Table of Contents
Metric 1.1: Percentage of Active Items under Contract
Metric 1.2: Purchasing Response Time
Metric 2.1: Average Cost to Issue a Purchase Order
Metric 2.2: Inventory Turnover in One Month
Metric 2.3: Operating Costs as a Percentage of Expenditures
Metric 3.1: Number of Purchase Orders in One Month
Metric 3.2: Percentage of Rush Purchase Orders
Metric 3.3: Number of Purchase Orders Placed per Full-Time Equivalent in One Month
Metric 3.4: Average Lines per Purchase Order
Metric 3.5: Average Number of Purchase Orders Placed to Top 10 Suppliers in One Month
Metric 3.6: Percentage of Invoices with Purchase Orders
Metric 3.7: Percentage of Invoice Matches
Metric 3.8: Percentage of Low Dollar Value Purchase Orders
Metric 4.1: Stock-outs at the Cart Level
Metric 4.2: Fill Rates to Customers
Metric 4.3: Percentage of Items Activated in the Master File in One Month
Metric 4.4: Percentage of Items Inactivated in the Master File in One Month
Metric 5.1: Percentage of Invoices Paid within Due Date
Metric 5.2: Supplier Performance
Metric 6.1: Voluntary Turnover
Standard 1.1: Purchasing Policies and Procedures
Standard 1.2: Audit Standards and Processes
Standard 1.3: Boilerplate Contracts and Key Legal Principles
Standard 2.1: Segregated Approval and Authority Schedules
Standard 2.2: Inventory Policy
Standard 3.1: Contracts Database
Standard 3.2: Low Dollar Value Transactions Strategy
Standard 4.1: Customer Survey Tools and Processes
Standard 4.2: Item Master Management Policy and Processes
Standard 5.1: Supplier Performance Management Process
Standard 6.1: Job Roles and Specifications
Standard 6.2: Performance Appraisal Process
Appendix A: Technological and Organizational Constraints
This user guide accompanies the report “Performance Measurement: Phase II — A Framework for Action.” It contains 32 Technical Worksheets with detailed descriptions and implementation information to assist hospitals in implementing 20 performance metrics and 12 operating standards. The Technical Worksheets enable supply chain professionals to:
- Assess the current use of supply chain metrics and standards within their organization;
- Assess readiness to implement metrics and standards;
- Prioritize metrics and standards to be implemented;
- Develop specific implementation plans for metrics; and
- Begin to develop standards tailored to the organization.
Users of this guide are encouraged to first read the report to better understand (1) the overall objective of the guide and (2) the recommended framework for adopting metrics and standards.
Getting Started
Knowing where to begin is often the most difficult task. The following is a list of recommendations to enable successful implementation of performance metrics and standards.
1. Define the Opportunity
Supply chain leaders should begin by reviewing the current state of their supply chains to develop a clear understanding of the critical areas that need to be addressed. For each area they select for improvement, they must develop and communicate a clear case for change. This should include an outline of the costs and benefits to the organization and the metrics and standards that align with the objective.
2. Senior Management Support
To successfully implement any transformation project, it is critical to secure full endorsement of senior management. Management should be prepared to engage in communication activities to ensure their endorsement is conveyed to all staff and relevant hospital stakeholders. This is especially important for metrics and standards that require implementation across multiple departments.
Support from senior management is not simply about endorsement; it must also include approval for sufficient funding and resources. The investment should be adequate to ensure that the initiatives are properly adopted and maintained over time.
3. Project Champions
In addition to senior management support, internal project champions are essential. Employees selected for these roles should be highly regarded by their peers and strongly support the initiative. The project champions will encourage support among their peers and help facilitate effective implementation. This should be done in conjunction with a structured, formal communications plan.
4. Communications and Stakeholder Management
The goals of the initiative must be clearly communicated to all employees and stakeholders. A formal communications plan should be developed, outlining how the initiative will be communicated to staff, internal stakeholders and suppliers. The communications plan should address the overall initiative as well as its key implications. It is critical that all employees and stakeholders understand the benefits and impact of upcoming changes.
As with any project, the individuals responsible for implementation should identify and manage stakeholders in departments outside the supply chain who are impacted. This can be done by conducting working sessions with stakeholders from purchasing, receiving and accounts payable as well as customers to develop improvement goals that meet the needs and expectations of all of these groups. It is also recommended that regular update meetings are scheduled to review progress towards the goals.
5. Training
All employees affected by changes in the supply chain process must be offered appropriate training. This is critical for any transformation initiative and will ensure the program is effectively adopted and complied with.
6. Maintaining a Customer Focus
To maintain support throughout the organization, it is critical that the initiatives do not negatively impact service levels. While implementing improvements in efficiency, the organization must be equally focused on quality of service to avoid increased errors and delays. Employing spot audits and tracking service quality indicators should help mitigate these concerns.
7. Demonstrating Quick Wins and Early Successes
Identifying and delivering quick, low-risk wins is essential for building confidence in any initiative within an organization. Quick wins usually involve small changes implemented with focus and discipline rather than major system changes. Choosing a small number of metrics and/or standards that are easiest to implement and have visible benefits can best demonstrate the overall value to the organization.
Results should be reported to stakeholders on a monthly basis to maintain visibility and demonstrate progress.
8. Using the Worksheets in this Report
Finally, take full advantage of this user guide. The information in the following Technical Worksheets can help support all of the above processes.
It is important to note that while the Technical Worksheets for the performance metrics contain specific implementation directions, such as which data to collect and how to collect them, the standards have been developed to provide just higher-level direction. The Technical Worksheets for the standards should provide guidance on the types of information that each standard should include and how organizations should begin to develop and implement the standard within their hospital.
Over the next several months, the Province will work closely with industry experts, the Working Group and other key broader public sector stakeholders to develop and publish detailed standards that can be adopted by hospitals. This work has already been initiated for two standards: 1.1 Purchasing Policies and Procedures and 1.3 Boilerplate Contracts and Key Legal Principles.
Metric 1.1: Percentage of Active Items under Contract
Metric 1.2: Purchasing Response Time
Metric 2.1: Average Cost to Issue a Purchase Order
Metric 2.2: Inventory Turnover in One Month
Metric 2.3: Operating Costs as a Percentage of Expenditures
Metric 3.1: Number of Purchase Orders in One Month
Metric 3.2: Percentage of Rush Purchase Orders
Metric 3.3: Number of Purchase Orders Placed per Full-Time Equivalent in One Month
Metric 3.4: Average Lines per Purchase Order
Metric 3.5: Average Number of Purchase Orders Placed to Top 10 Suppliers in One Month
Metric 3.6: Percentage of Invoices with Purchase Orders
Metric 3.7: Percentage of Invoice Matches
Metric 3.8: Percentage of Low Dollar Value Purchase Orders
Metric 4.1: Stock-outs at the Cart Level
Metric 4.2: Fill Rates to Customers
Metric 4.3: Percentage of Items Activated in the Master File in One Month
Metric 4.4: Percentage of Items Inactivated in the Master File in One Month
Metric 5.1: Percentage of Invoices Paid within Due Date
Metric 5.2: Supplier Performance
Metric 6.1: Voluntary Turnover
Standard 1.1: Purchasing Policies and Procedures
Standard 1.2: Audit Standards and Processes
Standard 1.3: Boilerplate Contracts and Key Legal Principles
Standard 2.1: Segregated Approval and Authority Schedules
Standard 2.2: Inventory Policy
Standard 3.1: Contracts Database
Standard 3.2: Low Dollar Value Transactions Strategy
Standard 4.1: Customer Survey Tools and Processes
Standard 4.2: Item Master Management Policy and Processes
Standard 5.1: Supplier Performance Management Process
Standard 6.1: Job Roles and Specifications
Standard 6.2: Performance Appraisal Process
Technological and Organizational Constraints
Hospitals are intrinsically complex organizations that come in all shapes and sizes. They have different areas of clinical specialty, different patient populations, and different needs based on geographical location. As a result, each Ontario hospital has unique supply chain requirements and faces unique challenges in upgrading and modernizing its supply chain operations.
Adding to the complexity, each hospital in the province is at a different point in its journey to achieving optimum supply chain performance. Many have already made decisions and investments regarding key technologies, processes and supplier relationships. Many are involved in regional integration initiatives to consolidate their supply chain and back offices. All of this makes the task of measuring supply chain performance across all Ontario hospitals formidable.
The Working Group has identified a number of areas in the hospital supply chain where obstacles to implementing the metrics and standards could be encountered. In general, these obstacles are caused either by technological or organizational constraints.
Technological Constraints
Limitations of Management Information Systems (MIS)
A small number of Management Information Systems (MIS) suppliers have captured a high percentage of the market for supply chain-related technology platforms in Ontario hospitals. As hospital administrators move to implement performance metrics, they will discover that each system has strengths and weaknesses.
Manual or paper-based –- as opposed to automated –- supply chain departments are disadvantaged as measuring performance is more time-consuming and prone to errors. In some cases, hospitals that use manual processes will be able to apply workarounds and fixes that provide the desired automation. In other cases, solutions might not be available, and hospitals will have to collect and/or report data manually.
Hospitals that employ electronic supply chain processes will find it easier to implement the metrics and standards. Key e-supply chain processes include electronic requisitioning, electronic contract management, electronic invoicing, electronic funds transfer, and automated warehousing and inventory management.
Differences among Hospitals in Collection, Storage and Reporting of Data
One obstacle to measuring performance between hospitals is the inherent differences in how the various MIS collect, store and report data. These differences include variations in collection intervals and information fields — both of which directly affect input data for calculations and reporting results. These factors can complicate the comparison of performance results between hospitals and hinder the ability to establish a centralized repository for supply chain performance data.
The Working Group has built flexibility into the metrics and standards to accommodate differences between the MIS. Still, hospitals could in some cases have to modify their data collection or reporting practices to ensure their performance measurement results can be compared with peer hospitals.
Centralized Product Catalogue
Every Ontario hospital has a centralized product catalogue, or “item master.” Centralized electronic
catalogues are searchable databases of contract and supplier information, including pricing and product purchasing history expiry dates. For many of the metrics, a key implementation success factor is the presence of a well-maintained centralized product catalogue.
There are three key components in effectively maintaining centralized product catalogues: (1) hospitals should work with their suppliers to introduce ways of keeping their centralized product catalogues up to date with new products and prices; (2) hospitals must ensure that consistent nomenclature is used throughout the database so that information can be accurately analyzed and reported; and (3) hospitals need to have policies in place to keep the data clean and accurate to ensure it is free of errors, does not contain duplicate items, and uses standardized units of measure. One way to achieve this is to limit the number of staff authorized to make changes to the catalogue and ensure that employees receive appropriate training.
Hospitals can also work in groups to realize benefits from consolidating and then jointly standardizing and cleaning their item master data. A number of Ontario hospitals participating in a datamanagement project with MedBuy Corporation have improved their item master performance in this way. The result has been a reduction in order errors and the time required to rework orders.
Hospitals face an additional challenge in organizing and maintaining clean centralized product catalogues due to product tax codes. Depending on how a product is used in the hospital environment, it may or may not be subject to Ontario provincial sales tax. Consequently, these items require two entries in the catalogue. This duplication of information increases the difficulty in measuring performance accurately.
Business Intelligence
Business intelligence (BI) refers to the tools and techniques organizations use to collect, store and report data, including supply chain data. Hospitals that leverage BI systems are better able to monitor their supply chain operations and detect emerging issues and problems. Early detection is critical because it allows supply chain staff to take corrective action and manage issues before they expand. BI systems support:
- Collection of data from multiple sources, including suppliers;
- Real-time performance monitoring;
- Online data-mining, with specialized analytical tools, graphical reporting and email notification; and
- Creation of balanced scorecards to track supplier performance.
A few Ontario hospitals have implemented BI systems that allow comprehensive tracking of supply chain performance metrics. However, most hospitals have only a limited number of BI tools in place. The Working Group firmly believes that the use of appropriate BI tools is critical to effective automated measurement of hospital supply chain performance.
Organizational Constraints
Collaboration between the Supply Chain and Accounts Payable Departments
Implementing supply chain leading practices, including performance metrics and standards, calls for close collaboration between the supply chain and accounts payable departments. In many hospitals, staff in these departments are managed separately and report to different senior executives. Achieving improved supply chain performance means fostering closer working relationships between these two critical departments. In fact, the Working Group strongly recommends aligning the two departments under common management. While this organizational change requires an upfront investment of financial resources and staff time, the result is a more effective supply chain that supports better patient care and generates benefits far into the future.
Hospital Size/Financial Cost
For each performance metric and standard, a minimum investment of financial resources and staff time is needed. For this reason, implementing performance metrics and standards is generally more challenging for smaller hospitals with limited resources compared to larger hospitals.
Investment Focus
In the hospital sector, the number one priority is patient care. And to meet the expectations of government and the public, hospitals must continuously improve the areas of their operations that directly affect the patient, for example, staffing, clinical equipment and bed capacities. In this environment, it can be difficult for hospital administrators to justify investing resources in areas traditionally considered a lower priority, such as the supply chain.
However, outside the hospital sector, private industry has demonstrated that investment in more effective supply chain practices leads to improved service levels –- and reduced costs. Hospitals have an opportunity to capture similar benefits. Implementing performance metrics can help identify areas for improvement across their supply chains and do cost-benefit analyses to support their investment decisions.
Glossary
360-Degree Appraisal: A 360-degree appraisal refers to multi-source employee development feedback collected from subordinates, peers and managers in the organization, as well as a self-assessment, and in some cases external sources such as customers, suppliers or other interested stakeholders.
Ad-Hoc Order: Ad-hoc orders are one-time, user-generated point-of-use orders for items not typically ordered on a regular basis.
ANSI: The America National Standards Institute (ANSI) is a private non-profit organization that coordinates the development and use of voluntary consensus standards in the United States for products, services, processes, systems and personnel.
Automated Requisitioning: Automated requisitioning allows customers to place requisitions on-line, which then directly feed through the approval and purchase order generation processes in the supply chain’s information system.
Blanket Order: A blanket order is a type of purchase order for multiple deliveries of a specified good or service from one supplier for a fixed period and/or quantity at an agreed price and under specific terms and conditions. A blanket order differs from a standing order in that the delivery schedules are not predetermined, but are on an as-required basis. The organization requests deliveries to be made on the blanket order through blanket order releases.
Blanket Order Release: A blanket order release authorizes the delivery of goods or services identified on a pre-established blanket order. Each release quantity is deducted from the total order quantity stipulated on the blanket order.
Capital Expenditures: Capital expenditures are monetary expenditures made in order to acquire new or improve existing capital assets.
Cart Management Application: A cart management application (or quota management system) is an information system module used for the management of point-of-use inventory replenishment.
Cart Quotas: Cart quotas are the predetermined maximum amount of each item stocked in a cart location and the amount to which items are replenished (or “Topped up”). (See Par-levels.)
Central Sterilization Reprocessing (CSR) or Sterile Processing Department (SPD): The departments in which personnel perform the cleaning, disinfecting and sterilizing, packaging and storing of reusable supplies and instruments for hospitals.
Clause Library: A clause library is a database of standard contract clauses pre-approved for use.
Closed-Cabinet Point-of-Use Systems: A closed-cabinet point-of-use storage system is a type of cabinet storage for which users must key in an access or identification code. Usually they also must key in the product they would like to take before they can either open the cabinet or the cabinet dispenses the item. The type of system may be used to control access to items requiring a higher security level and/or to track inventory.
Commitment: Commitment is an agreement by one party to supply to or purchase goods or services from another party under specified conditions.
Consignment: Consignment refers to goods provided to a purchaser by a supplier where the supplier maintains inventory on the premises of the purchaser and maintains ownership of the goods until the goods are drawn from stock.
CSR/SPD: See Central Sterilization Reprocessing (CSR) or Sterile Processing Department (SPD).
Departmental Stock Requisition: Departmental stock requisitions are user-initiated point-of-use orders generated on a regular basis on an ordering template.
Economic Order Quantity: The economic order quantity (EOC) is the amount of an item that optimizes the total costs associated with the acquisition, storage, handling and inventory investment.
Force Majeure: Force majeure is a common contract clause to excuse a party from liability if some unexpected and uncontrollable event prevents it from performing its obligations. Typically, force majeure clauses cover natural disasters or other “acts of God,” war, or the failure of third parties for whom the parties are not responsible.
Inventory Application: An inventory application is an information system module used for the management of stock and non-stock items within an organization’s materials management system.
Item Master: Item master is a database that contains information describing each individual item purchased by the supply chain. Alternatively, it may refer to each item within the database.
Lead Time: Lead time is the period of time from date of requisitioning to date of delivery, including the time required to process the purchase request internally and for the supplier to manufacture or prepare the goods for shipment.
Low Dollar Value Transactions: Low dollar value is defined in this document to be purchases of less than $100 before tax and surcharges.
MSDS: A Material Safety Data Sheet (MSDS) is a document containing data regarding the properties of a hazardous substance that identifies the volume and common names of the ingredients, the physical and chemical characteristics, the hazards of the chemicals and the emergency and first aid procedures to be considered when working with the substance. It is a critical component of product stewardship and workplace safety and is intended to provide workers and emergency personnel with product information and procedures for handling or working with that substance in a safe manner.
Par Levels: A par level is defined as a maximum supply, based on predetermined quotas originating from historical consumption data for a particular area of activity within a defined time period.
Pareto Analysis: Pareto analysis is a process that involves ranking items in order of importance to identify the 20 per cent that are of most significance and should be of focus and the 80 per cent that are of lesser importance.
Perfect Invoice Matches: Perfect invoices refer to purchase order invoices where the three-way match between purchase order, receipt and invoice quantities, and prices agree within the tolerance.
Physical Count: The most basic method to determine the actual volume of inventory is to physically count the items in stock.
Point-of-Use (POU): Point-of-use refers to cart- or shelf-based storage locations for supplies. Point-ofuse storage is found in departments where significant quantities of the same supplies are required, and customers need access to them quickly and easily.
Punch-out Order: Punch-out orders allow buyers to securely access a supplier’s website from their own procurement application. The procurement application builds the items selected from the supplier’s website into a requisition, which is processed and approved through the normal route.
Purchase Order (PO): A purchase order is a commercial document issued by a buyer to a seller, indicating the type, quantities and agreed prices for products or services that the seller will provide to the buyer. Purchase orders usually also specify additional conditions such as terms of payment, liability and freight responsibility, and required delivery date.
Purchase Order Line: Every item or service that the buyer wishes to order from a seller appears on a different line on the purchase order.
Purchasing Card: A purchasing card, or p-card, is a payment card assigned to a group or an individual for the purpose of purchasing business-related items. It may have designated transaction and monthly limits and has restrictions as to commodities that can be purchased. The purchasing card provides an alternative to acquiring goods and services through the supply chain for low dollar value, low risk goods and services.
Quota Management System: See Cart Management Application.
Radio Frequency Identification Device (RFID): RFID is an automatic identification method involving the use of radio frequency responders attached to the product or product packaging and remote scanning hardware to identify and track movement of the item.
Replenishment Schedule: The replenishment schedule is the set frequency or timing of supply item ordering.
Reorder Parameter: See PAR Levels.
Reorder Point: The inventory level at which a replenishment order is placed. Analysis to determine an item’s reorder point takes into account user demand and order lead time.
RFx: RFx, or Request for x, is the generic term for the competitive processes to obtain a response from suppliers. It covers request for information (RFI), request for proposal (RFP) and request for quote (RFQ).
Risk Pooling: Risk pooling is the combining of inventory management that would otherwise be controlled separately so that variability in demand can be handled with less safety stock (i.e., five sites sharing one warehouse).
Rush Order: An order that is marked rush by the customer must be issued to and processed by the supplier outside of regular ordering, lead times and delivery schedules.
Standing Order: A standing order is a purchase order covering repeated deliveries of goods or services in specified quantities, at specified prices, and according to a specified schedule.
Stat Stores: When an organization has moved inventory offsite into a centralized warehouse, there may be a small emergency inventory left on site referred to as “Stat Stores.”
Stockless/JIT: In a stockless or just-in-time (JIT) system, stock in a warehouse is eliminated, freeing up storage space. This is accomplished by significantly increasing the frequency of deliveries by suppliers. In effect, the items are warehoused by the suppliers instead of the organization.
Stock-out: A stock-out is a situation where the demand or requirement for an item cannot be fulfilled from the current inventory.
Three-Way Matching: Three-way matching is the process of reconciling each invoice with its related purchase order and receiving receipt.
Tolerance Levels: Tolerance levels are dollar values for three-way matching discrepancies set by an organization under which an investigation is not considered to be cost-effective and the documents are, therefore, considered to match.
Weighted Average Cost of Capital (WACC): Inventory is normally financed through equity (grants, other forms of revenue) and debt (loans). WACC is the cost of capital that takes into account the proportion of each used (i.e., equity vs. debt) and is a measure of the opportunity cost of employing the funds used for inventory that could have been employed elsewhere.
Universal Product Code (UPC): A unique code, usually stored as a bar code that identifies the product, product package size and supplier.
UNSPSC: The United Nations Standard Products and Services Code® (UNSPSC®) is a standard coding system to classify both products and services for use in eCommerce.
Zero Dollar or Zero Cost Purchase Order: Purchase orders are issued for zero dollar value when the supplier has provided the item at no cost for evaluation, or when an item is being sent for repair under warranty at no cost.
Footnotes
1 This standard is directly linked with the "Competence Frameworks" standard developed in the original Phase I report. Due to this interdependence, the Competence Frameworks standard has been integrated within the Job Roles and Specifications standard.
2 This standard is directly linked with the “Training and Development Curriculum” standard developed in the original Phase I report. Due to this interdependence, the Training and Development Curriculum standard has been integrated within the Performance Appraisal Process standard.
