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© 2009 AMR Research, Inc. | Page 1
The Healthcare Value Chain Transformation: A Time To Learn, Unlearn, and Relearn
MDISCC PresentationMay 20th, 2009
Hussain Mooraj – Vice President, Healthcare & Life Sciences
© 2009 AMR Research, Inc. | Page 2
Today’s discussion
• Challenges in the healthcare value chain
• The Provider Environment
• The Medical Device Environment
• The Value Chain Transformation
• Driving Change
• The Three Habits of Effective Value Chains
© 2009 AMR Research, Inc. | Page 3
• AMR Research is an advisory and research firm focused on global supply chain and enterprise strategies.
• Not consultants – provide research based advice
• Industries we focus on:
– Consumer Products (16 of top 20 firms)
– Healthcare & Life Sciences (18 of top 20)
– Industrial Manufacturing (13 of top 15 discrete manufacturers)
– Retail (14 of top 20)
• Retained advisory services and peer networking forums.
© 2009 AMR Research, Inc. | Page 4
Life SciencesLife Sciences
AMR Healthcare Value Chain Coverage Model
HealthcareHealthcare
PatientPharmaBiotechMed DevGeneric
© 2009 AMR Research, Inc. | Page 5
The Healthcare Value Chain Overview
© 2009 AMR Research, Inc. | Page 6
ManufacturerManufacturer
MaterialsMgmt Manufacturing
(Make-Pack)
Distributionand Distributors
Suppliers
New Product or ServiceNew Product or Service
Suppliers,CMOs
Manufacturers,Assemblers
Distributors,Wholesalers
Providers,Retailers
Consumers,Patients
Programs Programs
Today’s Reality…the healthcare value chain lacks visibility
ProvidersRetailersPatientsConsumers
ProvidersRetailersPatientsConsumers
Risk Lack ofVisibility
Risk Lack ofVisibility
RiskInventoryInefficiency
RiskInventoryInefficiency
RiskWaste RiskWaste
RiskLack of Visibility
RiskLack of Visibility
RiskCost RiskCost
• Supply chains designed with inside-out processes in mind – sub-optimized, constrained by silos
• Lack of end-to-end visibility and a Value Network Operations Strategy• Integrated information but disconnected processes and visibility for “trade offs”
© 2009 AMR Research, Inc. | Page 7
Is there a lack of trust with your trading partners?
2007 2008
The different industry segments in the healthcare value chain often do not trust each other. This has been a hindrance to information sharing and collaboration which drives significant cost and inefficiencies.
Source: 2008 AMR Healthcare Study
© 2009 AMR Research, Inc. | Page 8
Who is the customer?19%
21%
10%
19%
5%
10%
4%
4%
5%
2%
21%
19%
17%
10%
10%
7%
6%
6%
2%
1%
Patients/Consumers
Healthcare Providers
Wholesalers/Distributors
Doctors and Clinicians
Pharmacies
Drug or DeviceManufacturers
Government
Payers/ManagedCare/Insurers/Employers
GPO
PBM
20072008
Who is your PRIMARY customer?
Who is the customer that you serve?
Inside-out focused
Companies lack outside-in vision – not focused on patient outcome-based Moments of Truth
© 2009 AMR Research, Inc. | Page 9
Leaders are transforming strategies and business models
ProviderManufacturers
Wholesalers / Distributors
Low
Outside
In
Col
labo
ratio
n
Business Orientation
Retailer
High
Provider
Retailers
Wholesaler
Manufacturer
•Increasing demand visibility by leveraging various forms of downstream data
•Redesign of supply chain networks - segmentation
•Improving collaboration between internal and external partners
•Improving efficiencies and lowering costs
•Increasing demand visibility by leveraging various forms of downstream data
•Redesign of supply chain networks - segmentation
•Improving collaboration between internal and external partners
•Improving efficiencies and lowering costs
TechnologyVendors
TechnologyVendors
Moments Of
Truth
Moments Of
Truth
Inside
Out
•Moving from reacting to anticipating demand•Establishing networks but with limited upstream collaboration•Extending technology investment to providers •Moving to an information broker model.
•Moving from reacting to anticipating demand•Establishing networks but with limited upstream collaboration•Extending technology investment to providers •Moving to an information broker model.
•Supply chain management is moving to integrated environment –away from procurement orientation•Establishing closer links to manufacturers. •Increased accountability and control of services and pricing -standardization•Hiring talent from other industries
•Supply chain management is moving to integrated environment –away from procurement orientation•Establishing closer links to manufacturers. •Increased accountability and control of services and pricing -standardization•Hiring talent from other industries
•Re-thinking role of intermediaries in the healthcare value chain
•Potential to leverage treasure trove of information on patient
•One stop shop for nutritional, health and wellness – not just for food and Rx.
•Focus on proprietary differentiators.
•Re-thinking role of intermediaries in the healthcare value chain
•Potential to leverage treasure trove of information on patient
•One stop shop for nutritional, health and wellness – not just for food and Rx.
•Focus on proprietary differentiators.
Game ChangingPatient-DrivenOutcome Based
© 2009 AMR Research, Inc. | Page 10
The Provider Environment
© 2009 AMR Research, Inc. | Page 11
59%
54%51%
49%
34%32%
27%
22%20%
7%
31%
21%
10%
15%
5%7%
3% 3%5%
All issuesMost significant issue
Financial Challenges such as profitability or growth
Reimbursement is not keeping up with the rate of expense growth
Care for the Uninsured
Costs of supplies are rising at an unsustainable rate
Patient Satisfaction
Government Mandates
Patient Safety and Quality
Personnel Shortages
Capacity Physician recruiting/ retention
Top issues confronting hospitals
N = [65, 2+ hospital systems]
Financial challenges are top of mind for executives at smaller systems and the pace of reimbursement is a major issue for the larger hospital systems.
© 2009 AMR Research, Inc. | Page 12
87%
41%36%
29% 28% 28% 26% 24%
70%
13%
2% 3% 4% 3% 3% 2%
Rising Cost ofSupplies
Ability to driverationalizationof physician
productpreferences
Complexity ofproduct andinformation
flow
ContractProcess w ith
Suppliers
Lack ofConsistentService in
Supply
Lack of SCpartnershipand visibility
w ith specialtyareas (OR,Cath, IR, EP,Radiology)
Limited BestPracticeSharing
Lack ofleadership
vision,maturity andcontrol in the
SC
All challengesMost significant challenge
N = [121, Total sample]
Challenges to existing healthcare supply chain model
Quote from $2B+ Hospital System:
•“Seeing supply cost growing at twice the cost of labor….in a service industry that’s scary and requires attention.”
•“We cut contracts in half and doubled spend - we want fewer SKUs to make our supply chain more efficient. “
The rising cost of supplies and the ability to drive physician preferences are seen as the most significant challenges. Most executives are focusing their supply chains to solve these issues.
© 2009 AMR Research, Inc. | Page 13
Yes61%
No39%
A formal supply chain organizationQ 67. Do you have a formal supply chain organization (e.g., a group that focuses on the optimum sourcing of materials as well as the coordination and planning for the delivery of
products?
N = [65, 2+ hospital systems]
Even though 61% of hospitals report having a supply chain organization AMR strongly believes that many of these hospitals don’t understand the true meaning of supply chain.
This however, is changing with the incorporation of talent from outside of the industry.
Among hospitals that have a supply chain organization 94% have had one in place for 4 years or more.
Reporting structure of SC org is all over the map.
© 2009 AMR Research, Inc. | Page 14
Has the greatest potential to resolve challenges
35%
12%
9%
9%
7%
7%
7%
3%
3%
2%
2%
Manufacturers
Distributors & Wholesalers
Service Providers
Physicians
GPOs
Administration
The end user/patient
Government
Supply chain/purchasing
CEO/President
Combination of all involved
N = [65, 2+ hospital systems]
Quote from $500M+ Hospitals:
•“We’re looking to the manufacturer to drive efficiency in our SC. They have the knowledge, money and resources to drive visibility solutions.”
•“We're working closely with a manufacturer to drive down costs in our supply chain. This has definitely translated into more market share for them.”
•“Manufacturer X sales reps can speak the operational game/supply chain game vs. other manufacturers reps.”
Especially amongst larger systems, the manufacturers were deemed to have the greatest potential to solve these challenges.
AMR sees this as a great opportunity to create differentiation via supply chain services.
© 2009 AMR Research, Inc. | Page 15
The Medical Device Environment
© 2009 AMR Research, Inc. | Page 16
Med Dvc Primary Product Supply Business Strategy
9%
4%
4%
9%
9%
4%
4%
17%
13%
4%
9%
9%
4%
22%
17%
13%
13%
13%
9%
9%
4%
Improve collaboration in your enterprise with internal partners acrossR&D, Manufacturing, Supply Chain and Sales & Marketing
Replicating best practices across the enterprise using operationalexcellence programs such as QM, Six Sigma, RFT
Improve manufacturing performance visibility across manufacturingsites
Redesign of your supply chain networks
Standardize manufacturing processes and systems
Improve efficiencies and lower costs across the enterprise
Manufacturing outsourcing as an opportunity to boost productivityand efficiency
Identify and eliminate waste in manufacturing using leanmanufacturing practices
Detailed production scheduling, and adherence
Improve collaboration with your external partners such as ContractManufacturers, 3rd Party Logistics, Customers
Improve compliance across financial, manufacturing and qualityprocesses
Increase insight into downstream demand using near real-time datafrom the distributors and other intermediaries (e.g. PBM’s)
Product authentication, track and trace, integrity of supply chain20072012
Source: AMR Research Life Sciences Study 2007
Today:Cost & Compliance
Future:Internal Collaboration, Visibility Agility & Profitability
© 2009 AMR Research, Inc. | Page 17
Most important versus most challenging supply chain operations capability today in medical device companies
Which of the following is your company’s most important operations capability today?
Which of the following is your company’s most challenging operations capability today?
23%
19%
16%
10% 10% 10% 10%
3%
10%
6%
19%
3%
10%16%
6%
29%
Most Important
Most Challenging
Effective S&OP process that integrates regional & global requirements
Global supply chain network that achieves simultaneous objectives on quality, cost and time-to-market
Integrating processes with low-cost-country suppliers
Effective go-to-market strategy for new products
Effective supplier recruitment, certification & alignment programs
Integration of local market needs within global design, research and development functions
Protecting intellectual property in emerging markets
Retaining and developing supply chain talent in key markets
Tight links (joint value creation) with customers to obtain supply/demand visibility
n= Medical Device Manu, 31 AMR Healthcare Survey Nov 2008
Supply Chain has abdicated joint value creation to the commercial organization.
Leaders recognize this is a lost opportunity!
© 2009 AMR Research, Inc. | Page 18
Most important versus challenging to enable manufacturers, pharmacies, payers and providers to leverage patient outcome information
Which of the following is most important to enable manufacturers, pharmacies, payers and providers to leverage patient outcome information?
Which of the following is most challenging to enable manufacturers, pharmacies, payers and providers to leverage patient outcome information?
19% 19%
16%
13% 13%
10%
3% 3% 3%
3%
13%
10%
3%
19%16%
13%
23% Most ImportantMost Challenging
Good relations with payers and providers for visibility to patient outcome information
Effective planning processes to translate past outcome data into future forecast requirements
Efficient business processes and information systems to process patient outcome information
Moving beyond discussions of price toward discussions of disease management, patient outcomes, etc.
Development of wellness programs that provide patients and providers with incentives for maintaining healthy lives and preventing illness or injury
Building trust across the healthcare value chain
Elimination of policies and practices that discourage open communication, joint value creation, etc.
Linking patient outcomes with treatment and payment plans
Legislation or regulation to drive collaboration across the healthcare value chain to improve patient outcomes
n= Medical Device Manu, 31
© 2009 AMR Research, Inc. | Page 19
The Value Chain Transformation
© 2009 AMR Research, Inc. | Page 20
The State of Supply Chain in Life Sciences • Supply chain processes are ever-changing. We need to learn, to
unlearn to relearn…organizational lobotomy? Generic shock therapy?
• Teams are focused on the synchronization of demand and the most
profitable response. This is a significant shift….
• Today, there is a recognition that there is not one supply chain, and
that supply chains need to be designed not inherited. As a result,
there is a shift to aligning supply chain strategy with business strategy
and designing the supply response.
• A focus on cross-functional excellence is necessary to drive
improvements (S&OP, NPI, Commercialization, Supplier
Development, etc). The key is metric alignment to drive the right
response.
© 2009 AMR Research, Inc. | Page 21
The Core Elements of the Demand Driven Value Chain
Cus
tom
ers a
nd P
atie
nts
Demand Management
Demand Translation
Reliable, Profitable
Response from Supply Based on Demand
Suppliers
Demand Visibility Supply Visibility
Business & Risk Tradeoffs
S&OP
Demand Translation
The Downstream Data Architecture Model
Supply Capability Supply Supply Capability Capability
Demand OpportunityDemand Demand
OpportunityOpportunity
Reliable FlexibleResponsive Compliant
Reliable FlexibleResponsive Compliant
Master Data Analytics
Common Process Platforms& Processes (eg S&OP)
Operations &
Product Supply
Commercial
Agility by
Design“Profitable
Perfect Order”
Agility by
Design“Profitable
Perfect Order”
“Turntable”“Turntable”
Business Implications (Planning)
& Tradeoffs (Finance & Tax )
Business Implications (Planning)
& Tradeoffs (Finance & Tax )
Translation
Innovation
Translation
Innovation
Translation
Innovation
Innovation
Customer Segmentation Model
Shaping Translations
Shaping Translations
Sensed DemandSensed Demand
ERP
3rd Party
Distributor
Forecast
Do
wn
stre
am
Da
ta/ A
pp
lica
tion
Sta
ck
Repository
InvDemand Visibility &Insights
MES
Takeaway: Visibility and collaboration are key, but risk/opportunity tradeoffs are inherent
© 2009 AMR Research, Inc. | Page 22
Value Chain Transformation/Change Maturity
AcquireMerge
Partner Legacy Growth
Business Units and Functions
I
Inte
rnal
ly F
ocus
edEx
tern
ally
Foc
used
Integrate and Consolidate
Business Process Infrastructure
Build and Extend Core
Demand Management Processes
Joint Value Outcome Focused
Performance Management
IIIII IV
Growth and Profitability Cost to Serve
Responsive to Demand Cost to Deliver
Cost Focused Revenue Focused
Demand - Driven Value Driven Network
Customer / BrandDriven Control
MarketsFocused
• Growth & Market Share• Cost to “Serve”• Profitable Perfect Orders • Profitability (sku /shelf / account / segment)
• Cost to “Deliver”• Perfect Orders
© 2009 AMR Research, Inc. | Page 23
Value Chain Transformation Journey Stage 1
Markets FocusedStage 2
Customer & Brand Control
Stage 3Demand Driven
Stage 4Value Driven
Description Distributed business units and functions
Focused on local markets and products
Consolidated and standardized business
processes and infrastructure
Focused on consolidated & standardized controls and
efficiency
Extended set of integrated lean, business and supply chain
processes.Integrated front officeIntegrated back office
Focused on outward facing demand and supplier management
efficiency
Joint Value Creation Profitable relationships with upstream & downstream network partners
Focus on outside in demand translation into joint value
Metaphor
Metrics •Local business unit metrics
•Business /Geography Unit performance
•Market Share / revenue •Revenue
•Inside internal metrics •Efficiency , costs,
Standards•Transaction platforms
•Integrated core metrics
•Inside – out metrics•Transactional business
performance management• Speeds, feeds, cycle times,
service levels, adherence, compliance
• Collaboration metrics
•Outside – in metrics•Joint value creation
relationships and networks• Profitable perfect orders
•Relationship process management metrics
IT Strategy •Local IT organization, governance systems and
standards
•Centralized IT leadership & standards, consolidated
platforms, data, and infrastructure
•Business – IT partnership•Governance of the distributed IT
organization•IT Operations Excellence
• Business leadership of enabling IT
•Business-skilled IT resources embedded in business
processes
Boxes Boxes & Lines Synchronization Ecosystem
Life Sciences Median
Life Sciences Median
LS
Leaders
LS
Leaders
La
gg
ard
sL
ag
ga
rds
© 2009 AMR Research, Inc. | Page 24
Leaders Make The Link To Business Value Explicit
Supply chain strategy
Business Strategy
What are the right things to do to increase company value?
Value Chain StrategyWhat are the right ways to support the business strategy?
What are your companies priorities?
Right productplatforms
Design the supply
response
Build organizational systems and
manage talent
Align supply relationships
Align demandrelationships
Effective supply networks
Execution of buy-side strategies
Continuous Improvement
Capabilities required
Supply chain network design
Design networks
Innovation methodologies
Demand networks
Joint value creation strategies
Business ProcessHow do I do the right things right?
© 2009 AMR Research, Inc. | Page 25
Segmenting the Supply Chain – Volume, demand variability, technology and life cycle
High
Low
HighLowDemand Predictability
Volume LifecycleShort Long
Technology
Commoditized
Specialized
66
88
LifecycleShort Long
Technology
Commoditized
Specialized
LifecycleShort Long
Technology
Commoditized
Specialized
LifecycleShort Long
Technology
Commoditized
Specialized
15
10 9
11
77
55
22
44
11
33
1010
1212
99
1111
1414
1616
1313
1515
© 2009 AMR Research, Inc. | Page 26
The Hierarchy of Supply Chain Metrics:Availability and Perfect Order to Patients
Supplier Quality
Supplier On-Time
Purchase Costs
Dir MtlCosts
RM Inv
Cost Detail
Production Schedule Variance
Plant Utilization
WIP + FG Inventory
Order Cycle Time
Perfect Order Detail
AP ARInventory
Total
Cash-to-Cash
Demand Forecast
SCM Cost
Perfect Order
Source: AMR Benchmark Analytix
20%-65% Error
77%-94%
37%-69% Utilization
125-325 days
© 2009 AMR Research, Inc. | Page 27
The Key is BalanceSCM Costs
© 2009 AMR Research, Inc. | Page 28
What Does Good Look Like?
Level 1 Level 2 Level 3 Level 4
Reacting Anticipating Collaborating Orchestrating
Business Process
Organization
Measurement
Continuous Improvement
Technology
Culture
Inside out Outside in
Unconsciously
incompetent
Consciously
incompetent
Consciously
Competent
Consciously
Excellent
© 2009 AMR Research, Inc. | Page 29
Supplier Quality
Supplier On-Time
Purch Costs Dir Mtl Costs
Cost Detail
PrdctnSched
Variance
Plant Utilztn
Order Cycle Time
AP ARInventory
Total
Cash-to-Cash
Perfect Order
SCM Cost
Demand Forecast
Assess
Diagnose
Correct
On par
Below par
Above par
Key:
Perfect Order Detail
PharmaCo Example – Unconsciously Incompetent?PharmaCo Example – Unconsciously Incompetent?
Raw MtlInv
FG Inv
WIPInv
NewProd.TTM
© 2009 AMR Research, Inc. | Page 30
Supplier Quality
Supplier On-Time
Purch Costs Dir Mtl Costs
Cost Detail
Production Sched
Variance
Plant Utilization
Order Cycle Time
AP ARInventory
Total
Cash-to-Cash
Perfect Order
SCM Cost
Demand Forecast
Assess
Diagnose
Correct
WIP + FG
Inventory
On par
Below par
Above par
Key:
Perfect Order Detail
Example Company D: OrchestratingExample Company D: Orchestrating
“Consciously Excellent”
© 2009 AMR Research, Inc. | Page 31
Improving business operations through better visibility
• 24% less raw material inventory
• 22% less finished goods inventory
• 21% shorter cash-to-cash cycle times
• 32% shorter days sales outstanding
• 22% better plant utilization
• 9% lower SC costs representing approximately 5% of revenue
Source: AMR Research supply chain benchmark data from 70+ Fortune 500 companies
Better demand forecasters have…..
© 2009 AMR Research, Inc. | Page 32
Level of change seen amongst better demand forecastersin profitability performance over the last 12 months
Benefits realized as a result of demand forecast accuracy improvement
Leaders get benefits from visibility in life sciences
Source: 2008 AMR Healthcare Study
67%
42%
© 2009 AMR Research, Inc. | Page 33
+8% +20%
0 +2%
– Intensity of IT Deployment +
–M
anag
emen
t Pra
ctic
e +75th percentile
and above
25th percentileand below
25th percentileand below
75th percentileand above
Source: London School of Economics–McKinsey survey and analysis of top 100 companies in France, Germany, United Kingdom and United States / AMR Analysis
ERP + MES +EMR + Etc.
“Lean”
Business Transformation Enabled by IT
What’s needed to move to the next level? Combine process, technology and best practices
© 2009 AMR Research, Inc. | Page 34
DemandVisibility
Value Network Performance Management
Automatic / Responsive Replenishment and Demand Shaping
Global Product, Supply, and Network Optimization Value Network Redesign
Downstream Customer and Consumer “Capabilities”Segmented Channel Management, Cost to Service
Demand Intelligence, Operations—Sales Planning Process and Collaboration
Value Chain Performance Metrics, and Master Data Management Costs to Deliver, Operations Excellence, Measurement Strategy, Cycle Time
Harmonizing Core Business Processes, Leveraging IT Investments, Costs to Deliver, Strategic Governance, Value Chain Continues Improvements Strategies
Predictable Supply (Right First Time) and Costs (COGS); Waste and Loss Elimination, Lean
Roadmap to the Demand-Driven TransformationC
apab
ilitie
s
Responsive Supply
Time
© 2009 AMR Research, Inc. | Page 35
Driving Change
© 2009 AMR Research, Inc. | Page 36
Who’s going to drive change?
© 2009 AMR Research, Inc. | Page 37
How will changes occur to build trust and collaboration within the healthcare value chain?
2007 2008
•Sentiment favors government intervention
•But the healthcare industry is divided as to level of involvement
Source: 2008 AMR Healthcare Study
© 2009 AMR Research, Inc. | Page 38
Supply Chain Model for Life Sciences
© 2009 AMR Research, Inc. | Page 39
- Standalone departments- Functional Independence- Separate Metrics- In-Fighting - Focus on one or (2) key stations
-Synchronized Activities-Focus on organization creating collaborative opportunities with customers and suppliers- Visibility, Collaboration and Planning Tools Invoked
- Beginning connectionsBetween stations
- Leadership established- Development of internal - Metrics and system- Focus on reducing self inflicted wounds- Focus on (3) or (4) key stations
Fiefdoms
Internal Integration
External Integration
Strategic Partner
Reacting Anticipating Collaborating Orchestrating
Maturity mapping to the Demand Driven maturity modelMaturity mapping to the Demand Driven maturity modelSupply Chain Talent /Organizational Evolution
-Organization viewed as strategic differentiator-Broad station span of control- Tightly integrated into technology and NPDI activities- Expected to deliver “game changing”product and service offerings
Demand Driven Stage
© 2009 AMR Research, Inc. | Page 40
Collaborative Relationships•Relationship and process driven•Continuous improvement to drive joint value creation•Redesign for value•Aligned metrics to the shelf•Performance-driven business networks
CollaborativePractices•One off projects•Suppliers and hospitals have different goals•Not integrated into hospital and supplier workflows
10
9
8
7
6
5
4
3
2
1
EnablersAligned metrics to serve the patientShared savingsJoint business process innovationCost-to-serve improvements
EnablersCPFRVMI programsData sharing: EDI, B2B, and portalsCost to Deliver
Are you building collaborative practices or developing collaborative relationships?
Takeaway: Develop the vision that moves your organization towards collaborative relationships
© 2009 AMR Research, Inc. | Page 41
Questions to Ask
1. If I give you data, how will you use it?
2. How do you give incentives to your sales team to drive value?
3. How do you measure effectiveness?
4. What matters the most: cost to serve or cost to deliver?
5. What differentiates your brand, and how committed are you to innovation?
1. If I give you data, how will you use it?
2. How do you give incentives to your sales team to drive value?
3. How do you measure effectiveness?
4. What matters the most: cost to serve or cost to deliver?
5. What differentiates your brand, and how committed are you to innovation?
1. How good is your data today? Where are you going in the future?
2. What is your gap between planning and execution? How are you closing this gap?
3. How do you measure performance?
4. How committed are you to driving innovation for the patient?
1. How good is your data today? Where are you going in the future?
2. What is your gap between planning and execution? How are you closing this gap?
3. How do you measure performance?
4. How committed are you to driving innovation for the patient?
Provider to Manufacturer Manufacturer to Provider
© 2009 AMR Research, Inc. | Page 42
JVC Discussions Must Transcend Costs
$
Cost to Deliver• GPM = Price-Commission-COGS• Distribution costs expensed separately • Sales Rep’s commissioned on full price• GPM appears to be maximized• What about write-offs?
Cost to Serve• What impact could JVC efforts have on write-off’s?• Could expedited freight costs decrease?• Could decreased commissions be supplemented with process
incentives, service incentives?
© 2009 AMR Research, Inc. | Page 43
Basic Cost to Serve
Cost Factors Considered
PRODUCT COSTSRaw MaterialConversion Costs (direct overhead)Energy
SG&A COSTSTransportationCustomer ServiceOrder HandlingA/R processingPromotional Discounts on Price
ASSET RELATED COSTSInventory carrying costProduction Change overWarehouse costs
SPECIAL HANDLING COSTSSpecial requestsReturnsDeducts
Basis of Calculation
Product mix with Bill of MaterialProduction line utilization – from model inputProduction line mix
Frequency of LTL, TL, CL shipments% and Frequency of orders processed% of total activity annuallyQuantity x cost per transaction, DSO comparisonsPromotional rules and order data by customer
Inventory investment x carrying cost rateNumber of orders processedNumber of orders processed by warehouse
Special orders separated in demand dataSeparated in demand data analysisSeparated in demand data analysis
Data Source
ERP + modelERP + modelERP + model
Simulation output Simulation outputSimulation outputERP + modelModeled
Simulation outputSimulation outputSimulation output
Model inputModel inputModel input
Source: OnPoint Group
© 2009 AMR Research, Inc. | Page 44
Profitability – Conventional Contracting View of the Price Waterfall
Performance Based On-Invoice Discounts
Off Invoice Discounts Standard Costs
Price/Cost Index
Missing – Granular Insight into true Cost to ServeCourtesy © 2009 Model N, Inc. Model Performance Analytics
© 2009 AMR Research, Inc. | Page 45
True Profitability View of the Price Waterfall
Extended Price/ Cost Index
Base Price
Product and Market Value Adjustments
Negotiated On and Off Invoice Discounts
Unrecovered Cost to Serve
Market Driven Price Reductions
Performance Based Rebates, Admin Fees, Channel Settlements, Promos
Asset Related CostsSpecial Handling Costs
Courtesy © 2009 Model N, Inc. Model Performance Analytics
© 2009 AMR Research, Inc. | Page 46
Three habits of effective value chains
• Focused and strategic investments in trading partnerso Aligned incentives for collaboration o Enhance understanding and know-how of partners business o Development of trading partners
• Effective management of knowledge and information flows amongst trading partners
o Sharing of information in a timely mannero Product and process improvement initiatives
• Building trust amongst trading partnerso Reduces transaction costo Monitor and measure performance o Evaluating relationships on more than just cost