MSA Overview and Financial Transparency Presentation to The

MSA Overview and Financial Transparency Presentation to The Supplier Board Graham Moore CFO 12 December 2012 www. supplychain. nhs. uk

Agenda • The NHS Supply Chain Business • Business Structure Roles and Responsibilities • Reporting Mechanisms • Business Risk • The Financial Aspects www. supplychain. nhs. uk

Transparency for NHS Supply Chain Background and Objectives • The objective of a good transparency statement should ensure the reader has a clear understanding of the following aspects of a business: • • Roles and Responsibilities Business Objectives and Targets Reporting Mechanisms Monitoring of Performance Risk Evaluation and Management Expected Returns The aim in this presentation is to make sure all these areas are covered 3

The NHS Supply Chain Business 4

NHS Supply Chain – Overview of The Deal • NHS Supply Chain is a subsidiary of DHL • Tasked to deliver in excess of £ 1 bn savings to the NHS over 10 years • NHS Supply Chain acts as an agent for the Business Services Authority (BSA) • Purchase and onward Sale of “in scope” products A 10 year contract commenced Oct 2006 governed by Master Services Agreement (MSA) (5 Year Extension) • >90% of all sales into NHS, some to Service Providers for NHS, some to Private Customers. • First major public sector outsource – high profile • • A closed book contract, but with open book audit rights. NHSBSA (Supplier Management) manage the agreement and have close scrutiny of NHS Supply Chain Some activity on behalf of the Department of Health – SFVS, Childhood immunisation, Emergency Planning etc. • 5

Old and New Model Old Model (NHSLA and Pa. SA) Current Model (NHS Supply Chain) • Not-for-profit • Capped profit • No scope for risk • DHL take commercial risk • No reward for growth • Shared reward for growth • Procurement separate from Logistics • Procurement integrated with Logistics • Funded by margin • capital growth • • No DH funding for working Capital leased from DH • Funded by DH • • DHL fund working capital growth Capital leased from Landlord • Funded by DHL • @ commercial interest rates @ notional interest rates 6

The NHS Supply Chain contract • DHL are contracted to deliver: • • • Legally compliant procurement route for the NHS Proven supply chain resilience Contract scope is estimated at £ 4. 6 bn* of NHS non-pay spend spanning categories of product ranging from: • • Non medical consumables • • Medical consumables Specialist surgical products (orthopaedics, cardiology) Capital medical equipment (e. g. MRI scanners, digital mammography) is also in scope for the contract * Market can only be estimated as in the range of 4 -5 bn – and within this an estimate of £ 3 bn could be the addressable spend for NHS Supply Chain 7

The NHS Supply Chain contract • Acting as agent for the NHS Business Services Authority (NHSBSA): • • Commercial return for DHL is in the range of 1. 9% to 2. 2% • • Commercial returns are capped for DHL Trusts do not have to place an OJEU advert to utilise NHS Supply Chain Commercial Aspects • No mandate for NHS to use the service or buy in-scope categories from NHS Supply Chain • Catalogue prices include a margin which covers the cost of sourcing and delivering the product as previously • Universal service obligation to the Trusts • Service levels are underpinned by penalty regime • DHL will be able to take commercial risk on behalf of the NHS 8

Span of influence and value management Procurement Services Supply Centre Distribution Centres Patient Services Consolidation and Stock Control Trusts Private homes Nursing homes Raw materials production Sourcing and Procurement Supply Chain Services E-commerce 9

NHS Supply Chain – Margin Overview Commercially focused and driven business Relentlessly drive down costs and increase efficiency SALES Sell Price Aim: achieve the best possible cost to benefits ratio Aim: sell at competitive price for the value we add and to cover cost of doing business Cost of doing business (2) Logistics – warehouses and transport i. e. direct costs Sales, procurement, indirect costs and overheads Cost to serve NHS Savings (new price vs old price) Gross margin Sophisticated cost to serve models Cost of doing business (1) Net margin (EBIT) Buy Price Operating margin PROCUREMENT DHL provides all investment to fuel growth ahead of any guaranteed return curve for example new DCs, IT platforms etc. 10

NHS Supply Chain: An INTEGRATED procurement and supply chain solution 11

Business Structure Roles and Responsibilities 12

NHS Supply Chain Organisation Structure 13

Reporting Mechanisms 14

Customer Contacts Resolution Support • 57 k direct / relevant customer contact names • ability to immediately alert • 500 k customer queries answered • Supplier portal helpdesk introduced: • 192 Suppliers used August – October 2012 • Over 500 calls supported • Courtesy calls to >1000 suppliers to supportal use and policies • 19 k Customer special, urgent orders supported • 61. 7 k Customer returns agreed, 4% declined • 95% of customers satisfied with NHS Supply Chain 2011* Customer Interventions – 45 k supplier related Product/Price Dispute Wrong Goods 12505 Shortage 22772 Paperwork Product Complaint Alert/Recall 70 2050 441 Damaged Goods 1179 Unfit/Not to Spec 1893 Incorrect/Failed Delivery Unsatisfied Order – saved Product Search/Query * Source: NHS Supply Chain Customer Satisfaction Survey, 2011 1110 937 2558 366 15

Supplier Related Interventions Resolutions • 5. 9 k orders credited £ 898 k – customer resolution of supplier issue (shortage/delivery) £ 6. 9 million recovered from customer disputed 150 k supplier price/quantity queries annually invoices 64% quantity queries • 2050 product complaints 36% price queries • 29 product recall (including 10 medical devices) • 412 product alerts • 26% 44% 8% 22% Product complaints 2012 16

New Products - Reporting 14% 23% 52% 10% New products on contract Jan – Oct 2012 Contract renewals: • 97 k product lines added this year to date £ 64. 8 m • 8. 9 k product lines delisted £ 4. 5 m 17

Business Risk 18

Compliance/ Governance Concept and Future Programmes Risk Reports Quality Process Monitoring • Continuously • Detectable Structure Strategy Plan External Internal Governance Compliance Dashboard Quality Process • One Company approach to Quality and Compliance • ISO 9001 (Contractual Requirement for certification) • IT, HR, Inventory and others will be brought into the QMS • Distribution and Warehousing will be aligned with approach • Beginning of a positive reporting of Compliance to support the business • Risk Management will roll out to all levels of the business • To create a cultural shift ” Risk Based Decision Making” • Setting up of a new Steering group with NHSBSA to look and recommend direction for quality and compliance in the business • Potential new areas: • Safety and Health MS (OHSAS 18001 compliance) • Review of Business Continuity MS (BSI 25999 compliance) • Review of DATA Protection and IT Security (ISO 27001) 19

NHS Business Services Authority Purpose of NHSBSA – Supplier Management • Delivery of benefits • Compliance with agreement • NHSBSA supply chain expertise • Other managed contracts on behalf of DH (30+ service providers and c£ 800 m of product) NHSBSA - Main Role and Responsibilities (NHS Supply Chain Related) • Management of 10 year contract with reporting and assurance requirements • Formal review of performance against MSA with recommendations to the Joint Board • Annual reviews of the business plan and budget • Benchmarking NHS Supply Chain’s performance • Monitoring benefit realisation • Instigate performance penalties where necessary • Sign-off additional categories, customers and new opportunities • Recommend and sign-off 5 year extension • Gain insight into NHS Supply Chain performance and NHS outcomes 20

Business Risk and Compliance Contractual KPIs • OTIF (penalties may apply) • On time • In full • Customer complaints • Order level • Working capital (no penalties apply) • Debtor days • Creditor days • Plus a host of other performance measures which in isolation would not constitute a contractual breach but are monitored, reported and acted on by the subject matter experts within the NHSBSA 21

Transparency for NHS Supply Chain Background and Objectives - Conlusion • The objective of a good transparency statement should ensure the reader has a clear understanding of the following aspects of a business: • • Roles and Responsibilities – Organisation Charts Business Objectives and Targets – Background to the Agreement Reporting Mechanisms – Examples of Customer Services reporting and financial reporting Monitoring of performance – Explanation of meeting structures and review Risk evaluation and management – Compliance and Risk structures and processes Expected returns – Commentary on financial performance for 2012 The aim in this presentation was to make sure all these areas were covered in a clear way 22

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