational and Financial performance of those we serve through an integrated supply chain.

Vision:We will be a recognized leader in supply chain management through innovation and application of the best People, Processes and Technologies.

Values:Service, Excellence, Dignity, Alignment, Accountability

Supply Chain Solutions Warehousing and Distribution Services Inventory Management Transportation Management Process Improvement

Integrated Sourcing Solutions Product and Services Contracting Utilization Optimization Contract Compliance Monitoring Rebate Management Pricing Administration Member Services

ROi’s Structure

Manufacturing Solutions Pharmaceutical Repackaging Custom Procedure Tray Manufacturing Print Operations

Integrated Business Solutions Purchasing and Accounts Payable Services Information Solutions Account Implementation Customer Service

• One of the largest GPOs in the U.S.

• Highest $ penetration per bed

• Single Source negotiation strategy

• 500+ contracts ($800 million)

• International focus

• Demonstrated results in reducing cost

• Efficiency based sourcing

• Provider Integration

• 1st Provider based Private Label program in the US

• Growing interest with other providers

• Print Services

• Instrument Repair

• Largest Provider based CPT manufacturing operation in US

• FDA Registered

• Print Services

• Rx Unit Dose Repackaging

• Top 10 Volume Distributor according to HIDA

• Med/Surg

• Rx

• Office

• 80+ Vehicles

• +2.3 million miles per year

• Every location every day

• Back-haul common carrier

• Courier, TL and LTL

Integrated Business Model

ROi Supply Chain Operation

Springfield, MO

101,000 Square Feet Climate controlled Refrigerated and Frozen Storage Controlled Substance Cage and

Vault Suitable for all Healthcare supply

storage needs in one facility

Private Fleet (80+ vehicles) reduces third party transportation expenses

Shortened Order Cycle to 12 hours 66% increase in acute care Med/Surg

deliveries 42% Reduction in hospital inventory Elimination of 3,000 material service

failures (stock-outs) per week

Unique Programs

Private Label

Sourcing Strategy - Private Label

RATIONALE: End user design and ownership –

pride in ownership Reduces variation and

proliferation of SKU’s. Platform for provider collaboration Significant $ value

PRODUCTS: Basic Wound Care Pneumatic Compression Devices Can Liners Patient Positioning Products Cold Therapy Products Disposable Minor Procedure Kits IV Start Kits Isolation Gowns Hand Sanitizer Sterilization Supplies Disposable Blood Pressure Cuffs Patient Slipper Socks Alcohol Prep Pads Medical Tapes & Adhesive

Bandages Orthopedic Soft Good Line

Patient Bathing & Wipe Products Surface Disinfection Instrument Reprocessing Solutions Sterile Equipment Drapes Surgical Masks Surgical Apparel IV Tubing Sets OR Towels, Laps, Markers, Needle Ct OR Turn Over Kits DME - Canes, Crutches, Chairs,

Walkers ER Disposable Curtin System Special Procedure Kits Birthing & Neonatal Portfolio Non Acute Care Products Portfolio

Mercy Meds – Rx Repackaging & Distribution

Custom Packs - Why Change?

Traditional Custom Pack Model:

• Lack of cost containment• Inconsistent pack utilization• Unauthorized changes• Inferior product quality• Waste• End-use mistrust

Who is paying for all of this

extra material ??

ROi Custom Pack Manufacturing

FDA Regulated, provider ownedActivity based costing model - complete pricing transparency

Objectives aligned: No unauthorized substitutions No commission for volume growth 5.5 sigma manufacturing quality

Disaster Responsiveness – Joplin

The Healthcare Supply Chain Top 25

Industry Recognition

Essential to the larger strategy Transparent Desire to do what is right – for all Significant bottom line contributor Leadership Engine for Mercy Integration is key distinction

FINANCIAL PERFORMANCE: Mercy Supply Chain - Value Report – FY12 ROi - Customer Value Category

Mercy Value

Fee Elimination …………………………………………………………………….$3,222,850.

Centralization / Consulting ….…………………………………………….…$5,109,250.

Contracting / Rebates …………………………………………………………..$21,549,560.

 Total Supply Chain Contribution ……………………………………………

$29,881,660.Centralization Fee (to ROi from Hospitals) …………………………….

($6,711,810.) Net Financial Benefit to Customer (6.4:1) .……………………….…

$23,169,850.

ROi Net Income ……………………………………………………………………$9,205,000.

Total Net Financial Benefit …………………………………………………..$32,374,850.

Financial Contribution

Introduction & Background

Supply Chain as it relates to…

• Past: a Key Tactical Enabler

• Present: a Performance Optimizer

• Future: an Enabler of the Future Care Model, Industry Collaboration

Summary / Discussion

Agenda

Local Regional Virtual

Today Healthcare is simultaneouslyLocal, Regional, and Virtual

BC - 1950 1950 - 2000 2000 - ? Air Travel, InternetFoot, Covered

WagonInterstate Highway System

Changing Healthcare Business Model

By Providing access to multiple touchpoints of care and reducing barriers, the redefined model will ease the path our customers take through the care process.

Home monitoring

Diseasemanagement

Medical Home Convenient orretail care

Day surgery

Endoscopy andoutpatientprocedures

Inpatientcare

ChronicDiseasemanagement

Home care

Traveling nurseor care coordination

Mobile/Electronicaccess

Imaging andother testsin many ofthe care venues

Self-directed health management will be supported by the care model.

Supply Chain’s Future Evolution

Source: Average of group as per public company financials.

SG&A Comparison Retail vs. Healthcare Suppliers

14.1%

HEALTHCARE RETAIL

29.3%

Opportunity(15.2%)

Healthcare Retail

$50

$45

$40

$35

$30

$25

$20

$15

$10

$5

$0

Tax/Other (7.1%)

SG&A (32.0%)

R&D (11.3%)

COGS (29.8%)

NI (19.8%)

SOURCE: Company financials as reported in Reuters ProVestor Plus Company Report, December 27, 2009

Observations:▶ Company SG&A is…

▶ 2.8 X R&D▶ 1.1 X COGS▶ 1.6 X Net Income

▶ Mercy spent $16,447,000 for this company to sell us your products…

▶ Only 3 of Mercy’s 26 hospitals make more Net Income than this companies SG&A from our business.

Spend Breakdown of Mercy$51,396,800

$15.3

$5.8

$16.4

$3.6

$10.2

Are we the problem?SG&A is an efficiency measure of the trading partner relationshipWe have the ability to impact this… let us

The Cost of Doing BusinessCost Breakdown of a Major Trading Partner with Mercy

• 30% reduction in payables outstanding resulted in additional early pay discounts from faster payment that required less manual intervention.

• 73% reduction in discrepancies, includes a complete elimination of vendor part number and unit of measure (UOM) discrepancies by supplanting part number and UOMs with GTIN on purchase order.

• Improved sourcing of product by use of a single scan of a barcode to determine the right product and product UOM to reorder.

• Less calls to customer service in the sourcing process.

• Fewer stock outs due to the inherent simplicity offered to nursing staff of scanning barcodes at the bedside.

• Better charge compliance resulting from scanning as a surrogate to traditional practicesFor more information go to www.roiscs.com

Industry Leadership & Transformation

Mayo Clinic Mercy Geisinger KaiserIntermountain Healthcare

► Formed in December of 2010► Adoption of GS1 standards and improve operations through best practices► Unified voice of well respected brands to uniformly move the industry to

adoption► Work with trading partners to assure there is value for all ► Agree reduce variation in practice where ever possible in our trading

transactions► Linking standards adoption of improved tracking of clinical effectiveness

Industry Leadership & Transformation

Industry Dynamics

The ProblemThe healthcare industry is facing a crisis. External forces will strain providers operating margins. Providers will look for ways to operate

more efficiently and cost effectively to remain relevant.

Our Aspiration To reform the healthcare industry through collaboration by optimizing

the Supply Chain.

Introduction & Background

Supply Chain as it relates to…

• Past: a Key Tactical Enabler

• Present: a Performance Optimizer

• Future: an Enabler of the Future Care Model, Industry Collaboration

Summary / Discussion

Agenda

Proven method to reduce cost. Proven method to improve patient

safety. Proven method to integrate physicians

and clinicians in product decision making. Proven service enhancement model that

is a key satisfier for nursing. Proven method to unite culture.

Benefits of an Integrated Supply Chain

Secrets to Our Success

Stick to Guiding Principles Take Risks to Innovate Buy-In (at all levels) Experienced Talent Dedicated Resources Strong Business Cases Metrics Driven Systems Investments Industry Collaboration

CLINICAL: Can your supply chain be positively linked to better care?

OPERATIONAL: Is your supply chain known for improving patient or caregiver satisfaction?

FINANCIAL: Does your supply chain materially contribute to your bottom line?

STRATEGIC: Is your supply chain considered a department or a strategy?

Questions for Providers to Consider

CLINICAL: Do your products/services have a documented clinical

improvement in outcomes – science behind the marketing?

Are your solutions addressing needs in all patient care settings?

OPERATIONAL: Is your company efficient for providers to work with? Provider Supply Chain leaders are becoming more – are

you adjusting accordingly?

FINANCIAL: Does your product/service improve the provider’s

bottom line?

Questions for Suppliers to Consider

STRATEGIC: Suppliers are homogenized – are you differentiated? Are you selling “your box” or a solution to your

customer’s needs? Lines between GPOs, Distributors and Providers are

blurring. How are you responding? Are you strategically aligning with providers that will

survive future industry consolidation?

Questions for Suppliers to Consider