The Value of ecommerce in the Healthcare Supply Chain Industry Study Report

Transcription

1 The Value of ecommerce in the Healthcare Supply Chain Industry Study Report An integrated perspective on the application of an internet-based Procurement process. June 2001 Authors: Ramona G. Lacy, C.P.A. Kevin J. Connor, M.B.A. Patrick F. Crane, M.S., M.B.A. Amy R. Gonce, C.P.A. Kimberley A. Reid, M.B.A. Jill R. Harter, M.S. Foreword by: Charles T. Horngren, Ph.D. Stanford University V.G. Narayanan, Ph.D. Harvard University

2 Table of contents Executive Summary 1 Foreword 3 The Value of ecommerce Healthcare Industry Landscape 4 Reviewing the Study In-Depth Findings of the Study Study Participants Segments Analyzed Approach and Methodology Supplier Results Part 1-Manufacturer Results 13 Part 2-Distributor Results Provider Results 37 EHCR Comparison 43 Value Interplay/Conclusions 46

3 Executive Summary 1 The Value of ecommerce in the Healthcare Supply Chain Industry Study Report Executive Summary Estimates of the potential benefits of electronic commerce in the healthcare industry are staggering. To examine and project the impact of ecommerce, Andersen, a top five consulting and accounting firm, conducted a research study entitled The Value of ecommerce in the Healthcare Supply Chain. The corresponding study report and its findings support the creation of a detailed value model. This model uses activity-based costing methods to estimate the savings potential in the health care supply chain through the adoption of an ecommerce-based procurement process. Audience and Methodology Although many players are actively involved in the healthcare supply chain, this study primarily included product suppliers (manufacturers/distributors) and acute care health providers. The scope of this study focus specifically on the medical/surgical and pharmaceutical procure to pay processes. It is important to note that value can most certainly be achieved to varying degrees in other areas of the healthcare supply chain including dietary, office supplies, Maintenance, Repair and Operations (MRO), forms, etc. all of which were outside the scope of this study. A team of Andersen consultants visited high-profile, well-respected providers, direct and indirect manufacturers, distributors and pharmacy wholesalers at 12 supply chain sites. Dr. Charles T. Horngren of Stanford University and Dr. V.G. Narayanan of Harvard University participated in analyzing the study findings and were instrumental in validating the Andersen methodology and approach. The study examined several areas across all medical-surgical and pharmaceutical supply chain players, including contract management, product procurement, order management, invoice processing and systems integration. Potential benefits also were explored in a number of areas relevant only to suppliers, including operational efficiency, sales force efficiency and customer support. A future vision of ecommerce was thus created. This future state includes a dynamic pricing and contract information data warehouse shared across the supply chain. It incorporates real-time pricing and price tiers along with an estimated 85 percent conversion of all purchase orders from manual to electronic. The future state supports seamless system integration with all supply chain participants and allows web-based trouble-shooting of customer issues. Activity-based costing specialists observed key processes within the supplier and provider segments to determine the time consumed and associated cost of any given activity. At the same time, consultants visited the study participant sites to interview executives, customer service and sales representatives, procurement specialists and other supply chain participants. More than 100 interviews and process observations were conducted. Activity data was compiled for more than 100 sales representatives on the manufacturer side alone. In addition, data from other companies outside of the 12 study participants was integrated into the study as appropriate to form fictitious model organizations.

4 Industry Study Report Key Findings 2 Key Findings The key findings clearly support aggressively pursuing ecommerce throughout the healthcare supply chain. In fact, in a fully mature environment, ecommerce could bring 2 to 10 percent total benefit across manufacturers, distributors, and providers. The potential 2 to 10 percent total benefit is reached by combining a potential 1 to 2 percent benefit for providers, 1 to 7 percent benefit for manufacturers, and up to 1 percent benefit for distributors. Following are highlights of the study: MANUFACTURERS A fully integrated ecommerce solution can lead to revenue increases of 1 to 14 percent for early adopters. These increases result from minimizing rework and eliminating nonvalue activities by sales representatives, who spend 25 to 49 percent of their time on administrative tasks. Increase in net operating margin potential ranges from 2 to 57 percent, varying dramatically depending on the type of manufacturer, current technology state and level of ecommerce implementation. Fill rates can be improved if suppliers and manufacturers are able to track transactions throughout the supply chain. DISTRIBUTORS A fully integrated ecommerce solution can help benefit distributors from 1 to 10 percent of Selling, General and Administrative (SG&A) expenses. Medical-surgical distributors sales forces spend only 14 percent of their time selling products or educating customers, as a majority of their time is consumed by customer service related issues. Although automation of contracts, pricing and rebates have continued to increase, 2 percent of SG&A is spent on personnel to ensure pricing accuracy. The lack of standards in the pricing process continues to impede the reduction of resources. PROVIDERS Value can be created in the range of 1 to 3 percent of total provider supply costs by fully utilizing ecommerce capabilities. Current use of electronic data interchange (EDI), represents about 31 percent of total eligible transactions. An integrated ecommerce solution can reduce the rework related to processing errors by as much as 52 percent. Providers can overpay suppliers from 2 to 7 percent for contracted medical-surgical supplies. As much as 40 percent of buyer time and 68 percent of accounts payable time is dedicated to the manual processing of transactions. In addition, value related to access to information was quantified as part of this study; however, additional benefit may be available. Supply chain optimization information including logistics, inventory management, forecasting and operations management, is critical to suppliers and was quantified in this study, but may offer further benefits. Additionally, providers may be able to realize benefits in the contract compliance, standardization and utilization areas due to enhanced information beyond those quantified in the study. While the study shows potential results, marketplace experience proves that a full costreduction plan requires organizational commitment, leadership and a consistent focus on the end result. The value will be fully realized when supply chain participants reach the critical mass of acceptance, have the technology to integrate information system infrastructures and design a common language for communication. Healthcare delivery does not lend itself to the conventional supply chain optimization and improvement strategies used by other industries. Controlled revenue streams, physician preferences, indigent care policies, lean operating margins and federal regulations require unique strategies. This study shows that ecommerce will have an evolutionary impact on the supply chain, ultimately driving the efficiencies highlighted in this study.

5 Foreword 3 Foreword Despite industry promises of billions of dollars in savings, the U.S. healthcare supply chain has been slow to adopt ecommerce, perhaps because estimates of potential savings are based on unclear methods and fuzzy assumptions. This study develops a rigorous value model using activity-based costing methods to estimate the savings potential in healthcare supply chain through the adoption of ecommerce. This study provides an objective and meaningful methodology using a comprehensive, disciplined and systematic three-step approach: 1. The spending on various resources is mapped to the activities that actually consume these resources. 2. The impact of ecommerce on the volume of each activity is identified. 3. The changes in activity volume facilitated by ecommerce adoption are folded back to the level of resource consumption to estimate the total savings potential. As a result of this approach, the methodology used in this study combines the essence of activity-based costing and activity-based budgeting to obtain a credible estimate of the potential savings available through ecommerce. It is important for any stakeholder in the healthcare supply chain, including a manufacturer, distributor or provider, to estimate ecommerce savings potential independently by applying the methodology developed in this study to its own setting. Moreover, an organization can estimate the potential savings from ecommerce adoption prior to making a commitment to a particular ecommerce vendor. This capability is valuable for two primary reasons: All companies and healthcare organizations would like to know that the projected benefits of adopting ecommerce outweigh the costs. These organizations would find it useful later to compare the actual savings against the projected savings. Healthcare supply chain managers should consider that realization of the promised savings involves systematic follow-through to ensure that plans are executed while making tough trade-offs and painful decisions. With that in mind, this document identifies the way to realize these savings and provides a road map of what to expect when implementing ecommerce in a supply chain. The journey itself is demanding - but it can be extremely rewarding. Charles T. Horngren, Ph.D. Stanford University V.G. Narayanan, Ph.D. Harvard University

6 Healthcare Supply Chain Industry Landscape 4 The Healthcare Industry Landscape Statistics relating to the ever-growing healthcare industry are staggering: It represents more than $1.3 trillion per year in the U.S. economy, consuming more than 14 percent of the gross domestic product. 1 Longer life expectancies, new technology and greater consumer awareness keep the industry growing at a staggering pace. Analysts predict that by 2008, healthcare costs will consume more than 16 percent of Gross Domestic Product (GDP). According to the American Hospital Association, more than 5,800 registered acute care providers are operating in the United States. 2 Of the expense for providers, supplies and pharmaceuticals represent approximately $125 billion. 3 Optimizing the healthcare supply chain has become a very important strategy to combat declining reimbursement and improve the financial health of providers. However, supplier pricing cannot be the only way to gain efficiency and create savings. With the proliferation of new pharmaceuticals and emerging technologies, increased patient acuity and a sustained competitive environment, healthcare management must understand the potential for improving organizational effectiveness by advancing a strategic vision for the supply chain function.

7 Healthcare Supply Chain Reviewing the Study 5 Reviewing the Study The study described in this document was conducted by Andersen to validate the potential value of ecommerce for the healthcare supply chain. It focused on value for suppliers (manufacturers/distributors) and acute healthcare providers. It also examined how this technology could advance the interests of the entire supply chain from supplier finished goods inventories to payment for supplies by the provider accounts payable departments. More than 50 ecommerce solutions have been offered to healthcare providers from every one of the supply chain constituents, including pure-play dot-coms, manufacturers, established information technology companies, distributors and group purchasing organizations. Several unique business strategies are offered, from dynamic sourcing to complete supply chain management. Very few of these companies took the time to thoroughly study the impact ecommerce will have on the entire supply chain. This study set out to answer some very basic questions: Is this value real? If so, how much is there, and how soon can it be realized? Does everyone gain, or does value come at the expense of other constituents? Before these questions can be answered, it is important to clearly define the scope of the study and the definition used as the hypothesis: ecommerce is an enabling tool providing healthcare supply chain constituents with the ability to trade products, information and currency in a real-time dynamic environment. It has the potential to automate the procurement and fulfillment cycles and dramatically reduce the activities committed to these areas. Resources that are liberated as a result of full implementation can be utilized by manufacturers, distributors and providers to create additional value through improved standardization, utilization, contract compliance, clinical education and sales.

8 Healthcare Supply Chain IIn-Depth Findings 6 In-Depth Findings of the Study The study was conducted by visiting 12 supply chain sites, including direct manufacturers, indirect manufacturers, distributors and pharmacy wholesalers and providers. Here are some of the key findings of the study, as well as results that could be realized once a fully mature ecommerce solution is adopted by the entire supply chain: Segment Healthcare Industry Manufacturers Key Findings & Potential Results Real-time sales and purchase information can help suppliers track sales and providers better manage utilization and standardization. Supply chain participants should be able to troubleshoot 50 to 75 percent of their problems. All supply chain constituents can minimize errors and related rework. As much as 85 percent of all purchase orders and invoices can be converted from manual to electronic. A fully integrated ecommerce solution can lead to revenue increase of 1 to 14 percent for early adopters from optimizing their sales force time by minimizing rework and nonvalue activities. Increase in net operating margin potential ranges from 2 to 57 percent, varying dramatically depending on the type of manufacturer, current technology state and level of ecommerce implementation. Sales representatives spend 25 to 49 percent of their time on administrative tasks that can be significantly reduced by ecommerce. Fill rates can be improved if suppliers and manufacturers have visibility of transactions throughout the supply chain. Distributors Providers A fully integrated ecommerce solution can help distributors improve net operating margin 24 to 70 percent, which equates to a total benefit of 1.3 to 9.8 percent of Selling, General and Administrative(SG&A) expenses. Medical-surgical distributors can optimize their sales force time by minimizing rework and nonvalue activities with a benefit range of 4.75 to percent of revenue. Only 14 percent of medical-surgical distributors sales representative time is spent selling products or educating customers. Value can be created in a range of 1.25 to 2.45 percent of total provider supply costs by fully utilizing ecommerce capabilities. Current use of electronic data interchange, (EDI), represents only 31 percent of total eligible transactions. An integrated ecommerce tool can reduce the rework related to processing errors by as much as 52 percent. Providers can overpay suppliers anywhere from 2 to 7 percent for contracted medical-surgical supplies. As much as 40 percent of buyer time and 68 percent of accounts payable time is dedicated to the manual processing of transactions.

9 Healthcare Supply Chain Study Participants, Methodology and Processes 7 Study Participants, Methodology and Processes The current struggle within the healthcare industry to maintain control over increasing costs is a dominant issue for many constituents, including consumers, managed care organizations, government authorities, industry suppliers, providers and physicians. The key challenge remains organizing and optimizing the use of existing resources and information. As with any system change, a full costreduction plan requires organizational commitment, leadership and a consistent focus on the result. This study provides a basis for directing healthcare professionals in that effort, providing a roadmap that identifies short- and long-term opportunities for all constituents within this complex supply chain. The value of ecommerce will be realized when all stakeholders reach the critical mass of acceptance, have the technology to integrate their information system infrastructures and design a common language to communicate. The task of maintaining communications and product flow in this dynamic environment relies on the business collaboration between all stakeholders. This is an area where ecommerce may play an efficient role for the entire supply chain. The healthcare supply chain must work smarter, allotting time on those activities that truly make a difference in both cost and outcomes.

10 Healthcare Supply Chain Segments Analyzed 8 Segments Analyzed To ensure relevant results and gain a better understanding of the ecommerce value proposition across the entire supply chain, this study focused on specific factors that drive costs in today s systems. Figure 1 highlights (in purple) the components of the supply chain that were included in the study. The components not covered in this study have the potential to further enhance the savings through ecommerce, but were outside of the scope of the study. Figure 1. Scope of Study Manufacturer Distributor/Wholesaler Provider Projections Forecasts Projections Forecasts Raw Materials Procurement Procurement Production Work Process Finished Goods Inventory Finished Goods Inventory Contracting/Rebates Contracting/Rebates Contract Management Sales/Customer Service Sales /Customer Service Inventory Management Shipping and Receiving Shipping and Receiving Patient Charging Accounts Receivable Accounts Receivable Accounts Payable Accounts Payable Accounts Payable The participants in the study included name-brand, high-profile, well-respected companies. To assure a comprehensive approach we segregated the supply chain into six segments: Direct-Sell Medical-Surgical Manufacturers The manufacturer that sells direct may not be able to leverage the same savings in orderprocessing, customer service and shipping as those that use distributors. Instead, manufacturers of capital equipment, medical devices and specialty products find that the sporadic nature of provider purchases, coupled with the relatively high purchase order value, mitigates the use of a distribution center. In addition, some manufacturers of hospital supplies discover that direct relationships with providers better suit their business models. Distributor-Dependent Medical-Surgical Manufacturers This segment is characterized by close relationships between key trading partners to ensure cost-effective and timely delivery to provider organizations. Sixty to 80 percent of medical supplies consumed by U.S. providers come directly from a distributor. Many medical manufacturers recognize the inherent advantages that third-party distribution systems offer. Aside from streamlining operations, reducing costs and automating routine tasks, a distributor can help consolidate purchase orders, minimize back office overhead, expedite cash flows and reduce manufacturer-owned inventories. Pharmaceutical Manufacturers Pharmaceutical manufacturers currently exhibit transactional efficiencies and maintain close supplier partnerships. Overall, they have moved beyond internal distribution mechanisms to rely heavily on distributors for the physical movement of products, the expeditious handling of cash flows and the supply of critical information on acute care provider usage patterns. This relatively high-margin industry has a keen focus on its competitive landscape, along with its research and development pipeline providers.

11 Healthcare Supply Chain Segments Analyzed 9 Segments Analyzed Medical-Surgical Distributors Operating on thin margins, these entities provide the key interface between multiple manufacturers and acute care providers. Distributors accept responsibility for the physical flow of products, the coordination of timely and accurate payments, and the transmittal of essential information on end customer sales. The universe of U.S. medical-surgical distributors includes a handful of multibillion-dollar companies, coupled with more than 300 smaller distributors specializing in either specific product areas or specific geographic areas. Most acute care providers find benefit in sending their supply and equipment orders through a single distributor. The distributor, in turn, partners with the provider to minimize inventories and ensure timely delivery of vital products. Pharmaceutical Wholesalers The recent series of mergers and acquisitions in this segment creates yet another driver for industry change. Pharmaceutical manufacturers are almost totally dependent on a limited universe of pharmaceutical wholesalers for delivery of their products to retail pharmacies, government healthcare facilities and acute care providers. This industry is characterized by federally regulated, high-value products with limited shelf life, special storage requirements and a very complicated system of pricing and rebates. One unique characteristic of this segment is that pharmaceutical wholesalers typically own the software and hardware used to procure product. The landscape is further complicated by the prevalence of below-cost pricing strategies by wholesalers who speculate on impending retail price movements by key manufacturers. Provider Acute Care The study focused on acute care facilities and did not examine the benefits for alternate site (long-term care), home care or other supply-consuming areas. Supplies included pharmaceutical, medical, surgical and other consumable products. Provider inventory or PAR-level management, as well as the potential impact of patient charge/charge master controls, were not included within the scope. Participants in the study all highly respected in the industry represented each segment of the supply chain: manufacturers, distributors and providers. One control site was used to establish a baseline of current operations. A second control site was used to validate the findings. Shown in Figure 2, segment information throughout this article is modeled into hypothetical organizations to maintain confidentiality: Figure 2: Organization Names Segment Medical Surgical Manufacturer Direct Medical Surgical Manufacturer via Distributor Pharmaceutical Manufacturer Model Organizations ManDirCo ManDisCo PharmCo Medical Surgical Distributor Pharmaceutical Wholesaler Provider Acute Care ManDisCo PharmDisCo CareCo

12 Healthcare Supply Chain Approach and Methodology 10 Approach and Methodology This value study measures and quantifies both tangible and intangible benefits for healthcare supply chain participants. Focus groups and interviews were conducted prior to the study to determine which areas could potentially produce value and to identify the level of opportunity. The term core value driver, or CVD, is used throughout the study to segregate the value and provide measurement. CVDs include components called key elements that encompass the specific items measured by the research team. CVDs and key elements were validated and reviewed internally, along with study site participants, to gain the benefits of diverse perspectives. As expected, many of the CVDs are shared across the segments, but some are unique. A brief description of all the CVDs can be found to the right. Contract Database Management Management of existing and future contracts between providers and suppliers, including pricing, rebates, sales tax, freight and compliance Procurement Provider activities attributed to selecting an item, completing the requisition, aggregating requisitions into orders, verifying contract source and price, and handling of discrepancies Order Management Order processing from receipt to shipment; all provider and supplier activities related to order status checks, order expediting, back order handling and returns Operational Efficiency The visibility of real-time sales information, and the use of that information, to manage inventory and improve the ability to forecast finished goods manufacturing Field Sales Efficiencies Measuring a salesperson s volume (sales dollars), efficiency of customer maintenance (current customer satisfaction), marketability (acquisition of new business) and expansion of current accounts Customer Support Processing of return goods authorization, handling of customer problems, availability of real-time information, new product inquiries and technical support Invoice Processing Generation of the invoice through the receipt of payment, including invoice validation, payment receipt, matching of sales/purchase order to invoice number, reconciliation of discrepancies and rebates/charge back process System Integration Integration of a digital marketplace with existing internal systems, enterprise resource planning (ERP), electronic data interchange (EDI), warehouse management system (WMS), etc., and the connectivity to digital networks (product offerings vs. service offerings) through web-based portals Core Assumption Redeployment of resources: the reallocation of full-time equivalents from tactical activities to strategic supply chain processes and the value created

13 Healthcare Supply Chain Interviews, Observation and Analysis 11 Approach and Methodology The study establishes a base of current operations within provider and supplier organizations so that the potential value of an ecommerce solution may be realized. Understanding that a mature ecommerce tool was not deployed at the time of the research, it was necessary to calculate assumptions on the future value once tools are available. The baseline information was obtained through the following research methods: Activity-Based Costing Activity-based management specialists observed key processes within the provider and suppler segments to determine the time consumed and associated cost of any given activity. Focused Interviews Teams of consultants visited the study participant sites to interview executives, customer service representatives, sales organizations, procurement departments and other relevant supply chain participants. More than 100 interviews and process observations were conducted. Data Analysis Each participant provided detailed financial information regarding operations to enable the consultant teams to validate study results. Data Aggregation It was necessary to consolidate the data and key findings, add industry benchmarks, then normalize the data to protect the confidentiality of the participants. By using this normalized and aggregated data, it was possible to estimate what potential improvements could be realized for each supply chain participant. These estimates are predicated using a fully integrated ecommerce tool. Consequently, the data collected throughout the study was conservatively modeled in various formats to estimate the potential savings and improvement opportunities. The following findings are structured by study segment in relation to each core value driver assessed by the research team. Provider and supplier details are communicated using fact-based assumptions of the current and future states of ecommerce use. Supplier information is further explained in terms of manufacturers vs. distributors. Each of the segments is summarized in tables at the end of the section. These benefit ranges are derived from the actual data developed to create the hypothetical companies.

14 Supplier Results Part 1 Manufacturers

15 Healthcare Supply Chain Role of the Supplier 13 The Role of the Supplier Providers rely heavily on a well-established network of distributors and product manufacturers to provide cost-effective supplies and state-of-the-art medical equipment. The stakes have increased due to explosive increases in consumer awareness and growing pressures on managed care entities and third-party payers to deliver quality care. As a result, providers compete based on the ability to associate with physicians who provide cutting-edge interventions and buy the best equipment and supplies. All stakeholders in the healthcare supply chain manufacturers, distributors and providers must respond aggressively to this economic challenge by focusing on the costs and processes associated with the delivery of healthcare services. This study examined five distinct perspectives within the healthcare supplier industry: 1) medical-surgical manufacturer that sells direct 2) medical-surgical manufacturer that sells through distribution 3) pharmaceutical manufacturer 4) medical-surgical distributor 5) pharmaceutical wholesaler The study examines actual costs associated with procurement cycle activities. These activities then are projected into an environment where ecommerce is at the center of the cycle. Not surprisingly, our analysis shows a different set of future value drivers for each element of the supplier landscape. For example, heavy use of EDI in the pharmaceutical distribution environment severely limits the upside potential of ecommerce applications in routine transaction management. Conversely, manufacturers that sell products directly to providers rely almost exclusively on phone and fax techniques. This scenario provides extensive value opportunities. Most suppliers believe they employ efficient means for the physical movement of products, but will acknowledge certain inefficiencies in the flow of cash and information among key elements of this supply chain. Core Value Drivers: CVD 1 Contract/Database Management: The management of existing and future contracts with providers, including contract negotiations, contract maintenance, tiered pricing and contract monitoring for compliance CVD 2 Customer Support: The processing of return goods authorizations (RGAs), handling of customer problems, availability of real time information, new product inquiries and technical support CVD 3 Order Management: Order processing from receipt to shipment; all activities related to order status checks, order expediting, back order redirect, back order substitution and back order expediting CVD 4 Invoicing Processing: A cycle beginning from invoice generation through payment receipt, including invoice validation, payment receipt, matching of sales order to invoice number, reconciliation of discrepancies and rebates/ charge-back processes CVD 5 Operational Efficiency: The visibility of real-time sales information and the use of that information to manage inventory and improve the ability to forecast finished goods CVD 6 Field Sales Efficiency: Measuring a salesperson s volume (sales dollars), efficiency of customer maintenance (current customer satisfaction), marketability (acquisition of new business) and expansion of current accounts CVD 7 System Integration: The integration of a digital marketplace with existing internal systems (ERP, EDI, WMS) and connectivity to digital networks (product offerings vs. service offerings) through Web-based portals

16 Manufacturers 14 Part 1 Manufacturers To maintain the confidentiality of the study sites, hypothetical companies were created. The following information introduces the manufacturer study participants. ManDirCo Medical-Surgical Manufacturer-Direct $300 million in sales revenue Net operating margin of 20.5 percent SG&A of $103 million 95 percent fill rate 55 days sales outstanding 30,300 purchase orders per year Figure 3: Manufacturers Core Value Driver Estimated Value Range ManDisCo Medical-Surgical Manufacturer-via Distributor $300 million in sales revenue Net operating margin of 11.5 percent SG&A of 50.7 million 90 percent fill rate 35 days sales outstanding 104,000 purchase orders per year CVD 1 CVD 2 Contract Database Management Customer Support % of SG&A of SG&A PharmCo Pharmaceutical Manufacturer via Wholesaler CVD 3 CVD 4 CVD 5 CVD 6 CVD 7 Order Management Invoice Processing Operational Efficiencies Field Sales Efficiencies System Integration % of SG&A % of SG&A % of SG&A % of SG&A % of SG&A $1.5 billion in sales revenue Net operating margin of 40.1 percent SG&A of $740 million 95 percent fill rate 38 days sales outstanding 23,500 purchase orders per year CVD 8 CVD 9 Reporting Tools Redeployment of Resources Total Opportunity Not measured See field sales efficiency % of SG&A Figure 3 highlights the estimated savings range by core value driver as a percentage of SG&A.

17 Manufacturers CVD1: Contract/Database Management 15 CVD 1: Contract/Database Management ManDirCo manufacturers must depend on internal resources or GPOs to assure proper pricing, rebate and incentive compliance. In the ManDirCo model, contract management involves only a few key employees. However, the types of contracts managed such as equipment leases involve more complex arrangements. ManDisCo manufacturers rely heavily on the contract management capabilities of the distributor to minimize pricing problems. The majority of the manufacturer s efforts are focused on the negotiation of new contracts so that the best price is secured with potential customers. Very few resources are dedicated to contract maintenance. In the PharmCo model, contract management was streamlined and automated to minimize the maintenance effort. The challenge in this segment is associated with the proper class-of-trade (COT) affiliation. COT issues are the most common source of errors in purchase orders and the charge-back process for PharmCo. In using an ecommerce solution, contract information (including prices, tiers and volume slotting) will automatically upload into one central data warehouse with limited manual intervention. The contract information would be available to all interested supply chain entities (providers, integrated delivery networks, manufacturers, distributors and GPOs). Only one entry would be necessary to update the contract changes, and the resulting edits would be accessible immediately. Some of the benefits for ManDirCo, ManDisCo and PharmCo are: ManDisCo can reduce the activities related to contract maintenance by as much as 42 percent. ManDirCo and PharmCo can reduce the labor related to contract management by as much as 18 percent.

18 Manufacturers CVD 2: Customer Support 16 CVD 2: Customer Support Customer service personnel in the ManDirCo and ManDisCo segments spend the majority of their time answering questions about order status. Between 83 and 96 percent of their time is spent on activities that could be performed through the web. The PharmCo segment has two classes of customer service representatives. One group answers typical order-related questions, while the other group handles product-related inquiries. A common theme was cited by all study participants: Even with tools that offer self-service access to order information through the web, some customers still want to talk to a real person. In addition, even if an electronic confirmation shows that the order was processed using EDI, some organizations continue to receive phone calls to verify the EDI confirmation. Such calls may decrease as confidence increases; however, this was an interesting behavior result. Figure 4-6: Customer Service Representative Summaries for ManDirCo, ManDisCo, and PharmCo ManDirCo Customer Service Representative Activity Analysis $FWLYLWLHV:LWKLQWKH6FRSHRIH&RPPHUFH +DQGOLQJFRQWUDFW GLVFUHSDQFLHV 3ULFLQJLQTXLULHV 3URGXFWLQTXLULHVLQIRUPDWLRQ UHTXHVWV 5*$3URFHVVLQJ 2UGHU6WDWXV&KHFNV (',HUURUUHVROXWLRQ ManDisCo Customer Service Representative Activity Analysis (',HUURUUHVROXWLRQ 2WKHU $FWLYLWLHV:LWKLQWKH6FRSHRIH&RPPHUFH 2WKHU 2UGHU3URFHVVLQJ2UGHU SODFHPHQW2UGHU FRQILUPDWLRQ +DQGOLQJFRQWUDFW GLVFUHSDQFLHV 3ULFLQJLQTXLULHV 2UGHU3URFHVVLQJ2UGHU SODFHPHQW2UGHU FRQILUPDWLRQ 3URGXFWLQTXLULHV PharmCo Customer Service Representative Activity Analysis 5*$3URFHVVLQJ 2UGHU6WDWXV&KHFNV $FWLYLWLHV:LWKLQWKH6FRSHRIH&RPPHUFH 3ULFLQJLQTXLULHV +DQGOLQJFRQWUDFW GLVFUHSDQFLHV (',HUURUUHVROXWLRQ 2WKHU 3URGXFWLQTXLULHVLQIRUPDWLRQ UHTXHVWV 5*$3URFHVVLQJ 2UGHU3URFHVVLQJ2UGHU SODFHPHQW2UGHU FRQILUPDWLRQ 2UGHU6WDWXV&KHFNV

19 Manufacturers CVD 2: Customer Support 17 CVD 2: Customer Support All supply chain participants will troubleshoot 50 percent of their own problems and inquiries using a web-based tool. This allows manufacturers and distributors to focus customer support personnel on more value-added activities. It was calculated that the manufacturing companies created for the study could benefit as follows: ManDirCo Eighty-three percent of the customer service representative s activity relates to areas that can be affected by ecommerce. A significant portion of that time is spent responding to inquiries about pricing, delivery, product information and invoicing. ManDisCo Ninety percent of the customer service representative s activity relates to areas that can be affected by ecommerce. PharmCo Again, the first course of action would be for the customer to call the wholesaler for standard inquiries. However, 96 percent of the customer service activities can be affected by ecommerce.

20 Manufacturers CVD 3: Order Management, CVD 4: Invoice Processing. CVD 5: Operational Efficiency 18 CVD 3: Order Management CVD 4: Invoice Processing CVD 5: Operational Efficiency Order management for the ManDisCo model is a relatively easy task for 80 to 90 percent of business transactions. The manufacturer typically uses EDI applications to minimize errors and shorten the cycle time for order processing. Approximately 65 percent of order volume is processed using electronic tools for ManDisCo and PharmCo. This EDI penetration is significantly less for ManDirCo. The common modes of communication are fax or phone. For ManDirCo, only about 10 percent of the order volume is processed via EDI. With an integrated system, customers will shift from manual (phone and fax) order placement to electronic self service webbased methods. If 85 percent of the current orders processed by suppliers change from manual to electronic, the increased accuracy and time enhancements will generate savings throughout the supply chain. In the ManDisCo model, the primary customer is the distributor. Distributors are willing to pay by electronic funds transfer (EFT), and manufacturers are capable of sending the 810 EDI transaction (electronic invoice) and receiving the 820 payment confirmations from trading partners. In the ManDirCo model, the customer is typically the provider and there is limited use of EFT. EDI penetration typically is lower for this segment because of provider materials management information system limitations. For PharmCo, a key customer is the pharmaceutical wholesaler. The wholesaler tends to prefer electronic payment methods. However, timely payment can be hindered by pricing and class-of-trade issues. In an ecommerce environment, 85 percent of all invoicing can be conducted electronically. Electronic invoicing will eliminate the need to manually process billing documents. Payment processing via EFT for 85 percent of all invoices eliminates delays with collection float as measured by days sales outstanding, or DSO. In addition, delays in payment for invoice discrepancies can be minimized as outlined in the first core value driver description. In all three manufacturer segments, the importance of real-time data access and visibility was the key driver for improving operational efficiency. Access to daily sales tracking information is currently available. However, most manufacturers do not use the data for more accurate production planning and scheduling. Typically, forecasts are based on historical ordering patterns. Greater opportunities exist if manufacturers are able to automatically feed data back to the ERP or materials management information system and use the information for strategic planning. Current inventory holding costs and cost of goods sold is closely tied to how inventory is managed, and how sales and production schedules are developed. Many manufacturers find tremendous value in vendor-managed inventory programs and continuous replenishment initiatives. A web-based tool that allows access to real-time sales information will provide a supplier with key data to improve forecasting, create more accurate production schedules and decrease inventory. Many creative examples for obtaining point-of-sale data real-time will be a critical component of any ecommerce activities in this area. The efficiency gained from real-time information is closely linked to how the information is integrated with existing back office, data warehouse or other decision-support tools.

21 Manufacturers CVD 6: Field Sales 19 CVD 6: Field Sales A sales representative s salary cost is the largest component of SG&A covered for this study across all of the manufacturers. Sales representative spend a considerable amount of time traveling and making sales calls. Approximately 25 percent of their time could be refocused on more valueadded activities. Figure 7-9: Sales Representative Summaries - ManDirCo, ManDisCo, and PharmCo ManDirCo Sales Representative Activity Analysis $FWLYLWLHV:LWKLQWKH6FRSHRIH&RPPHUFH 5HSRUW3UHSDUDWLRQ 8WLOL]DWLRQDQDO\VLV &RPSOLDQFH 1RQFRQWUDFWSULFHTXRWHV &RQWUDFW 8SGDWHV(OLJLELOLW\3ULFLQJ 6WDWXV&KHFNV([SHGLWLQJ (UURU5HVROXWLRQ&UHGLW 3URFHVVLQJ %DFNRUGHU)DFLOLWDWLRQ 3URSRVDO3UHSDUDWLRQ 0LVFHOODQHRXV 6DOHVUHSWUDYHOWLPH 6DOHV&DOOV6XUJHU\ REVHUYDWLRQVSURGXFW GHPRQVWUDWLRQVWUDLQLQJ ManDisCo Sales Representative Activity Analysis $FWLYLWLHV:LWKLQWKH6FRSHRIH&RPPHUFH 0LVFHOODQHRXV 5HSRUW3UHSDUDWLRQ 8WLOL]DWLRQDQDO\VLV &RPSOLDQFH 6DOHVUHSWUDYHOWLPH 1RQFRQWUDFWSULFHTXRWHV &RQWUDFW 8SGDWHV(OLJLELOLW\3ULFLQJ 6WDWXV&KHFNV([SHGLWLQJ (UURU5HVROXWLRQ&UHGLW 3URFHVVLQJ %DFNRUGHU)DFLOLWDWLRQ 3URSRVDO3UHSDUDWLRQ 6DOHV&DOOV6XUJHU\ REVHUYDWLRQVSURGXFW GHPRQVWUDWLRQVWUDLQLQJ

22 Manufacturers CVD 6: Field Sales 20 CVD 6: Field Sales By implementing a Web-based electronic tool to address the problems with contract pricing, back orders and substitutions, the sales representative s time can be reallocated. Any resulting revenue generated can then be directly attributed to time spent on new sales. PharmCo Sales Representative Activity Analysis $FWLYLWLHV:LWKLQWKH6FRSHRIH&RPPHUFH 0LVFHOODQHRXV 5HSRUW3UHSDUDWLRQ 8WLOL]DWLRQDQDO\VLV &RPSOLDQFH 6DOHVUHSWUDYHOWLPH 1RQFRQWUDFWSULFHTXRWHV &RQWUDFW 8SGDWHV(OLJLELOLW\3ULFLQJ 6WDWXV&KHFNV([SHGLWLQJ (UURU5HVROXWLRQ&UHGLW 3URFHVVLQJ %DFNRUGHU)DFLOLWDWLRQ 3URSRVDO3UHSDUDWLRQ 6DOHV&DOOV6XUJHU\ REVHUYDWLRQVSURGXFW GHPRQVWUDWLRQVWUDLQLQJ

23 Manufacturers CVD 7: System Integration 21 CVD 7: System Integration Figure 10-15: Overall ecommerce benefit - ManDirCo, ManDisCo, and PharmCo ManDirCo - Overall Benefit Manufacturers must maintain a separate EDI data map with each distributor. The value-added network (VAN) costs are not excessive, but management of multiple maps can make it challenging to implement changes quickly. The ordering patterns and volumes managed with specific distributors or providers determine the feasibility of using an electronic tool. Where it is cost-prohibitive to implement EDI, manufacturers are investing in other options. Many are upgrading EDI translators so that Web-based orders using extensible Mark-up Language (XML) can be converted prior to uploading into the manufacturer s order-management system. The integration of the manufacturer and distributor systems via EDI offers a varying range of information access for both entities. Opportunities exist by using that information for strategic planning purposes. The ecommerce solution will allow one point of connectivity between suppliers and buyers, as well as seamless integration with back-office systems. Supply chain management and execution tools that allow for collaborative coordination through the Web offer tremendous opportunity to drive additional cost out of the supply chain for manufacturers. The largest opportunity exists in the area of operational efficiency. This area, however, was essentially out of scope for our value study. Some will argue that other, more expensive software tools, will be needed to truly achieve savings in the operational efficiency category. This presented a challenge for our research team and is critical to mention in the study findings.,qfuhdvhlq 1HWRSHUDWLQJ PDUJLQ GXHWR )LOOUDWHUHFDSWXUH RIWRWDOUHYHQXH LQFUHDVH 6DOHV7UDQVODWLRQ RIWRWDOUHYHQXH LQFUHDVH &RPSRVLWLRQRI%HQHILWV0HGLXP,QFUHDVHLQ1HW2SHUDWLQJ 0DUJLQ,QYHQWRU\&DUU\LQJ&RVW '62&DUU\LQJ&RVW /DERUVDYLQJV &RPSRVLWLRQRI%HQHILWV0HGLXP,QFUHDVH LQ1HW2SHUDWLQJ 0DUJLQ 2WKHUQRQODERUFRVW 2WKHUQRQODERUFRVW ManDisCo - Overall Benefit &2*6UHGXFWLRQ PharmCo - Overall Benefit &RPSRVLWLRQRI%HQHILWV0HGLXP 2WKHUQRQODERUFRVW &2*6UHGXFWLRQ /DERUVDYLQJV &2*6UHGXFWLRQ /DERUVDYLQJV '62&DUU\LQJ&RVW,QYHQWRU\&DUU\LQJ&RVW,QFUHDVHLQ 1HWRSHUDWLQJ PDUJLQ GXHWR )LOOUDWHUHFDSWXUH RIWRWDOUHYHQXH LQFUHDVH 6DOHV7UDQVODWLRQ RIWRWDOUHYHQXH LQFUHDVH '62&DUU\LQJ&RVW,QYHQWRU\&DUU\LQJ&RVW,QFUHDVHLQ 1HWRSHUDWLQJPDUJLQ GXHWR,QFUHDVHLQ1HW2SHUDWLQJ 0DUJLQ )LOOUDWHUHFDSWXUH RIWRWDOUHYHQXHLQFUHDVH 6DOHV7UDQVODWLRQ RIWRWDOUHYHQXHLQFUHDVH

24 Manufacturers CVD 7: System Integration 22 ManDirCo Summary Profit & Loss - Medium Benefit 5HYHQXH &KDQJHGXHWR &XUUHQW RI5HYHQXH,QFUHDVHLQ6DOHV 6DYLQJV )XWXUH RI5HYHQXH &2*6 *URVV0DUJLQ 6* $ 1HW2SHUDWLQJ0DUJLQ &KDQJHLQ1HW2SHUDWLQJ0DUJLQ ManDisCo Summary Profit & Loss - Medium Benefit 5HYHQXH &KDQJHGXHWR &XUUHQW RI5HYHQXH,QFUHDVHLQ6DOHV 6DYLQJV )XWXUH RI5HYHQXH &2*6 *URVV0DUJLQ 6* $ 1HW2SHUDWLQJ0DUJLQ & KDQJ HLQ 1 HW2S HUDWLQJ0DUJLQ PharmCo Summary Profit & Loss - Medium Benefit 5HYHQXH &KDQJHGXHWR &XUUHQW RI5HYHQXH,QFUHDVHLQ6DOHV 6DYLQJV )XWXUH RI5HYHQXH &2*6 *URVV0DUJLQ 6* $ 1HW2SHUDWLQJ0DUJLQ &KDQJHLQ1HW2SHUDWLQJ0DUJLQ

25 Supplier Results Part 2 Distributors

26 Distributors 24 Part 2 Distributors MedDisCo Demographics $1 billion revenue Net operating margin of 1.6 percent SG&A $115 million (11.5 percent of revenue) $100 million of on-hand inventory 10 inventory turns per year 1.6 million annual purchase orders 39 average days sales outstanding Below, Figure 16 highlights the estimated savings range by core value driver as a percentage of SG&A. Figure 16: MedDisCo Core Value Driver Distributor / Wholesaler CVD 1 Contract Database Management % of SG&A CVD 2 Customer Support % of SG&A CVD 3 Order Management % of SG&A CVD 4 Operational Efficiency % of SG&A CVD 5 Field Sales Efficiencies % of SG&A CVD 6 Invoice Processing 0 0.1% of SG&A CVD 7 System Integration % of SG&A CVD 8 Reporting Tools Not Measured CVD 9 Redeployment of resource See CVD 5 Total Opportunity 3.4 to 9.8% of Total SG&A

27 Distributors CVD1: Contract/Database Management 25 CVD 1: Contract/Database Management Many factors determine the ultimate price a provider pays for a given item, such as class of trade, tier and unit of measure. If one of the variables is misaligned, an error is generated, creating the need for at least two supply chain participants to reconcile the discrepancy. In order to bill their customers correctly, distributors must maintain contract information and associated pricing for all contracts a given customer is accessing. The distributor works with its customers to determine the appropriate contract for each item being purchased. In addition, the distributor must confirm eligibility and pricing information with the manufacturer to ensure the provider s price and the distributor s rebate is correct. Unfortunately, eligibility and pricing information is not housed in one place because the source of the correct price varies. The following table details the role that supply chain participants play in pricing. Given the multiple sources of information, the chance for error increases, as well as the resources required to maintain pricing and reconcile discrepancies. Because the distributor ultimately is the source for the invoice to the customer, distributors are at the greatest risk of bearing the burden for incorrect pricing. On the front end, the provider can refuse to pay the invoice price, while on the back end, the manufacturer can deny the rebate. As a result, distributors must be diligent in their efforts to correctly source and maintain pricing. Currently there is some degree of electronic exchange of contract eligibility and pricing among trading partners. The distributor extracts information from the multiple manufacturers and GPOs, sifting and sorting to reveal the correct price for each item. MedDisCo spends 2 percent of SG&A on personnel in the maintenance of contracts and pricing and processing rebates. Consistent and effective electronic contract management can significantly reduce user error and labor costs. Contract/database management is most consistently seen as one of the greatest areas of potential value for healthcare distributors. Implementing an ecommerce solution would create a centralized tool to manage contract information, converting from multiple sources of information to one. All supply chain participants would access and update the same source for contracts and pricing. It will be possible for distributors to automatically upload all relevant pricing data elements into their legacy systems with limited manual intervention. Contract information would be available to all interested supply chain participants (GPOs, providers, manufacturers and distributors) in real time. MedDisCo could eliminate as much as 80 percent of all personnel costs associated with contract maintenance and problem resolution. The lack of universal product numbers (UPNs), uniform units of measure and standard hospital identification numbers (HIN) to the ship-to will hamper achieving maximum efficiency in this area. Figure 17: Scope of Study Pricing Factor Contract to be accessed Supply Chain Participant Role in Pricing Information Manufacturer Provider Distributor GPO Source Maintain GPO Contracts eligibility Maintain Maintain Maintain Source Class of trade eligibility Source Maintain Maintain Maintain Individual Contracts Source Maintain Maintain Pricing including distribution fee Maintain Source Conversion of pricing to lower unit of measure Maintain Source

28 Distributors CVD2: Customer Support 26 CVD 2: Customer Support Customer support personnel field many inquiries that readily could be transferred to the customer through online access to the distributor s information system. The distributor industry segment is in a constant state of evolution, providing many new opportunities to improve upon established customer support practices. Figure 18 depicts the current state of automated functionality provided by distributors. The lack of automated customer service is clear when looking at the activities customer service personnel perform. To the extent that providers can perform their own inquiries and resolve more of the issues themselves, the distributors effort would be minimized. A prime example of the potential to transform through ecommerce is evident in the progress that has been achieved by pharmacy wholesalers. Automation of self-service inquiries and issue research eliminate the need for distributor s effort when the provider can resolve the problem. Once the provider confirms a discrepancy, it may be resolved online without ever requiring effort on the part of the distributor. However, resolution to a discrepancy that cannot be resolved online will still require human intervention. Human errors such as mispicks, short-ships or key-punching mistakes will still likely require personnel to resolve. In a fully integrated ecommerce environment, all of the functionality listed in the table above will be available to providers. They will be able to troubleshoot at least 50 percent of their problems and inquiries through a web-based tool, eliminating the need for distributor s effort. MedDisCo could enjoy savings of up to 0.4 percent of SG&A by relieving customer service personnel of these activities. A web-based tool will allow distributors to focus customer support personnel on value-added activities. Functionality Figure 18: Customer Service Automation Provider Availability of Automated Customer Service Not available Minimally Available Generally Available Facilitation of substitutes Initiation of returns Initiation of invoice discrepancy notification Payment application detail Order tracking Item availability Catalog information Product purchases Invoice detail Outstanding invoices Outstanding credits Report generators Figure 19: Customer Service Representative Summary - MedDisCo MedDisCo Customer Service Representative Activity Analysis $FWLYLWLHV:LWKLQWKH6FRSHRIH&RPPHUFH (',,VVXH 5HVROXWLRQ 2UGHU6WDWXV &KHFNV )DFLOLWDWLRQRI 6XEVWLWXWLRQV &UHGLW 3URFHVVLQJ +DQGOH3URGXFW,QTXLULHV +DQGOH3KRQH 2UGHUV ([SHGLWH2UGHUV (QWHU)D[ 2UGHUV Order status Price check Back order status

29 Distributors CVD 3: Order Management 27 CVD 3: Order Management Figure 20 Primary distributors have praised the virtues of EDI for many years. Success in converting providers from manual to electronic order placement is significant. More than 60 percent of provider orders are transmitted to primary distributors through EDI. Where an electronic connection has not been made, there is a perception that the cost is too high. However, the same is not true for secondary and specialty distributors where conversion to electronic order placement presents greater opportunities. Figure 20 illustrates the effort required by customer service for orders placed by each mode. Even though fax transmissions represent 13 percent of all orders, it requires 37 percent of customer service personnel s order-processing time. Customers will shift from manual (phone and fax) order placement to Web-based self service methods. In a fully integrated ecommerce environment, as much as 85 percent of all orders will be transmitted electronically, increasing the accuracy of orders and eliminating the manual effort of the distributor. Savings of as much as 0.4 percent of SG&A accrue to MedDisCo in customer service effort alone from moving from 62 percent to 85 percent electronic transmission of orders. Cost-prohibitive setups also will be eliminated as functionality is made available via the Internet.