Contract Management

1. Contract Management Implementing Strategic Sourcing Best Practices in a Research Intensive Teaching Organization John P. Willi, MBA, CPCM, C.P.M., A.P.P., CMRP Dana-Farber Cancer institute, Boston, MA

2. Contract Management Organizational Structure DFCI Background Strategic Sourcing at DFCI Application of Out-of Academic/Healthcare Best Practices

3. Contract Management Background

4. Contract Management Background (cont’d)

5. Contract Management Organizational Structure DFCI Background Strategic Sourcing at DFCI Application of Out-of Academic/Healthcare Best Practices

6. Contract Management Purchasing Adds Value in Two Primary Areas

7. Contract Management Strategic Sourcing As defined by Dana-Farber: To identify opportunities that bring operational efficiencies as well as cost savings and cost avoidances throughout the organization and value chain. Why the Process Works: • Provides a fresh perspective. Through identifying the friction points of a typically good procurement process by utilizing a structured, analytical – evidence based, and collaborative methodology. • Adds a sense of urgency. By facilitating stakeholder discussion of issues that are often tabled due to other day-to-day priorities. • Identifies superstitions within organization. Bringing great people from different sections together to address what the process really is.

8. Contract Management Opportunity Identification

9. Contract Management Seven Step Strategic Sourcing Process 1 month Strategic Sourcing Process Selected Activities Timeframe • Confirm user requirements • Develop category definition • Understand industry and supply markets • Identify qualified suppliers • Determine supplier value-added capabilities • Develop supplier “short list” • Assess bargaining position • Evaluate alternative strategies • Select appropriate approaches and techniques • Select competitive vs. relationship approach • Verify and adjust sourcing strategy • Develop implementation plan • Evaluate supplier proposals • Plan negotiation strategy • Conduct negotiations with suppliers • Plan and implement transition to new suppliers • Implement new pricing on databases • Conduct joint process improvement activities • Monitor market conditions • Assess new technology and best practices impact • Determine opportunities to reexamine category 1. Develop Category Profile 2. Generate Supplier Portfolio ½ month 3. Develop Sourcing Strategy • Inputs to Next SSI • Supplier Performance • Market Conditions • New Technology 4. Select Implementation Path ½ month 5. Negotiate and Select Suppliers 1 month 6. Operationalize New Agreements on-going 7. Sustain the Results Source: A.T. Kearney

10. Contract Management ABC Analysis – Potential Category Distribution

11. Contract Management Supply Market Analysis – Five Forces A detailed understanding of these forces will uncover opportunities to create supply advantage! Insights to Develop Porter’s “Five Forces” Framework Bargaining Power of Buyer • What forces are at work? • What drivers most influence supplier competitiveness in this segment? • What is the profile of a successful competitor in this market? • How can we use supply market dynamics to our advantage? Rivalry Among Existing Competitors Threat of Substitute Products or Services Threat of New Entrants Bargaining Power of Suppliers Source: M. Porter, Harvard Business Review, 1979

12. Contract Management Utilize a Category Segmentation Matrix High Leverage Strategic Leverage Commodity Great Importance in terms of Volume, % of Purchased cost, and Quality Consolidation of Suppliers Reverses Auctions Strategic Critical Limited Availability/Limited Suppliers Collaboration/Integration with Suppliers Continuous Improvement Long-term Contracts Early Supplier Involvement Innovation/Cost Reduction Ideas Business Impact/Strategic Importance Non-critical Generic Focus on finding lowest price from many suppliers Ease of “Supplier Hopping” P-Cards Short-term Contracts Transactional Bottleneck Unique High Level of Market Complexity Simplify the Procurement Reduce Risk Buying Consortiums Help Noncritical Bottleneck Low Low High Supplier Risk/Complexity Source: P. Kraljic, Harvard Business Review, 1983

13. Contract Management Organizational Structure DFCI Background Strategic Sourcing at DFCI Application of Out-of Academic/Healthcare Best Practices

14. Contract Management Application of Out-of Academic/Healthcare Best Practices Leverage eCommerce Promote Acceptance of a Payment Settlement Tool Partner in Stockless Programs / Store Fronts with Key Suppliers Ensure Contract Coverage - Get Everything in Writing Establish Supplier Negotiation Tactics Continuously perform detailed Category Analyses utilizing Spend relative to category, marketshare and benchmarks instilling a more evidence-based/data driven approach to sourcing

15. Contract Management Application of Out-of Academic/Healthcare Best Practices Leverage eCommerce (subset: EDI) • If suppliers aren’t already involved, encourage touch-less buys • Increased ordering efficiency for end users • eProcurement provides a better ordering experience for customers and reduces overhead and operational costs for both parties

16. Contract Management Application of Out-of Academic/Healthcare Best Practices Promote acceptance of a Payment Settlement Tool • It’s not a P-Card. It’s a settlement tool. Dynamic Discounting • Extended payment for the operations. Positive cash flow considerations • Gaining operational efficiency as cutting down cycle time. Cutting fewer checks • Receive a rebate from the card issuing company • The suppliers’ bank charges them a merchant fee of 1-3% (negotiable)

17. Contract Management Application of Out-of Academic/Healthcare Best Practices Partner in Stockless Programs / Store Fronts with Key Suppliers • Entrenched marketshare / increased ‘mindshare’ • Huge negotiation tactic • Low UOM discounts – means customers do not have to buy large amounts to achieve discounts • Decreases or eliminates freight costs • Better product availability for customers • It is still a lean, stockless program for the customer

18. Contract Management Application of Out-of Academic/Healthcare Best Practices Ensure contract coverage. Get everything in writing. • More favorable terms and conditions. • Vessel to make everything else concrete. • Cross-marketing tool for Materials Management & Supplier conveying they are partnering in driving down cost and creating value.

19. Contract Management Application of Out-of Academic/Healthcare Best Practices

20. Contract Management Application of Out-of Academic/Healthcare Best Practices

21. Contract Management Detailed Supplier Profile Supplier, Annual Spend, Vendor Spend, Top categories, Period change, marketshare, historical trend, and benchmark ABC Corporation Application of Out-of Academic/Healthcare Best Practices ABC Corporation ABC Lab Supplies ABC Chemistry Supplies

22. Contract Management Application of Out-of Academic/Healthcare Best Practices Detailed Category Analysis (Spend + UNSPSC/Marketshare + Benchmarks) • Vendor Spend, marketshare, historical trend, and benchmark • Department scorecards with associated department and lab spend, average unit cost and savings

23. Contract Management Application of Out-of Academic/Healthcare Best Practices Detailed Marketshare Analysis Spend Category, Supplier Spend and Marketshare Category Supplier Name Spend Marketshare Laboratory Electrophoresis and Blotting Systems and Supplies ABC Corporation $493,576 37% $199,433 14.91% Molecular Structure, Corp. Lab Supplies, Inc. $152,173 11.37% Atom & Atom $101,156 7.56% Electron, Inc. $72,615 5.43% Biostructure $46,224 3.45% Laboratory Electrophoresis and Blotting Systems and Supplies Total $1,337,971 100%