The Healthcare Supply Chain Top 25 for 2015

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The Healthcare Supply Chain Top 25 for 2015

Published: 18 November 2015

Analyst(s): Eric O'Daffer, Stephen Meyer, Lisa Callinan, Andrew Stevens

Gartner's seventh annual Healthcare Supply Chain Top 25 ranking

recognizes companies across the healthcare value chain that demonstrate

leadership in improving patient outcomes and lowering costs. Leaders are

showing progress by aligning to patient care, company strategy and future

revenue models.

Key Findings

■ _{Mayo Clinic attained the No. 1 spot in our ranking, becoming the first healthcare provider to}

reach this milestone.

■ _{Cardinal Health, Intermountain Healthcare, Owens & Minor and Mercy rounded out the top five}

spots in the ranking.

■ _{Henry Schein, Duke University Health System and Baptist Health South Florida were all new to}

the Top 25 ranking this year. Medtronic and BJC HealthCare came back after a multiyear hiatus. Distributors, as a group, added one company to the list, while manufacturers lost one compared to last year's ranking.

■ _{Alignment to patient outcomes, company strategy and future revenue models in healthcare are}

the themes for 2015. We see innovation coming from mature supply chains that have stable organizations and strong talent. These organizations are most ready to successfully lead in consolidation and collaboration initiatives that will advance the healthcare value chain.

Recommendations

■ _{Align your supply chain strategy directly to your organization's mission and key objectives on}

which senior leaders are focused. Supply chain has to tie directly to improved performance on metrics that matter.

■ _{Revisit your supply chain maturity through demand-driven supply chain and patient-driven value}

network assessments. Knowing your strengths and weaknesses, as well as how to map out strategic initiatives to advance, is critical to your organization's success, and ensures you are aligned to your customer's needs.

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■ _{Build collaboration capabilities now within supply chain, across your organization and with the}

broader healthcare value chain.

■ _{Determine where your organization lies in the path of mergers and acquisitions. Proactively map}

out how supply chain can help in the most likely scenarios.

List of Tables

Table 1. The Healthcare Supply Chain Top 25 for 2015...6

List of Figures

Figure 1. Healthcare Value Chain Capabilities Model...17

Figure 2. Peer Opinion Panel Composition: Value Chain Segment... 21

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Figure 4. Peer Opinion Panel Composition: Revenue... 22

Analysis

Overview

The Healthcare Supply Chain Top 25 for 2015 reflects the progress leaders have made in laying the foundation for success. Their effort is similar to advancing the ball in many sports. Team success is tied to the ability to advance the ball down the field so that in the future they can score. Similarly, while no company can claim to have solved the puzzle of optimized healthcare in the 21st century, leading companies are building the foundational capabilities and making investments that will pay off in the future. Supply chain leaders are educating their teams, trading partners and company leadership on the value of supply chain to improve service, lower costs, and enable growth and sustainable profits. Leaders demonstrate capabilities that advance the industry toward alignment with:

■ _{Company strategy} ■ _{Patient outcomes}

■ _{Future revenue models in healthcare}

Alignment to Company Strategy

Leaders in our ranking understand the value of supply chain and how it fits into the organizational mission and financial objectives. At manufacturers, distributors and retailers, this is usually service-, revenue- and profit-driven alignment. At healthcare providers, the alignment is to serving patients and sustainable margins.

In both cases, we see supply chain taking a lead through constant contact with senior leadership on the strategy of supply chain in supporting a bigger mission other than cost logistics. Healthcare providers like Mayo Clinic, Intermountain Healthcare and Banner Health know what their

organizations need, and build capabilities to ensure that they measure and communicate how supply chain supports those goals. Leading organizations don't leave a lot to chance, and communicate constantly. Banner even ties it to marketing materials it distributes that show the organization's vision, and how supply chain aligns strategically and through metrics.

Manufacturers, distributors and retailers also recognize that supply chain has a direct and growing impact on growth and profitability. Improved costs and service are steppingstones to the bigger objectives. Supply chain leaders at BD, Medtronic and AmerisourceBergen help achieve growth through expansion into new geographies, mergers and acquisitions (M&As), and collaboration opportunities with customers that bring revenue and productivity gains back to the organization. In a growing number of cases, this organizational alignment to strategy includes managing significant M&A initiatives. Eleven of Top 25 companies are involved in large-scale M&As, with

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supply chain playing a prominent role in delivering value in the transition. With organic growth slowing for most organizations and bigger being seen as better almost across the board, we expect this pace to continue. Supply chain organizations building capabilities to set, manage and deliver on expectations from these acquisitions will continue to be a critical skill (see "How to Deliver Supply Chain Value During Healthcare Provider Mergers and Acquisitions" and "Increasing M&A Activity in Life Sciences Requires Strong Supply Chain Leadership and Preparation").

Alignment to Patient Outcomes

Leaders are aligning to patient outcomes not only in new technology but also in thinking about how a company can best impact the quality and cost of care. In this area, we see the ball being

advanced not by a long pass but more by the groundwork to just make progress. Manufacturers have been historically slow in understanding this value but many integrated delivery networks (IDNs) and more progressive manufacturing leaders demonstrated progress on this front in 2015. The challenge is achieving scale through repeatable collaborative initiatives that go beyond decisions just about products.

Manufacturers understand, and are documenting internally that supply chain collaboration is good for the patient and good for business. Companies like Medtronic and Smith & Nephew built

businesses to take a product offering and build a supply chain and business operation structure around it connected to the provider customer and the patient experience. These offerings go

beyond product selection and cost to the root efficiency, efficacy and profitability of a care pathway. On the provider front, many of the health systems in the Top 25 made progress in using data and analytics in a scalable manner to make decisions that reduce variability, decrease complexity and allow for improved decisions that impact product cost and the total cost to serve. We see examples of providers deconstructing all the costs of a procedure, and using this data to establish a "must cost" model for their suppliers. We expect this to continue to evolve and expand at healthcare providers, and for them to get more into the specification setting for a product than reacting to what manufacturers bring to market. Organizations like Novant Health define these product categories as "workhorse" products that will make up 80% to 90% of the volume across various procedures, which allow them to source and optimize the total cost across the value chain for those products, while allowing for some variance in special cases.

Intermountain Healthcare has made similar strides in some categories, and has taken supplier collaboration to a more systematized and connected methodology. Intermountain chose 13 strategic suppliers, and requested a different kind of supplier response to address problem statements in different care pathways, to help lower costs and improve the quality of patient care. One easy-to-understand initiative was the development of a new patient gown that took 42 SKUs down to five SKUs, improved the patient experience in terms of comfort and modesty, and helped reduce expensive central line infections by 150 per year.

Among retailers, Walgreens has introduced a novel system by expanding its customer loyalty program, Balance Rewards, into the wellness management arena. By adding rewards for healthy choices, Walgreens has transformed the classic loyalty program that encourages customers to make purchases at their online and brick-and-mortar stores into one that promotes healthy

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to earn rewards. The program makes good use of technology, both via mobile apps and integration with wearable devices. Clearly, there are opportunities to cross-sell and build loyalty, so the move isn't borne out of pure altruism, but it is a thought-provoking way to promote healthy habits by leveraging an established retail program to reduce long-term healthcare costs.

Alignment to Future Revenue Models in Healthcare

Although not as mature as alignment to patient outcomes or corporate strategy, leaders made the most advancement year over year in alignment to future revenue models. In the coming five years, this alignment is the single area that separates leaders from laggards.

Most organizations agree that future revenue models will have a total decrease in gross dollars available, and that the payment will de-emphasize cost per acute procedure and focus more on total cost to serve — from preadmission through acute care to postadmission. Healthcare providers are learning to live in these worlds, and are starting to capture and align costs that go across the continuum of care. With this information, healthcare provider supply chain leaders know they can help their organization make trade-offs in supply chain costs that align with a lower total cost of patient care. Data and analytics play a role here, as well, as a deeper understanding of how the revenue model is changing. UPMC formed an executive advisory board for supply chain this year that includes senior executives from finance, hospital presidents, and uniquely included a senior representative from its health plan. The new demand signal for a growing part of its business is health plan revenue. Supply chain can play a role in lowering cost through supply chain services in pharmacy, procedures and home care.

Likewise, CEOs of large companies like Medtronic understand that they can no longer just be leaders in product development, but have to help their healthcare provider customers thrive in the new revenue environments. Medtronic's CEO and a team of senior managers are actively reaching out and meeting with large health systems around the country to act collaboratively in care

pathways and supply chain. This shift from a product-centric company selling to clinicians to a company that is looking for alignment with the health system's challenges is a great step forward. We see a shift in models that move from transactional collaboration, to operational collaboration, to more of strategic partnerships that recognize the new issues in supply chain that tie to patient outcomes. Increased cost for 30-day readmissions, hospital-acquired infections, and care avoidance pre- and postoperation are not just issues for the health system, but ones the manufacturers can help address, as well. Sales strategies for manufacturers need to change. Historically, instances of readmittance — and the repeated procedures that accompany them — meant additional sales for pharma or medical device companies. Manufacturers need to realize that helping providers get it right the first time is an enabler of long-term relationships.

Leaders are aligning their capabilities to advance the ball in supply chain. Companies on our list are putting themselves in the proverbial "position to score" through building improved capabilities. We wish these leaders and the healthcare industry great success in the coming year. And now we present the Healthcare Supply Chain Top 25 for 2015 (see Table 1).

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Table 1. The Healthcare Supply Chain Top 25 for 2015

2015

Ranking Company Name Three-Year Weighted ROA (2012 to 2014)1 One-Year, End-of-Year Inventory Turns (2014)2 Bond Rating3 Truven Health System Percentile Score4 Peer Opinion5 (88 voters) Gartner Opinion5 (21 voters) Composite Score6A,6B 1 Mayo Clinic AA 98.26 897 324 8.43 2 Cardinal Health 3.6% 10.5 1340 310 8.35

3 IntermountainHealthcare AA+ 93.04 934 292 8.27

4 Owens & Minor 3.6% 9.5 848 291 6.87

5 Mercy AA- 80.00 556 284 6.57 6 CVS Health 6.2% 9.6 746 242 6.38 7 McKesson 2.9% 11.7 730 214 6.15 8 AmerisourceBergen 2.3% 13.6 498 226 5.69 9 Johnson & Johnson 11.1% 2.8 1118 181 5.63

10 Walgreens BootsAlliance 6.1% 9.0 447 209 5.29

11 Banner Health AA- 83.91 299 191 4.97

12 BD 10.0% 2.8 822 189 4.96

13 Advocate HealthCare AA 93.91 267 106 4.35

14 UPMC AA- 20.87 619 156 4.24

15 Medtronic 5.7% 1.8 642 190 4.08

16 Pfizer 8.1% 1.7 537 194 4.03

17 BJC HealthCare AA 43.48 375 114 3.73

18 Henry Schein 8.2% 5.6 192 157 3.70

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2015 Ranking

Company Name

Three-Year Weighted ROA (2012 to 2014)1 One-Year, End-of-Year Inventory Turns (2014)2 Bond Rating3 Truven Health System Percentile Score4 Peer Opinion5 (88 voters) Gartner Opinion5 (21 voters) Composite Score6A,6B 20 Abbott 6.3% 3.5 625 106 3.65 21 AbbVie 11.4% 3.9 271 141 3.61

22 Duke UniversityHealth System AA 89.57 300 35 3.58

23 Ascension Health AA+ 26.96 175 158 3.55

24 GlaxoSmithKline 9.7% 1.7 334 172 3.49

25

Baptist Health

South Florida AA 90.43 111 68 3.46

Notes:

1_ROA:_{((2014 net income / 2014 total assets) * 50%) + ((2013 net income / 2013 total assets) * 30%) + ((2012 net income / 2012 total} assets) * 20%)

2_{Inventory Turns:}_{2014 cost of goods sold / 2014 inventory}

3_{Bond Rating:}_{All ratings were mapped to the Standard & Poor's (S&P) rating system using an industry-standard mapping system} 4_{Truven Health System Percentile Score:}_{Data taken from the Truven Health Analytics 15 Top Health System Percentile Score}

5_{Peer Opinion and Gartner Opinion:}_{Based on each panel's forced-rank ordering against the definition of "high-quality patient care at an} optimal economic cost"

6A_{Composite Score, Health Systems:}_{(peer opinion * 35%) + (Gartner opinion * 35%) + (bond rating * 15%) + (Truven ranking * 15%)} 6B_{Composite Score, Nonhealth Systems:}_{(peer opinion * 30%) + (Gartner opinion * 30%) + (ROA * 20%) + (inventory turns * 20%)}

2014 data used where available. Where unavailable, latest available full-year data used. All raw data normalized to a 10-point scale prior to composite calculation.

Source: Gartner (November 2015)

Inside the Numbers

The Top Five

Mayo Clinic

Mayo Clinic takes the top spot for 2015 after three years at No. 2. Mayo's supply chain continues to be a model of steady improvement for this $9.8 billion healthcare provider across 22 hospitals and associated care sites in five states. Mayo focuses on the strategic alignment of supply chain with the cost and quality of patient care through its one-year and five-year rolling strategic plan refresh process. In addition to documenting $163 million in savings last year, Mayo continues to be a leader in using analytics to make balanced decisions across the organization. This year culminated a

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five-year initial analytics project in supply chain, with progress made in aligning all costs to a procedure, and sharing that data to stakeholders in its managing to reimbursement project. Analytics

capabilities were so strong in supply chain that the larger organization promoted a key supply chain leader up in the organization to expand that role.

Other highlights in the past year include increasing collaboration initiatives with suppliers that replace sales representatives with utilization representatives, and aligned an iterative savings goals in cost to serve over a longer five-year term of an agreement. In addition, Mayo tackled new

projects that extend a formulary concept in pharmaceuticals to lab, medical device and equipment. Mayo also has a focus on sustainability, with one initiative on centralizing managed print yielding $400,000 in savings and reducing usage of paper and toner by 40%, while substantially reducing the number of machines.

Mayo has deep partnerships with several strategic suppliers/service providers that the company orchestrates to serve needs over five states. We anticipate that these strategic relationships will continue to grow and that Mayo will be a leader for years.

Cardinal Health

Cardinal Health drops to the second spot after a four-year run in the No. 1 spot. Cardinal touches almost everyone in the healthcare value chain at some point. It is a pharmaceutical wholesaler, medical-surgical distributor, solution provider and technology company. Despite the loss of $25 billion in the Walgreens business, Cardinal seems to be managing the transition well. Inventory turns remained steady at 10.5 along with return on assets (ROA) at 3.6%, while most of its wholesaler counterparts dipped a bit.

Cardinal continues to build on collaborative solutions with healthcare providers, retailers and manufacturers. Its Red Oak Sourcing joint venture for generic sourcing with CVS Health continues to make progress in ensuring supply and lowering costs. The Hospital Solutions Group and national Logistics Network strive to serve medical device manufacturers in new ways. Some of these

medical device solutions serve healthcare providers, as well, through WaveMark, and by enabling three-way relationships like one with Cook Medical and BJC HealthCare.

Cardinal continues to quicken the pace on acquisitions. It continued assimilating AssuraMed for homecare and WaveMark in point-of-use, RFID-driven technology. In addition, Cardinal continued to get deeper into manufacturing, with the $2 billion acquisition of Cordis in 2015, on top of its

AccessClosure acquisition last year, to deliver on its objective to standardize mature medical device segments of cardiology, wound management and endoscopy. Connecting the end-to-end supply chain with more owned manufacturing capabilities keeps Cardinal on the innovation frontier.

Intermountain Healthcare

Intermountain Healthcare retains the third ranking for 2015 during a year of progress and change. It bought the group purchasing organization (GPO) Amerinet, promoting its leader of supply chain to lead that new effort. In a testament to solid talent in supply chain, Intermountain's succession plan included an internal leader who stepped in by design to continue the vision of Intermountain supply chain. The goals of Intermountain's supply chain going forward speak volumes: extraordinary

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service, world-class performance and to serve as a model to the industry. Intermountain is a leader in organizational understanding that investing in supply chain people, process and technology across all nonlabor spend contributes to the balance of patient care, cost and profitability.

Initiatives that supported these goals in 2015 include the standardization at 95%+ of 60 categories of spend across 22 hospitals and 200 clinics. In the operating room, it developed a program entitled ProComp that delivered $57 million in savings by guiding decisions that intersected cost and quality near the point of use to reduce variability. Collaboration initiatives advanced, as well, with the

establishment of a 13-member supplier council to help solve "problem statements" in different care pathways. These strategic relationships go beyond a bigger group of transactionally collaborative suppliers to think about the resources of each company, and how they can bring those resources to Intermountain to reduce costs and improve quality.

Owens & Minor

Owens & Minor takes our fourth spot for the second year, and marks its seventh year in a row in the top five. Ranking fifth in peer votes and solid on analyst votes kept them in this spot, despite a declining ROA over the past four years — from 6.0% in 2012 to 3.6% this year — and inventory turns that declined to 9.5 from 10.3 versus last year. Owens & Minor's strategic vision of

"connecting the world of medical products to the point of care" exemplifies an interconnected and interdependent healthcare value chain in the Gartner Healthcare Value Chain Capabilities Model. Owens & Minor has expanded, and now has $9.4 billion in revenue coming through 23 international distribution centers to complement the 43 in the U.S.

Owens & Minor made progress in collaboration with providers, expanding its consolidated service center (CSC) network and capabilities to include pharmaceutical cross-docking at Advocate Health Care, and extending and expanding a decade-long CSC operations partnership with UnityPoint Health. We call that a sustainable collaboration. Owens & Minor also acquired ArcRoyal to expand its custom-kit operations on top of what the Medical Action Industries acquisition brought. Owens & Minor is also enabling container direct shipments to IDNs on high-volume products, saving 7% to 15% on those large purchases. Lastly, Owens & Minor is utilizing Amazon in a unique partnership to get its medical products to nonacute buyers through a different channel type.

Owens & Minor is a leader in supply chain education, as well. Thousands of people have attended Owens & Minor University (OMU) and taken one of the 120 supply chain courses available.

Mercy

Mercy is back in the top five after three years of being out but still in the top 10. Mercy's branded supply chain division, ROi, delivers value for this $4.6 billion, 22-hospital, 700-point-of-care and increasingly virtual/digital-care-centric provider, while seeking to sell the benefit of its capabilities to other IDNs. This pushes Mercy to think about what is best for its own operation as well as what could benefit other systems. In 2015, Mercy innovated in a number of areas that fit into this model. First, it opened its first partnership consolidated service center (CSC) with Franciscan Missionaries of Our Lady Health System (FMOLHS), where Mercy runs the CSC operation in partnership with FMOLHS supply chain management. In addition, the "repless" Spine Distribution model Mercy

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pioneered in 2014 expanded to total joints with a focus on total cost reduction and standardization (see "Healthcare Supply Chainnovators, 2014: Fresh Approaches to Major Challenges"). Mercy expanded its successful custom-kit operation in partnership with a medical device manufacturer to form Synchronis Medical, to lower costs on that front for Mercy and others, with improved visibility across the operation for all. On the alignment of costs, patient outcomes and revenue, Mercy launched its perioperative dashboard for improved analytics, saving more than $12 million in total cost to serve.

Perhaps most interesting to watch in the coming years will be how Mercy's leadership in advanced analytics and virtual care play out. Mercy is investing heavily in these areas, and while it is early, how it aligns the supply chain response to the changing care delivery models and access to data should be compelling.

Retailers

Retail pharmacies continue to innovate ways to deliver patient care, leveraging their proximity to populations and enormous customer bases. The major players aren't content with either size or scope; they are leveraging key acquisitions and collaborations in an effort to establish new care pathways. The big players continue to get bigger as CVS Health and Walgreens Boots Alliance continue to make acquisitions. While some mass merchants and grocery stores continue to provide pharmacy services to their customers, Target's exit of the pharmacy business may be an indication that the pharmacy business is best left to the specialists.

These companies are arguably the most innovative when it comes to care delivery, and their retail heritage has helped them develop their supply chains as competitive advantage. The pharmacies' direct interaction with a "wired" population has led the major players to explore new ways to promote population health and the products they sell at the same time, via connected devices. At the core, direct competition may be the biggest driver of innovation. In the U.S., the

omnipresence of CVS, Walgreens and Rite Aid (along with Walmart and regional options Kroger and Safeway) gives consumers significant choice of what many view as a commodity service. With the exception of a few high-end drugs, all companies are able to provide the drugs patients need, leaving the companies to compete on value-added services. Patients, and the healthcare system as a whole, stand to benefit.

CVS Health (No. 6) is ranked in the top 10 for the third consecutive year, thanks to strong analyst support and their inventory turns performance. As we have come to expect, CVS continues to innovate when it comes to healthcare. Through partnering with leading hospital systems in Rhode Island, Pennsylvania, and Kansas and the U.S. Department of Health and Human Services, CVS is looking to expand the care that its Minute Clinics are positioned to deliver while being affordable. The development of its Digital Innovation Lab looks to create cutting-edge pharmacy and health experiences for its customers, and a partnership with IBM leverages the cognitive computing power of Watson for analysis to support chronic disease care. The acquisition of Omnicare will lead to greater revenue and purchasing synergies, along with the access to expertise in specialty pharmacy. CVS also continues to focus on foundational activities, with active partnerships to reduce the cost of sourcing generic drugs.

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Walgreens Boots Alliance (No. 10) makes the top 10 with solid financials and analyst support. Of particular note is its improved inventory turns year over year, improving from 7.5 to 9.0. This represents a decrease in inventory of over 11%, while the cost of goods sold increased by 7%. Walgreens' relationship with AmerisourceBergen, now in its second year, is clearly paying dividends. Thanks to its strategic acquisitions, Walgreens is a global business with 370 distribution centers and 180,000 pharmacies in 20 countries. Its recently announced acquisition of Rite Aid, if it passes regulatory scrutiny, will continue its expansion. Walgreens continues to focus on its core business, now in the middle of a three-year initiative to deliver $1 billion in savings in corporate, field,

distribution and store costs. Walgreens is also embracing the power of technology, looking to leverage tools that improve health. Notable solutions include an Apple Watch app that reminds patients to take their medication, and a partnership with WebMD that integrates medical advice with products it provides.

Distributors/Wholesalers

Distributors and wholesalers have always been well-represented in our ranking. They combine reasonable ROAs with significantly better inventory turns than manufacturers in healthcare. 2015 is no different, and we added an additional distributor to our mix that focuses on serving medical practices. As population health models proliferate in the U.S., we see wholesalers and distributors working more on initiatives to serve patients in nonacute settings. We see examples this year in how these companies are connecting more to adherence, and getting products efficiently to the lowest cost points of care-like clinics, retail and even the home. Globally, we see these companies

expanding rapidly compared to a few years ago. With effectively two customers — a provider/ retailer and the manufacturing community — these companies are building capabilities to serve manufacturers across growing geographies.

McKesson (No. 7) jumps two spots this year, its seventh year in a row in the Top 25. Analyst opinion improved while peer opinion fell slightly. ROA declined to a six-year low of 2.9%, while inventory turns hit a six-year high of 11.7. McKesson is another company with a big and growing footprint in wholesaling, oncology practice management, specialty pharmacy, medical products distribution to offices, technology solutions and a growing global presence. Many supply-chain-driven initiatives were delivered in 2015 to improve efficiency and to collaborate with customers. On the operations front, McKesson realized $150 million in Six Sigma savings in its U.S. pharmaceutical business, while driving 99.98% order accuracy to customers. On the technology solution side, McKesson launched a strategic supply sourcing program designed to intersect formulary-driven value analysis process close to point of use with a beta customer in St. Luke's Health System. It added 500 Health Mart pharmacies, and developed several adherence programs designed to improve the profitability of independent pharmacies and better connect to patient outcomes. McKesson has built a

collaborative relationship with Rite Aid, which may be threatened in 2016 by the announced acquisition by Walgreens.

AmerisourceBergen (No. 8) holds steady this year. Its ROA of 2.3% is lower than peers and declining from 3.5% in 2014, but its 13.6 inventory turns are best among the Top 25.

AmerisourceBergen focused heavily on the integration of the Walgreens business in Year 2 of a 10-year agreement and its role as internal logistics provider, while setting a platform for global growth. This partnership's breadth and depth are shining examples of the value of collaboration.

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AmerisourceBergen's stated goal is to "lead the market through knowledge, reach and partnered innovation." It has supported that stance with additional acquisitions globally of Xcenda and World Courier to support pharmaceutical manufacturers' development and growth. Like McKesson, AmerisourceBergen developed new programs aimed at independent pharmacies, creating the Elevate Provider Network, which is aimed at improving business practices, profitability through better revenue capture and patient care.

Henry Schein (No. 18) made the ranking for the first time after a steady progression toward the Healthcare Supply Chain Top 25 over the past several years. Inventory turns are stable year over year at 5.6, while ROA has climbed consistently over the years from 6.5% in 2009 to 8.2% in 2015. At the same time, peer and analyst recognition have increased as people better understand the capabilities of this $10-billion, office-based, medical- and dental-practice-focused distributor. Henry Schein has refined its model, and is as good operationally across the supply chain as any company in healthcare. With small average order sizes and 1 million customers, it has adopted some of retail's best practices in shaping demand through promotions in its business, which has several sales channels — including external reps, inside sales, catalog and online across medical and dental, and other office-based practitioners. Henry Schein leverages its partner UPS effectively to improve service and lower costs, and operates a 20,000 SKU private label program with an effective balance of cost and quality. Henry Schein qualifies as a company on track for metrics mastery measuring how it does business with a customer from multiple angles. In 2015, it took on Cardinal's office-based business in a long-term deal to benefit both parties and their customers in serving this growing and segmented market for many IDNs.

Manufacturers

Manufacturers in the healthcare industry continue to operate in an environment of uncertainty. Their customers (all of them — providers, patients, payers and distributors/wholesalers) are becoming savvier, and require tailored responses. The manufacturers see the "writing on the wall," and know that they need to drive costs out without sacrificing customer value. This is where most supply chains struggle — optimizing the balance of inward and outward focus.

Collaboration with downstream partners to improve care is actively pursued, but supply chains are finding it a challenge to implement scalable solutions. Many companies find the basic

communication difficult — getting the right parties to interact at both the provider and the manufacturer.

The need for growth and cost control remain significant business drivers impacting supply chains for life science companies. Companies are pursuing growth both organically (especially via expansion to new markets), developing products outside and by acquisition.

Johnson & Johnson (No. 9) is once again our highest ranked manufacturer. Buoyed by the second overall highest peer recognition, Johnson & Johnson claims this honor along with the distinction of being the only healthcare company included in the Gartner Global Supply Chain Top 25 for 2015. With a supply chain organization larger than many whole companies on this list, Johnson & Johnson's size is both a blessing and a curse. The benefits include seemingly endless best practices that can be discovered, promoted and adopted companywide, and the critical mass to

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launch initiatives with the talent and resources to be successful. The downsides relate to the complexity it creates. Significant time and effort are spent making sure that the broad organization is "on the same page." Johnson & Johnson deserves recognition for its centralized supply chain strategy, embrace of innovation, and talent initiatives. Johnson & Johnson has multiple customer interface initiatives, clearly understanding the importance of collaboration to the future of healthcare delivery. Specifically, its initiatives in the pharma and logistics areas are delivering key insights on how to build value with their varied customer base.

BD (No. 12) joins the ranking, thanks to the second-highest peer recognition for manufacturers. Functionally, logistics and distribution continue to be a source of strength. Projects in this area delivering value include mode analysis and network optimization in North America and Europe. As with many life science companies, the scope of the global supply chain doesn't include the entire plan-source-make-deliver spectrum, and visibility can be a challenge as a result. BD continues to leverage its Signature Solutions group for building specific solutions for key customers that help it optimize clinical and operational activities. The future will be interesting for BD as it continues the integration of CareFusion. In an industry where M&A has become the norm, BD is an anomaly — this acquisition is the first in its 118-year history. This integration will have significant supply chain ramifications, especially in the U.S., where CareFusion's business is essentially the same size as BD's.

Medtronic (No. 15) is back on our list for the first time since 2009. For this year's ranking, Medtronic is evaluated as a combined entity with Covidien, which was ranked 19th last year. The integration of Covidien will be a significant focus for the next few years at Medtronic. The acquisition has already paid off in the area of customer collaboration, where the combined organization is leveraging best practices to improve its customer support model. Acknowledging a need to improve inventory efficiency, many of Medtronic's recently completed initiatives focus on improving inventory

utilization by standardizing metrics, safety stock methodology and vendor relationships. Medtronic Hospital Solutions won the Gartner 2015 Healthcare Chainnovator award for manufacturers. This solution is novel to the industry, in that Medtronic leveraged the voice of the customer to develop a set of capabilities that extends its classic business model. Along with providing medical devices, Medtronic now can help customers by leveraging a suite of services that range from materials management to training to financing.

Pfizer (No. 16) rose five spots from last year, thanks primarily to analyst recognition of their efforts to advance its supply chain. Inventory efficiency continues to be a challenge, as this year's inventory turns of 1.7 were the lowest of the companies in the Top 25. Much of Pfizer's recent efforts to improve its supply chain are focused with managing the complexity of its business. Pfizer has recently completed an initiative to move from a collection of separate entities to designed, end-to-end supply chains. This will define accountability, manage trade-offs and align expectations, while keeping customer needs squarely at the center of all supply chain activities. After acquiring nearly 20 companies in the last 10 years, there was a multitude of processes and systems. Pfizer has successfully migrated to a single ERP platform, leverages end-to-end governance and metrics, and has a "control tower" solution to give enterprisewide visibility. Its recently proposed acquisition of Allergan is potentially another test of Pfizer's integration abilities.

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Abbott (No. 20) leverages strong peer opinion to make this year's list. The company has

comparatively strong — albeit slightly declining — inventory turns compared to last year, with a result of 3.5. This is a good indicator of supply chain efficiency, helped by rising revenue. Abbott's Clonmel, Ireland, site was recognized for its continuous improvement accomplishments with the prestigious Shingo Prize last year. It was able to implement significant improvement to productivity, lead times and cost through a commitment to continuous improvement. Abbott deserves

recognition for its efforts around sustainability. It is the leading life science company in the 2014 Dow Jones sustainability index, a measure that considers economic, environmental and social factors. Like many companies in the industry, Abbott continues to pursue growth in ways that prove challenging to supply chains — in emerging markets and through acquisition. Last year, Abbott added new manufacturing capability in North America, Europe and Asia.

AbbVie (No. 21) is in the second year of being assessed as a stand-alone entity. It had the highest three-year weighted ROA (11.4%) and inventory turns (3.9) of any of the ranked manufacturers. Both numbers are slightly lower year over year, as its revenue has grown but its cost of goods sold

(COGS) has shrunk. Absolute inventory decreased, but not quite at the same rate as COGS. AbbVie has solid plans to increase supply chain efficiency and continue its focus on patient outcomes. Programs to improve foundational abilities, like a common ERP platform and a new procurement process, are building better efficiency. The company prides itself on patient-centricity, and is leveraging distinctive ways to connect to patients, like myHumira, which assists with treatment financing. Logistics is a key focus of the AbbVie supply chain, as it simultaneously ceases

leveraging shared services from its former parent company and introduces innovation in cold chain and security.

GlaxoSmithKline (GSK) (No. 24) is the final manufacturer in this year's ranking in part due to Gartner analyst opinion and ROA. Struggling again with declining top-line growth, GSK has made significant investment in strategies and initiatives to build solid foundational supply chain capabilities. This should provide a more efficient cost structure while facilitating organic growth. Of particular note is the GSK Production System, which is a corporatewide initiative to implement standardization to improve quality, reduce cost and launch products on schedule. GSK has also embraced

segmentation, developing differentiated supply chain responses for varied products, customers and geographies. Collaboration is also a key component of GSK's strategy, partnering to develop

solutions to key global challenges like malaria and Ebola.

Healthcare Providers

Healthcare providers remain the same number of companies in our ranking, at 11 this year. Healthcare providers continue to build on past success to deliver additional innovations for 2015. Many of these innovations involve collaboration. About half of the advanced IDN supply chains have some focus on the development of new revenue models or commercial offerings. All of them seek to sustain their leadership and find clearer ways to show their value beyond sourcing and logistics for their organization. Leaders continue to build talent, which showed its importance this year, as at least five of our ranked health systems had turnover in a top-three leadership position in supply chain in the past 12 months. These leaders will continue to get larger, as well, with four of the 11 deeply involved in mergers in 2015 or looking into 2016.

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Banner Health (No. 11) is a big mover for this year's ranking, moving up 13 spots on top quintile Truven scores and improved peer and analyst votes. Banner has been quietly racking up recognition from multiple industry groups in the past few years as they have shown a light on its unique

alignment to Banner's Corporate Vision 2020. This sustained alignment — as Banner has grown and moved from an acute care focus to a clinical quality focus, and now a population health

management company — is consistent and value-driven. Banner now has $6.3 billion in revenue in 29 hospitals and 293 clinics after the successful completion of the University of Arizona Health Network acquisition. Banner's capabilities center on a vertical supply chain across the care

continuum, engaging physicians, educating stakeholders and developing a culture of supply chain competency. Key initiatives in the past year include continued progress in the pharmaceutical supply chain; a dyad with clinical support services to improve the effectiveness and connectedness of value analysis to a formulary; and how supply chain supports the "Triple Aim" in healthcare: improving patient outcomes, improving health of populations and reducing the per capita cost of healthcare.

Advocate Health Care (No. 13) holds its spot on consistent year-over-year performance across the categories of any company. Great quality of care scores and bond, along with steady peer and analyst opinion, put Advocate in the Top 25 for the fourth year in a row. Advocate continues to build out operational supply chain capabilities along with analytical skills to support good decision

making for supply chain and patient care pathways. This year saw continued improvements in Advocate's CSC partnership with Owens & Minor. Advocate has also been a pioneer in controlling all logistics centrally through a third-party partnership that has been a model for deployment around the country. Aligning the cost of products, utilization and outcomes have been a continued focus with gains made from its SharedClarity investment in 2015, and further development of a clinical product research tool to engage the IDN on making decisions based on data at the intersection of cost, quality and outcomes. Early work on the appropriate cost and utilization of robotic technology yielded savings of over $1 million in 2015 across the system.

UPMC (No. 14) moves up three spots this year. Flat but strong peer votes plus an uptick from the analysts offset a still-languishing Truven score that just kept UPMC above the bottom quintile for quality of care. UPMC is a big organization at $12 billion across 21 hospitals and 500 medical offices. In addition, it is the payer/health plan for $2.7 million people, and has an advanced view of how to make trade-offs between supply chain cost and total cost of patient care. Many recognize UPMC for its efforts over the past seven years to build central supply chain services in distribution through a CSC, pharmaceutical wholesaling/group purchasing organization (GPO), biomedical insourcing, supply chain transaction services, procure to pay with 100 suppliers, and even employee transportation. In addition, UPMC has direct alignment to clinical departments through more value analysis teams than most IDNs would even try to operate. New developments in 2015 include a comprehensive review of shoulder procedures, and the development of a bundled group of supplies for each procedure at a cost that allows UPMC to go from losing money to making money. UPMC also formed the supply chain executive advisory board consisting of senior-level people in finance, care quality, hospital presidents, physicians, health plan leaders and technology leaders to help align decisions and manage change through supply chain. UPMC does this with deep talent in key areas of supply chain and a passion for developing the next game-changing innovation.

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BJC HealthCare (No. 17) is back in the Top 25 for the fourth time in the seven years of the ranking after a three-year hiatus. BJC's already strong supply chain talent has been supplemented in the past four years to include a new chief supply chain officer (CSCO) and strong direct line leaders. Projects like its end-to-end supply chain visibility pilot with long-term distribution partners Cardinal Health and Cook Medical earned BJC a Gartner Healthcare Supply Chainnovator award this year for its efforts in taking inefficiencies out of the supply chain for stents (see "Healthcare Supply

Chainnovators, 2015: Collaborative Models in Medical Devices Rise to the Top"). This project was successful enough to merit expansion and a $10 million investment from BJC to build it out. BJC continues to tackle standardization opportunities, and launched projects to address blood management and lab services to address cost through utilization management, standard procedures and cost across the system. In addition, the company has implemented an OEM reprocessing initiative to reduce costs and improve sustainability for medical devices.

Cleveland Clinic (No. 19) drops three spots this year. Cleveland Clinic is a leader in healthcare, with a strong brand name and lofty supply chain ambitions. It developed a new regional GPO model called Excelerate Strategic Health Sourcing two years ago with VHA, and continues to build out that business. The system also joined the Midwest Health Collaborative this year — along with

OhioHealth and ProMedica — to share data and best practices, and to reduce overall costs in the region. This collaboration may leverage Excelerate, as well as a big data spin-off from Cleveland Clinic called Explorys designed to use data to see what products truly have an impact on patient outcomes. Cleveland Clinic also is breaking new ground in co-developing products with

manufacturers like Lubrizol for cardiology and Parker Hannifin for medical technology.

Duke University Health System (No. 22) is a newcomer to the Top 25, but is a familiar leader on multiple fronts in the industry. Duke was an early advocate and influencer in illuminating the benefits of better data standards and unique device identification (UDI) for manufacturers and health

systems. More an academic medical center with regional affiliates than some of the more sprawling providers in the study, Duke has made supply chain discipline a cornerstone of what it does, which can be a challenge at an academic medical center focused on innovation at any cost, in some cases. It has long self-contracted for medical products, purchased services and even

pharmaceuticals. In addition, supply chain is integrated into the flow of patient care uniquely at Duke, with supply chain sitting on the care redesign team to help balance supply chain costs with patient care metrics. Duke has strong analytics that connect product decisions in value analysis with patient care and drive compliance across the three locations, where the surgeons may all have procedures on a given day.

Ascension Health (No. 23) dropped 11 spots due, in large part, to a significant drop in its Truven ranking. Keeping quality of care high across the largest health system in our study is challenging. With 131 hospitals, 1,900 clinics and $20 billion in revenue, the supply chain operation is larger than many entire health systems in our study. Seeing the opportunity to bring value to Ascension, the supply chain group has branded itself The Resource Group, and has accelerated its supply chain capabilities aggressively over the past five years, growing from 30 people to 330 people. Strong leadership has driven industry-leading levels of compliance and standardization, with consistent dashboards allowing everyone to know where they stand with the organization's goals. Suppliers have taken note, and Ascension has chosen partners knowing that whatever they decide on has to be scalable to diverse regions. Ascension calls it "user-directed strategic sourcing," and it has

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helped the company standardize and even launch its own GPO/supply chain services business moving away from a national organization to enter the market.

Baptist Health South Florida (No. 25) is a new entrant to the Top 25. This $2.1 billion, seven-hospital system is set to merge with Bethesda Health System in late 2015. Long a technology leader and one of HealthCare's Most Wired health systems for many years in a row, Baptist has built supply chain leadership regionally through the Premier South Florida Regional Collaborative, and has aligned with sustainability initiatives led by its affiliation with Practice Greenhealth to look for supply chain solutions that are environmentally friendly, in areas from the operating room to the lunch room.

Healthcare Value Chain Capabilities

For the Healthcare Supply Chain Top 25 for 2015, we maintained our model for value in healthcare. Our model is designed to highlight activities in the healthcare value chain that enable high-quality patient care at optimal cost, driven by the following core set of capabilities (see Figure 1).

Figure 1. Healthcare Value Chain Capabilities Model

■ _{Patient focus —}_{A patient-back supply chain strategy focused on market accessibility, patient}

outcomes, care quality and cost impacts all intraorganizational and interorganizational functions, from product development to partner collaboration.

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■ _{Collaboration —}_{Trading partners must enter into sustainable, collaborative relationships with a}

shared vision and transparent set of mutual goals to create win-win improvements influencing the entire value chain.

■ _{Network visibility —}_{Trading partners must create bidirectional visibility to key information,}

such as inventory, demand, compliance, outcomes and cost.

■ _{Dynamic supply —}_{Because high-quality outcomes aren't static targets, all organizations must}

create agile, value-added supply chain responses tailored to multiple customer and channel segments.

■ _{Change management —}_{Value in healthcare is a long-term quest, and organizations must have}

the vision, strategy, execution discipline and strong governance to sustain change in the face of ingrained beliefs and process habits.

■ _{Foundational excellence —}_{To drive toward higher-level capabilities, organizations need to}

focus on the basics and optimize their operational excellence and business process harmonization initiatives. Moreover, they need to ensure that their systems are capable of supplying credible data on which to implement higher-level capabilities that affect outcomes and cost. Developing future supply chain talent requirements is important at the foundational layer as well.

This model is also used to guide both peer and analyst voters as they consider companies to select for the ranking. The organizations that received the most recognition have established either a strong and credible foundation, an innovative vision for future success, or are already pursuing and realizing benefits from joint initiatives with trading partners. Although our model cannot ensure success in execution, the industry overall recognizes that the path toward a future healthcare system — one that is cost-efficient and focused on patient outcomes — is based on the principles captured in our model. Wherever a company sits in the value chain, and wherever one falls on this year's ranking, this model can be used to frame and set parameters to supply chain strategic goals. At the same time, leaders must develop the skill sets most conducive to executing against initiatives that involve an end-to-end understanding of processes, and culturally ingrain a "patient back" perspective within their company.

The Healthcare Supply Chain Top 25 Methodology

Consistent with our Global Supply Chain Top 25 research methodologies, the Healthcare Supply Chain Top 25 ranking is derived from two main analyses: quantitative measures and opinion. Quantitative measures provide a view into how companies have performed in the past, and establish proxy connections between financial health, performance and supply chain excellence. The opinion component offers an eye to value chain leadership and demonstrated supply chain performance — crucial characteristics of our Top 25 ranking. These two components are combined into a total composite score.

Health systems have vastly different operating models compared to publicly traded manufacturers, distributors and pharmacies. Access to common, public financial data is not easily captured; therefore, we utilized different assessment methodologies for these two major segments of the healthcare value chain.

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Manufacturers, Distributors and Pharmacies

The first step in our Top 25 methodology was to identify a population of companies to include in the analysis. Consistent with prior years, we derived our 2015 master list of 89 manufacturers,

distributors/wholesalers and retail pharmacies from a combination of external sources. Compared to the methodology for our global cross-industry Supply Chain Top 25, the annual revenue threshold required for inclusion is lower at $1.5 billion in sales to ensure that we cast as wide a net as

possible. However, one factor remained constant: All companies must publish audited financials specific to a healthcare business to be included in the Healthcare Supply Chain Top 25.

The second step in our methodology was to determine the quantitative measures to utilize in our analysis. Consistent with prior years, we utilized ROA and inventory turns for operating and supply chain effectiveness, respectively. Publicly available, audited financial data was collected for each company for the years 2012 through 2014. This data was used to calculate a three-year weighted average for ROA and a 2014 end-of-year measure of inventory turns.

The third step in our methodology was to determine the weighting applied to the quantitative

measures versus the opinion score. We strongly believe that the collective wisdom of the healthcare crowd points the way to supply chain excellence and successful trading partner collaboration. We also believe that repeated, bidirectional and genuine collaboration between trading partners is a crucial ingredient to achieving value in healthcare. So, consistent with last year's methodology, we applied a 40% weighting to the quantitative measures and a 60% weighting to the opinion score.

Health Systems

Our methodology used to select the 74 health systems in our study changed slightly, while the methodology used to rank them remained the same. As we have for the past five years, we partnered with Truven Health Analytics on two components of the process: to determine a

meaningful group of health systems to analyze, and to determine a proxy for quality-of-care score for the health systems. Our goal for this year was to better align the size of the health systems with that of the manufacturers, distributors and retailers ($1.5 billion and above), while including only those companies in the top 80% of the Truven Health Analytics 15 Top Health System study. We openly discuss this methodology with key executives from health systems, and the majority of these executives support this change. We have kept the primary components of our analysis intact, but placed the focus on the more complex health systems while continuing to exclude the health systems that scored poorly in the Truven study.

Truven Health has collected quantifiable public data in 10 key areas of patient care for the last 21 years. The results are published in its 15 Top Health Systems report on patient care, which is part of its 100 Top Hospitals program. This percentile score is based on publicly available data across 10 measurements of patient care performance, including mortality, complications, patient safety, core measures, 30-day patient readmits, 30-day mortality, average length of stay (ALOS), expense, operating profit margin and Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS).

As previously mentioned, we used the Truven Health report for two purposes. First, we included the systems that were in the top four quintiles of the Large Health Systems category ($1.5 billion and

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above) of the study. To be consistent with our previous Top 25 rankings, we also included two midsize systems that scored very well in the peer and analyst voting from The Healthcare Supply Chain Top 25 for 2014, and were in the top 80% of Truven scores. Second, we used the percentile score from the study to develop a force-ranked score for the quality of patient care for each hospital system.

As we did last year, we chose bond rating as a proxy for operational efficiency at the health system level. Although a bond rating is not a perfect proxy of operational efficiency, it does reflect the financial discipline and management effectiveness of a health system. We used ratings from

Standard & Poor's (S&P), Moody's and Fitch to develop an aggregate bond-rating composite score. For consistency purposes, we mapped all bond ratings to the S&P scale, which is reflected in Table 1.

The last step in our health system methodology was to decide how to balance our quantitative measures and opinion scores. To maintain consistency with last year's methodology, we applied a 30% weighting to the quantitative measures and a 70% weighting to the opinion score. Here, once again, the wisdom of the collective healthcare crowd should prevail.

Opinion Component

The goal of the opinion component is to draw on the extensive knowledge of the professionals who interact and have direct experience with the organizations being ranked. Any supply chain leader from a manufacturer, distributor, pharmacy or health system is eligible to vote. However, only one vote is accepted per company.

This year, we received peer votes from 88 supply chain leaders. Voters came from the most senior levels of supply chain organizations from across the value chain. To keep the voting composition consistent with the representation from the different segments in the value chain overall and the historical averages of the voter population, we allocated an aggregate percentage vote to four key areas this year. Manufacturers have a 43% weight, Health System voters a 33% weight,

Wholesalers/Distributors 8%, Retailers 4% and Other (including experts, academics and consultants) a 12% weight (see Figures 2 through 4).

Twenty-one Gartner analysts representing various industry and functional specialties cast analyst opinion votes as well. These analysts drew on their primary field research and work with healthcare value chain companies when casting a vote.

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Figure 2. Peer Opinion Panel Composition: Value Chain Segment

Figure 3. Peer Opinion Panel Composition: Role

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Figure 4. Peer Opinion Panel Composition: Revenue

Polling Procedure

Peer panel polling was conducted during September 2015 via a Web-based, structured voting process. Voters were taken through a four-page system to identify their final selection of leaders. Here's a breakdown of the four-page system:

■ _{The first page provided instructions and a description of our model for value in healthcare.}

Specifically, they were asked to consider the following:

■ _{Which organizations are developing and implementing strategies to support the delivery of}

high-quality patient care at optimal costs?

■ _{Which organizations are building and implementing supply chain capabilities in the areas}

depicted on our healthcare value chain capabilities model?

■ _{The second page solicited demographic information from voters.}

■ _{The third page provided panelists with a complete list of the organizations to be considered. We}

asked them to choose 25 to 50 that, in their opinion, most closely achieved the ideal of value in healthcare.

■ _{After the subset of leaders was chosen, the panelists were then asked to force-rank the}

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Individual votes were tallied across the entire panel, with 25 points earned for a No. 1 ranking, 24 points for a No. 2 ranking and so on. The analyst panel and the peer panel used the exact same polling procedure.

By definition, each person's expertise is deep in some areas and limited in others. Despite that, voters weren't expected to conduct external research to place their votes. The polling system is designed to accommodate differences in knowledge, relying on what author James Surowiecki calls the "wisdom of crowds" to provide the mechanism that taps into each person's core kernel of knowledge and aggregates it into a larger whole.

Composite Score

All this information — that is, the quantitative measures and opinion votes — is normalized onto a 10-point scale and then aggregated using the aforementioned weighting into a total composite score. The composite scores are then sorted in descending order to arrive at the final Top 25 ranking.

Gartner Recommended Reading

Some documents may not be available as part of your current Gartner subscription.

"The Healthcare Supply Chain Top 25 for 2014"

"Healthcare Supply Chainnovators, 2015: Collaborative Models in Medical Devices Rise to the Top" "Introducing the Patient-Driven Value Network Model for IDN Supply Chain"

"Now Is the Time for IDNs to Build Patient-Outcome-Driven Supply Chains"

"How to Deliver Supply Chain Value During Healthcare Provider Mergers and Acquisitions" "The Gartner Supply Chain Top 25 for 2015"

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The Healthcare Supply Chain Top 25 for 2015