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Assistive Devices Program
Pricing and Supply Chain Review
Final Report
June 24, 2011
Executive Summary
Executive Summary
Project Background and Scope
Despite rising costs, funding of assistive devices and provision of high quality services to individuals with long-term physical
disabilities in Ontario continues to be a priority for the Ontario government. However, the process in which the Ministry of Health
and Long Term Care (MOHLTC) funds the Assistive Device Program (ADP) seems to be costly based on the findings from the 2009
ADP audit performed by the Office of the Auditor General of Ontario (AG). The AG identified issues of over-pricing and spend
management across the Program, and concluded that the Program’s pricing reviews were not completed on a timely basis and did
not take into account potential for capturing rebates or volume discounts. In order to address the AG findings, ADP has engaged in
several initiatives including a Modernization Project that seeks to address program opportunities. A specific focus of the
Modernization Project is to review the funding and pricing of the various device categories, to identify solutions for mitigating value
for money risks and ensure that the vendors are compensated equitably and the clients are paying a fair price.
PricewaterhouseCoopers LLP (PwC) was retained by ADP to support the Modernization Project in achieving its mandate by
conducting a supply chain and funding / pricing evaluation. The scope of the review was as follows:
•General:
o Determine and document opportunities for ADP to play a role in the supply chain of assistive devices;
o Evaluate current ADP funding framework and models, and evaluate other appropriate funding models;
o Document alternative options and impact analysis, and recommend new funding and pricing framework;
o Present action plan to Senior Management; and
o Provide an arms-length, transparent evaluation of current funding models.
•Specific to the Supply Chain Review:
o Conduct a detailed evaluation of the supply chain for devices funded by ADP to identify opportunities that can drive
supply chain efficiencies;
o Provide sustainable options and alternative models for ADP to expand its role in the supply chain; and
o Outline recommendations and corresponding business impacts and requirements of implementing each option.
•Specific to the Funding / Pricing Review:
o Document in detail and evaluate the current funding and pricing models used by ADP for all categories of devices;
o Identify costs drivers and their impact on pricing of the devices’ categories;
o Conduct a review of the funding and pricing models and make recommendations on future state funding / pricing models
that would provide ADP with best value for money while supporting ADP’s objective of providing client-centred support
and funding to Ontario residents who have long-term physical disabilities; and
o Conduct a jurisdictional review (comparable assistive device programs) to identify other models that might be adopted.
PwC
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Executive Summary
Project Approach
The work plan below illustrates the collaborative approach taken to address the requirements listed above and to outline the
findings, recommendations, a business case for change and an implementation roadmap that will help facilitate the achievement of
the Modernization Project’s mandate. The project was 8 weeks of effort across 3 months of calendar time.
Week 1
N/A
Week 2
Week 3
Week 4
Week 5
Week 6
Week 7
Week 8
Current State Assessment
Analysis and Opportunity Identification
Confirm scope,
key dates, roles,
work plan and
communications
plan
Recommendations and Final Report
Current State Confirmation
and Recommendation
Development Workshop
Desktop review of documentation
Interviews with ADP Staff
Interviews with external stakeholders
Documentation of the current state models
Confirmation with ADP Staff
2nd Recommendation
Development Workshop
Final Report Development
Mobilize team
and conduct
Kick-off
Meeting
Review available
documents to
obtain overview
of current state
business process
and systems
Jurisdictional Scan
Interviews with Jurisdictional Representatives
Current State Evaluation highlighting strengths and opportunities
Gap Analysis
2 Final Report
Feedback Meetings
Analysis of data collected
Identification of Funding / Pricing Model and Supply Chain Options
Refinement through discussion with ADP staff
Weekly project status meetings with discussion of recommendation development
Validation events
PwC
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Executive Summary
Project Approach
The project was completed over an eight week period, during which PwC interviewed internal ADP staff and conducted internal
future state development workshops to solicit input from the staff members on future state options. As well, PwC interviewed
external stakeholders which included:
•Other departments within the Ministry;
•Manufacturers;
•Vendors and Health Service Providers;
•Equipment Pools; and
•Clients.
PwC also conducted a jurisdictional review to compare and contrast the ADP program with other comparable programs.
Jurisdictions that were included in the review included:
•Alberta (Alberta Aids to Daily Living Program);
•Saskatchewan (Saskatchewan Aids to Independent Living Program);
•Quebec (Régie de l'assurance maladie du Québec);
•New Zealand (Accessable and Enable) ; and
•South Australia (Domiciliary Equipment Service).
ADP’s Supply Chain was assessed from both a qualitative and quantitative perspective in order to identify advantages of the existing
supply chain structure as well to highlight potential opportunities for ADP to expand its supply chain roles and capabilities. The
qualitative assessment involved a review of qualitative data including interviews, existing documentation and a comparison of
ADP’s current supply chain against a targeted future state. The quantitative assessment involved an analysis of ADP’s financial data
including Accounts Payable spend and spend with the Transfer Payment Agencies. Quantitative information will provide a baseline
against which any future solution can and will be measured.
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Executive Summary
Summary of Key Findings
PwC found that the ADP structure and business processes that are employed, are generally effective and aligned with ADP’s
mandate of providing client-centered support, access and funding to Ontario residents who have long-term physical disabilities.
Over the last number of years ADP management and program staff have been successful in driving internal improvements and have
positively impacted service delivery to clients. The following are some initiatives that have been implemented or in the process of
being implemented:
•Implementation of a new information system that seeks to increase the level of automation in the claims process, improve cycle
time, reduce Accounts Payable backlog and improve ADP’s ability to monitor the authorizer and vendor network;
•Improved transparency of the procurement of home oxygen services by establishing a vendor of record list and establishing clear
requirements for vendors;
•Internal process improvements as part of the Modernization Project to drive efficiencies;
•Standardization of claims processing;
•Issuance of customer satisfaction surveys every 2 years which highlight the fact that 87% of respondents reported overall
satisfaction with the program;
•Use of standing committees to facilitate input on policy development and overall program direction; and
•Increasing the quality and amount of information on the program’s website to improve program transparency.
Although ADP has been successful in driving some improvements, PwC observed a number of current state challenges which, if
addressed, would lead to further improvements in compliance, overall cost-effectiveness, improved program management and
address the issues raised in the 2009 Auditor General’s Report.
PwC understands that it has been a strategic decision by ADP not to play a significant role in the supply chain. As such, the supply
chain evaluation highlights current state implications of that decision, and focuses on opportunities where ADP can increase its
supply chain involvement and capabilities.
The following section will outline findings from the PwC review, including what elements of the program are working well and some
challenges that are impacting ADP’s ability to maximize its effectiveness.
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Executive Summary
Summary of Key Findings
The following are advantages of the current pricing / funding models and supply chain structure observed:
Current State Advantages
Implications
Equipment Pool Model – PwC noted a number of advantages associated with the equipment pool
model:
•The Equipment Pools are contractually obligated to competitively tender and establish contracts with
the manufacturers to get best value for money.
•The Equipment Pools (e.g. Ventilator Equipment Pool) have been successful in securing volume
rebates as part of the contract negotiation process.
•Consolidated purchasing allows the Equipment Pools to take advantage of bulk buying from the
manufacturers in order to further drive down pricing.
•Freight efficiencies are realized by consolidating deliveries at a central warehouse which further
drives down pricing.
•Refurbishment program promotes recycling and drives savings by maximizing asset longevity.
• Drives value for money
by competitively
tendering for
manufacturer pricing,
consolidation of
purchasing and
shipments and
refurbishment of assets.
Ongoing Audits – The Verification and Testing Unit (VTU) conducts detailed audits of transactions
on behalf of ADP. In the last three years, $2.4M* in vendor overpayments have been recovered
through this process.
• Recovery of
overpayments.
Current Funding Models – PwC noted a number of advantages associated with the current funding
models:
•The grant model maximizes client choice and minimizes transactional costs for low dollar value, high
volume transactions.
•The maximum contribution model allows the market to establish the price.
•The fixed price model establishes a consistent price for all ADP clients.
• Drives value through
reduced transactional
costs.
• Client satisfaction
metrics indicate positive
outlook of the program.
Current Pricing Models – PwC noted a number of advantages associated with the current pricing
models:
•The establishment of a Vendor of Record in the procurement of home oxygen services sets forth
clear requirements for vendors at a price that is mutually agreeable.
•In most cases, guarantees the vendors a defined markup and ensures fair compensation.
• Establishes a price
based on clearly defined
requirements of the
vendors.
PwC
*Based on Recovery Report provided to PwC.
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Executive Summary
Summary of Key Findings
Current State Advantages
Implications
Expert and Dedicated Staff – ADP staff members have significant knowledge and experience with
respect to the products that are funded, as well as overall program administration. They provide high
levels of customer service, addressing and resolving client issues as they arise. The processes
employed by ADP and its staff members are highly consistent with ADP’s vision of providing clientcentered support and funding to Ontario residents who have long-term physical disabilities and to
provide access to personalized assistive devices appropriate for the individual’s basic needs.
• High levels of clientcentred support
consistent with ADP’s
mandate.
Commitment to Running a Cost-Effective Program – ADP is committed to continue its efforts to
strengthen program accountability, to ensure the efficient use of resources and the provision of high
quality devices at competitive prices. Many accomplishments have been made to-date, and ADP is
focused on implementing sustainable processes that drive value for its stakeholders.
• High focus on improving
program accountability
and cost-effectiveness.
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Executive Summary
Summary of Key Findings
During the review, a number of challenges were observed. These challenges appear to be impacting ADP’s ability to maximize its
cost-effectiveness. '
Current State Challenges
Implications
Managing Conflicting Priorities – Conflicting strategic priorities appear to be impeding ADP’s ability
to maximize its cost-effectiveness. ADP aims to provide comprehensive access and client-centered
support to clients. This strategic imperative can conflict with an alternate focus of securing the best
pricing for assistive devices, especially if client choice or access is limited as a result of achieving
these prices. Striking the right balance between customer service and achieving value for money will
be paramount in determining future direction.
• Challenge in maximizing
cost-effectiveness
• Difficulty in meeting
strategic objectives
Guiding Principles – While ADP staff appear to have a good understanding of requirements that
drive funding / pricing decisions, a set of funding / pricing guiding principles does not exist. Guiding
principles should link to ADP’s overall strategic objectives and be formalized to support its mandate.
• Lack of consistency in
pricing / funding decision
making process
Spend Management – While there are a formal registration contracts and agreements in place with
all vendors there is opportunity to leverage spend more effectively in order to drive maximum value
for money. Challenges and observations related to spend management are outlined below:
•Limited strategic sourcing activities. Price setting is primarily based on manufacturer self reported
landed costs to vendors as opposed to contracting for prices via a competitive tendering approach.
•ADP is not taking advantage of commercial terms such as rebates and early payment discounts
which are prevalent within the industry. The Ventilator Equipment Pool is taking advantage of
manufacturer rebates and early payment discounts. Other buying groups within the industry (e.g.
VGM) have been successful in establishing secondary discounts with manufacturers.
•Of the 1502 vendors, 103 vendors represents 80% of ADP spend. This long “tail” indicates an
opportunity to leverage ADP volumes in order to establish favourable commercial terms with
manufacturers and vendors and work more strategically with a rationalized supply base in exchange
for improved rates / prices. If leveraged effectively, it is expected that pooling of ADP volumes would
drive significant value given ADP’s 35% market share within Canada’s Assistive Devices Market.*
• Excess Manufacturer /
Vendor margins
• Inability to obtain
competitive price for
clients
• Client dissatisfaction
• Challenge in adequately
addressing all of the
AG’s concerns
PwC
*Informed by PwC assistive devices market sizing review.
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Executive Summary
Summary of Key Findings
Current State Challenges
Implications
Pricing Optimization – The current approach to the pricing of ADP devices lacks robustness in some
areas and limits ADP’s ability to ensure maximum value for money. Several challenges were noted:
•In the current Cost Assessment Mark-up Model, a fixed mark-up percentage (33 1/3) is applied on the
quoted manufacturer to vendor device price to allow for the vendor cost. There are inherent
challenges and risks imposed by this model:
•The vendor cost becomes proportional to the manufacturer’s price of the device. For example, if the
manufacturer’s price increases by 10%, the value attributed to the vendor’s cost is automatically
increased.
•The model assumes that devices with a higher manufacturer’s price require greater resources on the
part of the vendor. For example, the vendor receives a higher price for personalizing a device that has
a higher manufacturer price.
•The model provides for a 25% margin for the vendor to cover service and overhead costs and make a
profit. In practice, margins can vary quite considerably (e.g. market conditions, volume discounts the
vendor may have with the manufacturer.
•A high level review of WSIB procurement practices and pricing highlighted the fact that WSIB has
been successful in leveraging its volumes to drive down prices with manufacturers, and has been able
to achieve lower prices than ADP in some sampled products.
•In some categories (e.g. mobility, CPAP, insulin pumps, etc) pricing is set for a group of devices
within the category as opposed to establishing a true cost for each device type. Vendors are incented
to sell clients a lower model in order to maximize margins. The risk of vendor up-sell is mitigated since
the authorizers are required to specify the exact device required by the client.
•For the cost assessment mark-up model , the data is self-reported from the manufacturer and there is
no mechanism to validate the accuracy of this data. Almost 50% of total ADP spend is driven by this
pricing model.
•Where manufacturer information is not available, ADP applies a 30% flat discount to manufacturer
MSRP prices and takes a weighted average price across several manufacturers.
•There does not appear to be a definitive understanding of the vendor services included in the price
(e.g. service, warranty period, etc).
• Not achieving best
value for money
• Manufacturer / vendor
overpayments
• Challenge in
adequately addressing
all of the AG’s concerns
• Client dissatisfaction
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Executive Summary
Summary of Key Findings
Current State Challenges
Implications
Supply Chain Resources – ADP staff members have significant knowledge and experience with
respect to the products that are funded, as well as overall program administration. Given ADP’s
decision not to focus on supply chain, ADP has not invested in supply chain resources with experience
in financial/market analysis, strategic sourcing, contract negotiation, spend analytics, or vendor
management.
• Challenge in obtaining
best price for clients.
• Challenge in
adequately addressing
all of the AG’s concerns
Contract and Vendor Management - Several challenges related to contract and vendor management
were noted during the PwC review:
•With the exception of the Equipment Pools, Insulin pumps and Home Oxygen products there is limited
focus on establishing contracts with manufacturers to obtain the best value for money.
•Data was limited, but based on the review PwC approximates that 30-40% of spend is on contract,
primarily due to the Home Oxygen VOR. Pricing for the remainder of the spend is primarily based on
manufacturer self-reported landed cost data or online research of MSRP costs.
•There is no mechanism in place to ensure that the vendors are complying with all the terms of the
contract. Spot audits are conducted and have identified areas of non-compliance, but they are reactive
in nature.
•There is no process in place to analyze vendor spend and consolidate the vendor base to drive value
(e.g. driving higher volumes to vendors in exchange for cheaper rates). All vendors are able to
register as long as they meet ADP prescribed criteria. Based on a review of the vendor base, Hearing
Aids, Mobility and Visual Aids had the highest number of vendors of all products. This trend is
relatively stable across all regions. Although the widespread number of vendors and high degree of
commonality indicate a potential opportunity to consolidate, any consolidation exercise will need to
ensure that accessibility is not impacted.
•There is no evidence of robust analytics on device longevity (e.g. depreciation) prior to setting policy
and replacement periods. Vendors are incented to replace products (even if not defective) once
eligibility is renewed rather than refurbishing the current device (e.g. CPAP equipment can last 10
years but clients are eligible for an exchange after 5 years). Replacement, however, is not automatic
as ADP evaluates the merit of refurbishing vs. buying new based on vendor quotes.
• Vendors not fully
delivering on their
commitments
• Client dissatisfaction
• Challenge in
adequately addressing
all of the AG’s concerns
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Executive Summary
Summary of Key Findings
Current State Challenges
Implications
Product Standardization – There is no process in place to analyze product spend and consolidate
the product catalogue to drive value (e.g. product standardization can lead to increased volumes and
cheaper prices with manufacturers). All devices are approved as long as they meet ADP prescribed
criteria. There is no formal, consistent process in place to check for existing substitute devices. There
is, however, a formal delisting process (e.g. if the product is no longer manufactured ). Of the 8,000
devices that are managed by ADP, spend in FY09 was observed against only 2,373 of the devices,
which represents only 30% of the product catalogue (analysis includes grant codes, e.g. DHGRANT,
OGGRANT). This indicates that there may be an opportunity to consolidate the product catalogue.
• Not achieving best
value for money
Budgeting / Forecasting – No formal budgeting / planning / forecasting process in order to develop a
budget reflective of market demand at the device level. Forecasted annual spend /growth is based on
a percentage increase year-over-year as opposed to conducting a detailed bottom-up build to facilitate
accurate demand and supply planning. ADP has identified improvement opportunity in its
budgeting/forecasting process and is currently developing a robust, bottom-up forecasting model and
approach that accounts for its spend profile and industry statistics.
• Challenge in
adequately identifying
and addressing
variances
• Challenge in accurately
forecasting demand
and supply needs
Process Opportunities – Process inefficiencies within ADP processes appear to be driving up vendor
costs and ultimately the pricing (e.g. manual faxing of insulin applications / orders to the vendor results
in the vendor incurring a great deal of customer service costs and delays in delivering products to
clients). In an effort to address opportunities for improving efficiency, ADP is presently engaged in a
lean assessment which seeks to identify areas for improving efficiencies within the program.
• Improving efficiency
can result in cheaper
prices – lower cost to
serve
• Client dissatisfaction
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Executive Summary
Summary of Current Pricing Models
Current Pricing Models
ADP currently employs three overarching strategies for setting the price: cost assessment, market price assessment and competitive
tendering. ADP has adapted each according to the description provided below.
Pricing Model
Cost
Assessment
Market Price
Assessment
Description
Mark-up Method
Manufacturer to vendor quoted cost + fixed mark-up percentage
• Applies a percentage increase to the quoted manufacturer to vendor device price. The
goal is to cover all costs incurred in producing and delivering the device and to provide a
margin to cover an allocation of the vendor / health service provider’s direct costs and a
level of profit for the vendor / health service provider.
• Fixed mark-up percentage is currently 33 1/3.
• For some devices, price is set for specific grouping of devices type within category,
irrespective of manufacturer or model. Price is averaged for data collected from
manufacturer and/or group of manufacturers for the device.
• If manufacturer quote is not provided, a 30% discount to MRSP pricing is applied.
• Assumes that the direct costs of the vendor/ health service provider are proportional to
the cost of the device.
Time and Materials
• Price is based on a Time and Materials Study
Legacy cost*
• Price was based on an estimate of the total cost the assistive device(s) to the client.
• There is no reconciliation between total actual cost and total amount funded.
Survey, RFI, etc.
• Price is based on a review of vendor costs.
Competitive Tendering
• Prices is negotiated with manufacturers/vendors usually through a competitive tendering
process.
Price was established based on an assessment of costs at point in time. Depth of assessment conducted to establish price has not been defined.
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Executive Summary
Summary of Current Funding Models
Current Funding Models
ADP currently employs three overarching models for funding the device: a Fixed Price Model, a Maximum Contribution Model, and
a Grant Funding Model. A description of each is provided below.
Funding Model
Description
Fixed Price
Funding
•
•
•
•
Maximum
Contribution
Funding
• ADP funds a defined percentage up to a maximum contribution, based on the price ADP expects a vendor to
charge ADP clients.
• Registered vendors are able to establish their own retail prices. The client (or third party payer) is
responsible for the balance between the funded amount and the vendor’s retail price.
• Funding is paid to the registered vendors once the client application has been approved and the device
delivered to the client.
Grant Funding
• The client receives a defined sum of money, either one-time or at recurring intervals, as a contribution
towards the cost of their assistive device / medical supply.
• The device / medical supply is most often purchased in an open market environment.
• The client may purchase their assistive device / medical supply from their vendor of choice.
• No claw back and/or verification of actual spend, although client is to maintain receipts in the event of audit.
PwC
ADP funds a defined percentage of the ADP price.
ADP prices are listed in the ADP Product Manuals.
Clients can only purchase specific products from registered vendors.
ADP controls the market as the registered vendor can set a retail price lower than the ADP price, but may
not charge more.
• Funding is paid to the registered vendors once the client application has been approved and the device
delivered to the client. The client (or third party payer) is responsible for the balance.
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Executive Summary
Supply Chain Gap Analysis: Business Area
The table below outlines ADP’s current involvement in each of the supply chain business areas and an assessment of the gap to the
desired future state. The future state was developed during the workshop with ADP staff.
Area
R
A C
I
Key Activities
Budgeting / Forecasting
• Establishing budgets and forecasts that sets targets for the business
• Identifies anticipated volumes in order to plan activities
Sourcing and Pricing
• Market research
• Spend reviews to identify opportunities for reducing prices
• Competitive Tendering
Contract Management
• Managing contract timelines, expiry dates, negotiations, etc.
Purchasing
• Process of buying and receiving the products
Customer Service / Issue
Management
• Application process
• Taking calls and resolving vendor / client issues
Returns Management
• Process of managing product returns, warranty, recalls
Vendor Management
• Process of ensuring that vendors are complying with their contractual
terms.
Vendor / Product Catalogue
Maintenance
• Approving vendors and products for listing
• Process of adding & removing vendor / products from the catalogue
Invoice Validation and Payment
• Validating invoices and paying vendors
Indicates range of
“As-Is” capabilities
Indicates anticipated future
state capabilities
PwC
RACI Definitions
• Responsible: the individual who performs the work
• Accountable: the individual who has the power to modify the business process
• Consulted: the individual who is involved in the process for additional information
• Informed: the individual who needs to be informed about the outcome of the process
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Executive Summary
Supply Chain Gap Analysis
The table below outlines a maturity assessment of ADP’s Supply Chain. The assessment is based on PwC’s Supply Chain maturity
framework as well as benchmarking against other jurisdictions and a target ADP future state.
Area
Developing
Practicing
Optimizing
Leading
ADP Challenges and Opportunities
Strategy
Governance
No evidence that strategic directives or goals translate into specific
operating-level actions for the supply chain. There does not appear to be a
mechanism in place to measure supply chain performance against
overarching goals and objectives. Some policies are in place (e.g. conflict of
interest) but a comprehensive set of supply chain policies and procedures
does not appear to exist. As ADP takes on more supply chain responsibility,
it will need to
Structure /
Organization
There is good coordination and alignment of ADP resources. Resources
appear to be highly skilled clinicians with significant experience in program
administration, but are not experts in financial analysis and supply chain
management. This presents a risk for ADP given the level of spend that
they are managing. There are examples of collaboration with the Ministry of
Government Services (e.g. Home Oxygen VOR), but these appear to be adhoc in nature.
Performance
Management
Does not appear to be a process to analyze supply chain performance on a
routine basis in order to drive improvements (e.g. spend analytics, contract
vs. non-contract spend, vendor scorecards, etc). Supply Chain metrics are
not leveraged to drive performance. There is a process to review pricing
every two years, but limited market/spend analytics are performed.
Process
With the exception of the Equipment Pools, there are gaps in supply chain
processes including strategic sourcing and contract management. Spend
does not appear to be leveraged or controlled effectively in order to drive
value (e.g. competitive tendering, product / manufacturer / vendor
standardization, contract management, etc).
Information
Systems /
Technology
Currently, supply chain processes are primarily manual. ADP is in the midst
of an IT implementation that aims to automate a significant amount of front
office processes to drive efficiencies. Go-live date is set for June 13, 2011.
Indicates range of
“As-Is” capabilities
PwC
Indicates anticipated future
state capabilities
Assessment Definitions
• Developing: Base maturity levels, opportunity for substantial improvement in practices.
• Practicing: Some mature practices with some challenges to deliver benefits / mitigate risks.
• Optimizing: Mature and efficient practices with the ability to deliver benefits and mitigate risks.
• Leading: In alignment with leading practice, mature practices with little room for improvement.
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Executive Summary
Pricing Model Gap Analysis
Pricing Model Assessment: Evaluate against ADP strategic objectives and identify opportunities
The table below reflects PwC’s understanding of ADP’s strategic objectives and identifies current pricing challenges that may be
impacting ADP’s ability to fully realize its strategic objectives. '
Pricing Model
Challenges and Opportunities
Evaluation
Cost Pricing
Market Price
Assessment
Mark-up
Method
•
•
•
•
Relies on good faith of manufacturer for accurate cost information.
Does not encourage efficiencies by the manufacturer.
Mark-up percentage has not been formally and recently supported or validated.
Benefits vendors who are able to negotiate lower manufacturer costs,
discounts/rebate. Inevitably leads to margins that may be higher than the market
may otherwise dictate them to be.
• Opportunity for ADP to leverage buying power of all clients and vendors for best
manufacturer price and for dedicated vendor management ensures service delivery
needs are consistently met.
1
Time and
Materials
• Significant investment of resources required. May be able to refresh hourly rates
without re-evaluating standard times. Refresh hourly rates may increase price.
• Opportunity to reflect impact of new materials/technologies used in manufacturing
which may result in decreased prices.
2
Legacy
Cost
• Price is based on historical cost and has not been updated / does not take into
account a changing environment. A change in price may be required to maintain the
25/75 cost share relationship, if this is the desired state.
0
Survey,
RFI, etc.
• Relies on good faith of vendors for accurate cost data.
• Opportunity for ADP to collaboratively engage with vendors and formulate definitive
service requirements and compensate vendors based on this supported data.
2
• Obtain the best price
• Build market and price expertise and leverage leading supply chain practices.
4
Competitive Tendering
PwC
4 Best positioned to meet objectives
3 Some opportunity, well positioned to meet objectives
2 Opportunity to better meet objectives
1 Significant opportunity, somewhat suited to meet objectives
0 Significant opportunity, not suited to meet objectives
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Executive Summary
Funding Model Gap Analysis
Funding Model Assessment: Evaluate against ADP strategic objectives and identify opportunities
The table below reflects PwC’s understanding of ADP’s strategic objectives and identifies current funding challenges that may be
impacting ADP’s ability to fully realize its strategic objectives. A full circle implies that the model is best positioned to achieve
objectives and is a leading practice, while an empty circle implies that the model is not best suited to meet the objectives.
Funding Model
Challenges and Opportunities
Evaluation
Fixed Price Funding
• Requires a definitive price which controls the market.
• Ensure underlying pricing model obtains best value for money
3
Maximum Contribution
Funding
•
•
•
•
Client (or third party payer) absorbs variance
May not achieve 75 / 25 cost sharing relationship
Ensure underlying pricing model obtains best value for money
Requires ongoing market research to manage client portion
2
Grant Funding
• Client (or third party payer) absorbs variance
• Requires appropriate, functioning internal controls to ensure recurring
payments are made to only eligible individuals
• Requires regular audit to ensure grants spent in accordance with guidelines
• Opportunity to consolidate buying power of ADP to achieve a lower price for
the client
4 Best positioned to meet objectives
3 Some opportunity, well positioned to meet objectives
2 Opportunity to better meet objectives
2
1 Significant opportunity, somewhat suited to meet objectives
0 Significant opportunity, not suited to meet objectives
Note to reader on the 75 / 25 Cost Share Structure
ADP was designed with a 75 / 25 cost share structure, and evaluation of this structure was not part of the scope of this review.
(ADP funds 100% of the device cost for clients receiving social assistance.) The evaluation presented here within does not
consider this cost share structure. The challenges and opportunities identified, retain the assumption that ADP will continue to
funds 75% of the device price and the client is responsible for the remaining 25%.
PwC
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Executive Summary
Supply Chain Opportunities
The table below outlines advantages and challenges associated with ADP’s current supply chain, and outlines some opportunities for
improving capabilities. Examples where other jurisdictions have leveraged some of these opportunities are indicated below.
Description
Advantages
•
•
•
•
•
Current sourcing and pricing process tends to maximize client choice.
Some examples of tendering with manufacturers (e.g. Equipment Pools).
Wide vendor group & diverse product catalogue allows for maximum access and choice across the province.
In some cases, vendor requirements are clearly established and defined (e.g. VOR for Home Oxygen).
ADP administers client satisfaction surveys and conducts vendor audits to ensure the client received the device and
appropriate service level.
Challenges&
• Lack of rigour in the sourcing, contracting and price setting process may be contributing to excess manufacturer / vendor
margins and an inability to obtain competitive pricing for clients.
• Lack of supply chain consolidation (sourcing, purchasing, logistics) drives duplication of efforts and impedes ADP’s ability
to effectively leverage its spend, leading to extra costs within the supply chain network.
• ADP does not have internal supply chain expertise (e.g. strategic sourcing and contract management).
Opportunities
• Improve spend and market analytics and implement sophisticated strategic sourcing and contract management
techniques (e.g. competitive tendering) to leverage spend to drive maximum value for money.
• Consolidate products and manufacturer / vendor base to drive value for money.
Opportunity
Considerations
in Developing
Solutions
• &Need to establish a clear balance between client choice and driving value for money (e.g. through product
standardization, manufacturer / vendor rationalization). These initiatives cannot limit access of services to a point where
there would be a conflict with ADP’s strategic mandate.
• &ADP must balance decreasing costs to clients, with the need to ensure a network of viable vendor businesses around
the province that can serve disabled clients in rural and Northern areas.
• &In some categories there are limited number of manufacturers and vendors and ADP may not have sufficient leverage to
drive down prices.
Other
Comparable
Jurisdictions
• Programs in other jurisdictions have leveraged their buying power and have competitively tendered and established
contracts directly with manufacturers for the landed cost of the device.
• Vendor buying groups have been successful in establishing secondary discounts with manufacturers.
• WSIB competitively tenders with manufacturers for pricing (e.g. hearing aids).
• &Programs in other jurisdictions have consolidated the supply chain and realized savings/efficiencies (Australia)
PwC
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Executive Summary
Pricing and Funding Opportunities
The table below summarizes the advantages and challenges associated with ADP’s current pricing and funding models, and outlines
some opportunities for improving capabilities.
Description
Advantages
•
•
•
•
Current funding models are enablers for ADP in achieving its strategic objectives.
Current pricing models tend to maximize client choice and does not restrict access.
Current pricing model for HOP was a collaborative process which obtained valuable input from the vendors.
Equipment pools are an effective strategy for consolidating purchasing power to drive value through the
competitive tendering process.
Challenges
• Lack of rigor in the price setting process may be contributing to excess manufacturer / vendor margins and an
inability to obtain competitive pricing for clients.
• Lack of accurate and reliable data from vendors on their costs incurred to personalize the device for the client
does not support or validate the current 33 1/3 mark-up.
Opportunities
• Engage in competitive tendering to leverage spend to drive maximum value for money.
• Attribute a value to the vendor cost to ensure maximum value for money and appropriate compensation for
stakeholders.
• Create a sustainable framework reflecting the underlying pricing and funding guiding principles for selecting the
best-fit pricing and funding model to drive value.
Opportunity
Considerations
• &Need to establish a clear balance between client choice and driving value for money (e.g. through product
standardization, manufacturer / vendor rationalization).
• &Any rationalization initiative (e.g. competitive tendering) cannot limit access of services to a point where there
would be a conflict with ADP’s strategic mandate.
Other
Jurisdictions
• &Programs in other jurisdictions have leveraged their buying power and have competitively tendered and
established contracts directly with manufacturers for the landed cost of the device.
• &Programs in other jurisdictions have established a vendor cost separately from the manufacturer device cost.
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Executive Summary
Future State Options to Close the Gap
In order to address the current state gaps that were identified as part of the review, several options were developed in collaboration
with ADP staff and management to outline opportunities for ADP to increase its role in the supply chain. As well, a revised funding
and pricing framework was developed that will allow ADP to make funding and pricing decisions using a robust, analytically-driven
process that will drive value for money while maintaining ADP’s mandate of providing client-centered support and funding to
Ontario residents who have long-term physical disabilities.
Supply Chain Options
Several options for a future state ADP supply chain operating model were considered and are outlined below. A discussion of the
options, including the scope, advantages, disadvantages and impacts of each option follows. The options have been categorized into
three overarching options, some of which have several sub-options within.
#
Option Name
Brief Option Description
1& Status Quo
Option 1: Continue as-is with enforced existing policies.
2& Address AG Concerns
Option 2: ADP to improve robustness and frequency of pricing reviews to ensure that market realities are
taken into consideration when setting pricing (e.g. technological advances).
3
Address AG Concerns
and Implement Leading
Practice to drive Value
for Money
Option 3a: ADP to invest in and expand its Strategic Sourcing and Contract Management capabilities .
Option 3b: Leverage a 3rd Party for Strategic Sourcing and Contract Management.
****Note: It is assumed that Options 3a and 3b would include adoption of the proposed future state pricing and funding framework
recommended as part of the report. This will be discussed beginning on page 28.
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Executive Summary
Future State Options to Close the Gap
Supply Chain Options
Required Inputs
These options are illustrated on the continuum of increasing effort and benefit below. Each option and sub-option builds upon the
previous option both in terms of anticipated benefits as well as anticipated costs and change management efforts. As ADP moves up
the curve, assistive devices are more strategically sourced and better value for money is achieved.
Expected Benefits
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22
Executive Summary
Future State Supply Chain Options – Option 1
A discussion of the supply chain options, including the description, key requirements, advantages and disadvantages is outlined
below.
Option 1
Status Quo
Description
• Continue with current state processes with enforced existing policies.
• Maintain existing price setting processes.
• ½ to 1 FTE to ensure that existing policies are enforced.
Key
Requirements
Advantages
Challenges Risks
• Minimal investment required
• Minimal risk
• Minimal change/impact to clients and vendors
• Limited hard savings
• Difficulty in achieving best price for clients
• Difficulty in addressing AG concerns
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Executive Summary
Future State Supply Chain Options – Option 2
Option 2
Address AG Concerns
Description
• ADP to improve robustness and frequency of pricing reviews to ensure that market realities are taken into
consideration when setting pricing (e.g. technological advances).
Key
Requirements
• Continue to establish pricing by collecting vendor and manufacturer cost data.
• To improve the robustness of the pricing review process ADP should incorporate the following two elements on
a go-forward basis:
• Conduct market research to understand how device pricing fluctuates, and overlay the findings of the market
research against the vendor and manufacturer cost data to establish a fair price that is based on
manufacturer/vendor costs as well as market realities; and
• Conduct jurisdictional price benchmarking against other provinces or international jurisdictions to compare
Ontario prices against prices established by other jurisdictions. This jurisdictional comparison should consider
Ontario’s purchasing advantage relative to the other jurisdictions.
• Develop a pricing review schedule for all devices that ensures that all devices are reviewed every two years at
a minimum. Apply the 80/20 rule and review devices with high spend and/or high price volatility on a more
frequent basis (e.g. once per year).
• Consider hiring a Business Analyst to assist program staff with market research and benchmarking analytics.
Advantages
Challenges Risks
• Will address AG concerns at a minimum
• Low change
• Some purchase price savings by enhancing pricing review
analytics
• No change management efforts required
• Compliance driven
• Does not address the gaps as identified in the gap analysis
• Does not obtain best value for money (e.g. relies on good faith
of manufacturer/vendor for accurate cost information and
benefits vendors who are able to negotiate lower
manufacturer costs, discounts/rebate. Inevitably leads to
margins that may be higher than the market may otherwise
dictate them to be).
• Lack of supply chain consolidation (sourcing, purchasing,
logistics) drives duplication of efforts and impedes ADP’s
ability to effectively leverage its spend.
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Executive Summary
Future State Supply Chain Options – Option 3a
Option 3a
Address AG Concerns and Implement Leading Practices - ADP to invest in and expand its Strategic
Sourcing and Contract Management capabilities.
Description
• ADP to invest in and expand its Strategic Sourcing and Contract Management capabilities, which includes
establishing leading practice processes (e.g. expanded use of competitive tendering with manufacturers, issue
surveys and RFI’s to vendors to establish pricing, routine spend/market analysis, establishing contracts directly
with manufacturers and vendors for the procurement of goods and services, contract negotiation, manufacturer
and vendor performance management, manufacturer/vendor/product standardization, etc).
Key
Requirements
• ADP to establish an internal Supply Chain team and will need to invest in additional resources to accommodate
the extra workload. It is assumed that the level of effort would require at least 6 FTE’s, including 1 Manager, 3
buyers and 2 analysts.
• Will require some investment in technology (e.g. business intelligence software to facilitate proper data
analytics and a contract management system).
• The Supply Chain team would be responsible for the following:
o Strategic sourcing including research, tendering and manufacturer/vendor selection to consolidate spend and
establish pricing for devices;
o Recommendations on vendor costs based on vendor surveys, RFI’s and time and materials studies;
o Product standardization including selection of preferred manufacturers and products for funding;
o Negotiating manufacturer and vendor contracts;
o Maintaining a centralized database of all contracts and a centralized product and vendor catalogue; and
o Ongoing market / spend analytics to continuously identify improvements.
Advantages
Challenges Risks
• Addresses some of the gaps as identified in the gap
analysis
• Will fully address AG concerns
• Relatively low change
• Growth contributes to more jobs internally at ADP
• Some savings through consolidation of spend
• Relatively low change management efforts required
• Will achieve value for money – cheaper pricing for clients
• Would likely be a lengthy implementation with longer time to
benefits, as ADP would be building this from scratch.
• May not be maximizing supply chain leading practices.
• Supply chain is not a core competency for ADP and this may
result in conflicts between operations and policy.
• Increased operating costs and complexity of the ADP business.
PwC
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Executive Summary
Future State Supply Chain Options – Option 3b
Option 3b
Address Auditor General Concerns and Implement Leading Practices - Leverage a 3rd Party for
Strategic Sourcing and Contract Management.
Description
• Strategic sourcing and contract management to be centralized with a third party supply chain shared services
organization (SSO). This is similar to equipment pool model except without the warehousing component.
• The SSO could be an internal government organization (e.g. within the Ministry of Health or within another
Ministry/agency) or an external vendor.
• Ultimate controls rests with ADP. Accountability, compliance and strategy is never outsourced.
Key
Requirements
• The SSO would perform the same scope of services as outlined in Option 3a.
• The relationship between ADP and the SSO and performance targets are set out in an SLA, and would
require governance oversight (please see page 82 for more details).
• Although it is expected that this option will drive the highest degree of benefits for ADP based on PwC’s
experience with other SSO’s, a business case is required to evaluate the cost-effectiveness is recommended.
As part of the business case ADP will need to consider some of the following: anticipated savings, costs and
return on investment, governance and accountability, risk management, SSO funding model and
implementation plan. For further details on the business case, please see Appendix A.9.
Advantages
Challenges Risks
• Faster implementation, speed to benefits and highest savings.
• SSO is contractually obligated to fulfil its mandate.
• Will provide ADP with the assurance that procurement activities are consistent with Ontario’s
Procurement Directives.
• Through its partnership with an SSO, ADP will benefit from supply chain leading practices
(e.g. processes and technologies such as e-Procurement) that will improve supply chain
efficiencies and drive value for clients.
• Allows ADP to focus on its core competency of program administration rather than supply
chain.
• Scalable solution that provides ADP with the flexibility to consider centralized purchasing,
warehousing, logistics and refurbishment of equipment as a potential long-term strategy.
Expanding the program to include purchasing/warehousing would allow ADP to realize
savings from bulk buying and shipment consolidation.
• Potential for high costs (need to
be evaluated against
anticipated savings)
• Higher level risk
• Higher degree of change
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Executive Summary
Future State Pricing and Funding
Proposed Pricing and Funding Framework Overview
The proposed pricing and funding models are built on a foundation which requires ADP to:
1.Examine Pricing and Funding Objectives;
2.Conduct Market Assessment; and
3.Select the Pricing and Funding Model.
In the following pages we present a framework for selecting the pricing model which values the device price separately from the
vendor cost to arrive at total price. The decision points in the framework are established around key criteria , which is informed by
ADP’s pricing and funding objectives and the market assessment. The framework allows an informed selection of a competitive
tendering, time and materials or market price assessment pricing model as these pricing models were evaluated to most closely
align with ADP objectives. Our analysis supports continued application of the following funding models: fixed price, maximum
contribution, and grant funding. The decision criteria in selecting the best fit funding model for each of the device type has been
developed based on synthesis of data collected and is set forth within the section.
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Executive Summary
Future State Pricing and Funding
Setting the Foundation for Pricing and Funding Decisions
Our proposed pricing and funding models are built on a foundation which involves the following
three steps:
1.Examine ADP Pricing and Funding Objectives
A selected model should reflect the organization’s goals and strategic objectives. For example,
ADP’s strategic objective to provide access to personalized assistive devices would inform a strategy
which was not prohibitive to vendors providing access to clients in underserviced regions.
Through our documentation review, key stakeholder interviews and workshops, PwC has drafted a
framework for selecting the strategy supported by the following ADP Pricing and Funding
Objectives:
•Provide ADP with best value for money while supporting ADP’s objectives of providing customercentered support and funding to Ontario residents who have a long-term physical disability.
•Provide access to personalized assistive devices appropriate for the individual’s basic needs.
•Ensure that ADP obtains competitive prices.
•Ensure that the clients receive appropriate services related to their device.
•Ensure that stakeholders in the ADP funding process are compensated appropriately.
2. Conduct Market Assessment
It is critical for ADP to continually assess the market in which it operates. This involves possessing
intimate knowledge of the devices and the key elements of the market, such the manufacturers who
are active in the space and the devices they offer. A market assessment for each of the 26 device
categories may include: market sizing; market attractiveness assessment;
competitive analysis and benchmarking; market definition and segmentation; and a trend analysis.
Pricing is a marketing decision and market research is critical to selecting the most appropriate
pricing strategy to meet the pricing objectives.
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Executive Summary
Future State Pricing and Funding
The focus of this engagement was not to conduct a detailed market assessment. Based upon our understanding of the devices
and the market, obtained through documentation review, interviews with key stakeholders, and jurisdictional research, we have
the following observations which have been applied in proposing a pricing and funding strategy for each of the 26 device
categories:
•ADP is the dominant buyer in the market for the majority of the device categories.
•There are a varying number of manufacturers / vendors for each device type.
•Devices require varying levels of customization / inputs required by the vendor to personalize the assistive device appropriate
for the individual’s basic needs.
A detailed market assessment would be required to ultimately inform the final selection of a pricing and funding strategy
appropriate for each device category.
3. Select the Pricing and Funding Model
In the following pages we present a framework for selecting the pricing and funding model. The decision points in the
framework are established around key criteria , which is informed by ADP’s pricing and funding objectives and the market
assessment. We have walked through this framework and present our rationale and the proposed pricing model and funding
model for each of the 26 device categories . This includes:
•A description of the funding models to be applied in the future state along with the decision criteria to inform selection;
•A description of the pricing models to be applied in the future state along with the decision criteria to inform selection;
•A description of how the pricing models could be employed at ADP alongside the component-based priced approach;
•A matrix showing pricing and funding decisions that need to be made concurrently to ensure an efficient and effective process.
•Overview of the proposed framework for selecting the future pricing and funding models;
•Discussion of the decisions points in the proposed framework; and
•Use of the proposed framework to map the devices to a pricing strategy.
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Executive Summary
Future State Funding Framework & Decision Criteria
Our analysis supports continued application of the following funding models. The decision criteria in selecting the best fit funding
model for each of the device type has been developed based on synthesis of data collected and is set forth below. PwC recommends
that ADP adopt these decision criteria in order to inform the selection of the future state funding model.
Funding Model
Decision Criteria
Rationale
Fixed Price
Funding
• Can accommodate all levels of
competition.
• Can accommodate levels of
device value and volume
• Low to medium customization
• A market, in which there is low competition, is not incented to provide
best price. A fixed price can control the cost for both the client and ADP,
and incent the vendor and manufacturer to find the most cost effective
and efficient way to provide the device.
• Able to control the price of highly customized devices, but may restrict
client choice to only the most basic device.
Maximum
Contribution
Funding
•
•
•
•
Competitive markets
Low to medium device value
High device volume
Low level of device
customization; can
accommodate medium to high
customization with some risk
to the client
• Widely publicized prices
among vendors
• As the vendor may charge more than the ADP price, a competitive
market is required to maintain the client portion at a reasonable level
which does not impede access for the client.
• Devices with high volumes and low levels of customization may have
commodity-like properties. Commodity-like products tend to have modest
profit margins and be competitively priced.
• Also enables the client to select a more highly customized / performing
device at their own expense. As customization may translate to higher
value, also increases the risk to the client in the uncontrolled market.
Grant Funding
• High number of low device
value transactions.
• Devices which are a very
personal choice to the client.
• Low device unit cost
• Low price volatility
• Low market share
• As the cost to the client is ultimately determined by the amount the client
pays to the vendor, less the amount of the grant, to keep the price to the
client at an affordable level, competition is needed to control the client
cost.
• Clients are free to purchase devices from the vendor or manufacturer of
choice.
• Vendors may not have to be registered with ADP.
• Can reduce administrative processing costs for ADP.
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Executive Summary
Future State Pricing Framework & Decision Criteria
We recommend ADP increase their use of competitive tendering, time and materials and market price assessment pricing models.
These models should be applied for the manufacturer cost and vendor price where appropriate based on the framework and
decision criteria. These pricing models were evaluated to most closely align with ADP objectives, namely that they obtain
competitive prices and that stakeholders in the ADP funding process are compensated appropriately, ultimately providing ADP
with the best value for money. Competitive tendering would include both the manufacturer and vendor levels depending on the
device type. Please see Appendix A.8 for further details.
PwC recommends that ADP adopt these decision criteria in order to inform the selection of the future state pricing model. It would
be the responsibility of the SSO to apply the decision criteria as part of its ongoing market/spend analytics process to determine the
optimal pricing models and approach per device category. This would be a sustainable process to ensure pricing is reflective of
market realities.
Pricing Model
Decision Criteria
Rationale
Cost
Assessment
Time and
Materials
• Low to medium number of
manufacturers / vendors
• High device customization
• Appropriate regardless of volume
• In markets with low competition among manufactures / vendors,
market pricing dictates that prices are primarily driven by laws of
supply and demand.
• Best suited for markets with highly variable inputs required on a
device to device basis.
Market Price
Assessment
Survey, RFI,
etc.
• Low to medium number of
manufacturers / vendors
• Low to medium device customization
• Appropriate regardless of volume
• In markets with low competition among manufactures / vendors,
market pricing dictates that prices are primarily driven by laws of
supply and demand. Suited for markets in which the
manufacturer is incented to operate efficiently and pass on the
best price to the client.
Competitive
Tendering
•
•
•
•
•
•
• Competition among providers invites best price.
• High volume and bulk purchases leads to efficiencies which could
be passed on to the purchaser. Low volume and device value
also provides opportunity to invite best price.
• Commodity devices (those requiring low customization) may not
need to be supplied by a specific manufacturer, this opens the
market for competition among providers. High customization and
high device value also provides opportunity to invite best price.
Competitive market
High volume
Low volume with high device value
Low device customization
High customization (with high value)
Device / service specifications need to
be well articulated
• High ADP leverage to drive value
* Characteristics described for both the pricing model and funding models are not exclusive and there may be other factors specific
PwC the device type which may have a positive or negative effect on the success of the model.
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Executive Summary
Future State Pricing Models
A discussion of how these models could be leveraged for ADP is included below and continues on the next page. These models
should be applied for the manufacturer cost and vendor price where appropriate based on the framework and decision criteria.
Model
How could the model be leveraged in the future state?
Cost
Assessment
Time and
Materials
• Conduct a detailed review of the inputs. This may include a time and materials study or a third party review of
costs. For example, in time and materials, the hourly rate would be defined by fully-loaded hourly market labour
rates, and a market-defined standard defined period of time.
Market Price
Assessment
Survey, RFI,
etc.
• In this model, price is based on upon analysis and research compiled from the targeted market
• Once the market price is established, vendors could be invited to participate at the defined price. This could be
conducted formally using a Vendor of Record (VOR).
• There are several options for implementing this strategy. Examples of how this may be employed for ADP
include a survey or a Request for Quotation (RFQ) / Request for Information (RFI) from the manufacturers /
vendors / health service providers to gather information on the costs incurred.
Competitive
Tendering
• Price is set by inviting bids or tenders and choosing the manufacturers / vendors from among the bids received.
Competitive tendering would include both the manufacturer and vendor levels depending on the device type.
Please see Appendix A.8 for further details. Can be a formal process or an informal process which may only
involve obtaining quotations for infrequent purchases.
• For Option 3b, ADP would consult with a Steering Committee working with the SSO to detail the types of devices
and the specifications required of the manufacturer, in issuing a competitive tender for price. For Option 3a,
these decisions would be made internally in collaboration with the supply chain and policy staff.
• Consolidation of the product list would funnel volumes, increasing ADP’s buying power. The extent to which this
was done should need to be informed by transactional data and the expertise of the health service providers, who
hold intimate knowledge of the various devices and the needs that each is able to provide to the client.
• ADP would review the manufacturer proposals with the Steering Committee and select the successful bid(s).
• Devices purchases for ADP clients would be made at the ADP contracted price.
• Volume rebates and / or discounts would be payable to ADP.
• For infrequent and highly customized purchases, quotations would be obtained from manufactures (3). ADP
would require the selection of the manufacturer quote that provided the best value for money.
* A price assessment is still required for assistive devices funded under the grant model as the price to fund the grant at needs to
PwC be determined. PwC has not assessed the 25/75 cost sharing relationship as part of this engagement.
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Executive Summary
Future State Pricing and Funding Model Matrix
Pricing and funding decisions need to be made concurrently to ensure an efficient and effective process.
Some pricing models are more congruent with one funding models over another. For example, for devices in which it is appropriate
to provide grant funding based on the decision criteria, the required investment to attribute a value to the grant using a time and
materials study may not be appropriate. Similarly if a competitive tender is used to set the price, this would most likely result in
contractual terms under which ADP would be able to provide purchasing for its vendors. Where we have competitively tendered, it
may not be appropriate to funding using a grant model.
Below we provide a matrix of funding and pricing models, together which maximize value for money. This matrix informs the first
decision point on the future pricing and funding framework in the subsequent pages.
Pricing Model / Funding
Model
Maximum
Contribution
Funding
Cost
Assessment
Time and
Materials


Market Price
Assessment
Survey, RFI,
etc.




Competitive Tendering
PwC
Fixed Price
Funding
Grant

33
Executive Summary
Future State Pricing and Funding Framework
The following pricing framework is built on recommended ADP pricing objectives and assumes the completion of a comprehensive
market assessment. A description of the decision points and critical elements for consideration when selecting the pricing strategy
follow, as well as a mapping for each of the 26 device categories with a supporting rationale.
PwC
34
Executive Summary
Future State Pricing and Funding Framework
Framework for Selecting the Pricing Model
Device
Price
Decision Point: Manufacturer Market Assessment
A market assessment, specifically a competitive analysis, should be the basis for evaluating the competitiveness of the
Ontario assistive devices market. In a market in which manufacturers compete for market share, ADP would be in a position
to leverage a competitive tendering pricing strategy to drive the best price for the terms defined by ADP. If there is no or
limited competition within the market, competitive tendering would likely not drive significant value in which case a pricing
strategy built on a market pricing strategy may be more appropriate.
Decision Point: Spend / Volume
This decision point is informed by transactional-level historical ADP data and future projections for types and quantity of
devices funded. Devices with a high level of spend (either by high volume, or by low volume and high unit cost) stand to gain
the most through a bid pricing strategy. It should be noted that even a moderate consolidation of the product list will help
drive volume at a category level. Devices with a low unit value would be more effectively priced with a market pricing
strategy.
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Executive Summary
Future State Pricing and Funding Framework
Framework for Selecting the Pricing Model
Vendor
Cost
Decision Point: Client Access to Vendor
In markets where there are few vendors and/or underserviced regions, the pricing strategy chosen should not be prohibitive as
to restrict access for clients. Competitive tendering or vendor rationalization in these types of market would not be
appropriate as limiting access would impede ADP’s ability to meet its strategic objectives. For assistive device categories
whereby there are few vendors a pricing strategy built on a Cost Assessment Model may be more appropriate.
In markets with a vast number of vendors, competitive tendering which results in rationalizing the vendor base, would be
expected to yield value without negatively impacting access. A detailed accessibility study would be required.
Decision Point: Variability of Inputs to Customize
The assistive devices require varying levels of resources and expertise to personalize them to meet the individual’s specific
needs, and varying levels of service intensity. For example, we expect that the inputs to customize a prosthetic or orthotic
would be highly variable from device to device. Variability of inputs may also exist from client to client, which is the situation
in delivering home oxygen to a palliative vs. non palliative client. For some devices there may be limited variability of the
inputs to customize a device. An example of this would be hearing aids.
PwC
36
Executive Summary
Recommendations
The future state options have been categorized into three overarching recommendations which have the potential to deliver
benefits (financial and qualitative) for ADP, vendors, clients and key stakeholders, while at the same time maintaining or
improving service delivery and access to personalized assistive devices appropriate for individuals with long-term disabilities.
For risks and corresponding mitigation strategies associated with implementing the recommendations, please refer to the Risk
Assessment found on pg 47.
Recommendations
1
Strategy & Governance:
ADP should revisit its strategic priorities and ensure alignment across organizational directives. PwC recommends that ADP:
•Clarify strategic objectives to ensure balance between maximizing client access and choice with driving value for money.
•Formalize funding and pricing guiding principles which support ADP’s strategic objectives, and communicate to stakeholders.
2
Supply Chain:
PwC recommends that in the short term (3-4 months) ADP should address the concerns raised by the AG report by
implementing Option 2, which involves improving the robustness and frequency of pricing reviews to ensure that market
realities are taken into consideration when setting pricing. While implementing Option 2, ADP should consider implementing
either Option 3a or 3b in the long term. Implementing either of these options would provide significant benefits over and above
Option 2, including driving value for money. In considering implementation of Option 3b, (which involves leveraging a third
party supply chain shared services organization (SSO) for the provisioning of strategic sourcing, and contract management
services), PwC recommends that ADP consider the following:
•The SSO could be an internal government organization (e.g. within the Ministry of Health or within another Ministry/agency) or
an external vendor.
•Although it is expected that Option 3b would drive significant value for ADP and its clients, it is recommended that ADP
conduct a detailed business case and risk assessment to validate the costs, benefits and risks in partnering with an SSO.
•Develop detailed business requirements and issue an RFP in order to identify and select an SSO.
•Prior to engaging in any vendor rationalization activities, conduct an accessibility analysis to determine the appropriate
number of vendors by product category and by region / city. This will provide ADP with a clear understanding of the appropriate
number of vendors, and address the potential risk of limiting access within the province.
•ADP should establish a steering committee* which will provide policy guidance to the SSO and make final decisions on pricing
and funding approaches, manufacturer/vendor/product rationalization activities and decisions related to new product
introductions. ADP should have oversight over the SSO through a robust Service Level Agreement (SLA).
PwC *For further details on the roles of the steering committee, please see page 82.
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Executive Summary
Recommendations
Recommendations
• SSO should conduct a comprehensive market/spend review for all 26 device categories to understand market realities,
validate the extent of ADP leverage in the market and the optimal pricing/funding approach for each device category.
Analytics for each device category should continue on a routine basis.
• The SSO, in collaboration with ADP, should conduct a comprehensive review of the product catalogue – rationalize
comparable devices, remove devices (in accordance with ADP’s strategic objectives), and update device details. Analytics for
each device category should continue on a routine basis.
If implementing Option 3a, ADP will need to consider the following:
• There will likely be a need to invest in additional resources to accommodate the extra workload. It is assumed that the level of
effort would require at least 6 FTE’s, including 1 Manager, 3 buyers and 2 analysts.
• This option will likely require some investment in technology (e.g. business intelligence software to facilitate proper data
analytics and a contract management system).
3
Pricing and Funding:
ADP should implement a new pricing and funding approach, leveraging newly developed framework and decision criteria. PwC
recommends the following with respect to implementing a new pricing and funding approach:
•ADP should continue to leverage the following funding models: Fixed Price, Maximum Contribution and Grant Model. ADP
should apply the newly developed framework and decision criteria to select the best fit funding model for each device category.
•ADP should leverage the following pricing models: Competitive Tendering, Cost Assessment Pricing (Time and Materials
Studies) and Market Price Assessment (surveys, RFI’s). ADP should apply the newly developed framework and decision
criteria to select the best fit pricing model for each device category.
•ADP should leverage the pricing framework and decision criteria to value the manufacturer/vendor price separately.
•ADP should expand its use of competitive tendering (in particular with the manufacturers) and negotiate contracts directly with
the manufacturers to drive maximum value for money.
•As part of the price setting approach, establish clear requirements as to what services are to be included in the price (both
manufacturer and vendor) to improve transparency.
•Leverage the SSO to conduct analytics on an ongoing basis to validate the application of the pricing / funding models per
device category, revise as required and track savings.
PwC
38
Executive Summary
Recommendation Summary and Rationale
The table below outlines the rationale for each proposed recommendation.
Recommendation Summary
1
Strategy & Governance:
ADP should revisit its strategic priorities
and ensure alignment across
organizational directives.
2& Supply Chain:
PwC recommends that in the short term
(3-4 months) ADP should address the
concerns raised by the AG report by
implementing Option 2, which involves
improving the robustness and frequency
of pricing reviews to ensure that market
realities are taken into consideration
when setting pricing. While implementing
Option 2, ADP should consider
implementing either Option 3a or 3b in
the long term.
PwC
Rationale
• Will provide alignment between strategic objectives and pricing/funding
approaches and decisions.
• Will allow for transparency in pricing/funding approaches and decisions.
In the longer term, PwC recommends Option 3a (ADP to invest in and expand its
Strategic Sourcing and Contract Management capabilities) or Option 3b
(leveraging an SSO for the provisioning of strategic sourcing and contract
management services) for the following reasons:
•These options allow ADP to address the gaps that were identified in the current
state assessment.
•Other comparable jurisdictions (e.g. Australia) have realized significant savings
by implementing supply chain best practices, which ADP would be taking
advantage of in both options.
•By taking advantage of best practices in competitive tendering and contract
management, in both options ADP would realize value for money and cheaper
pricing for clients.
•In either option, ADP would still have ultimate accountability over policy
development.
•Either option would ensure that procurement activities are consistent with
Ontario’s Procurement Directives.
•In either option, ADP would benefit from supply chain leading practices.
•Having dedicated resources with the right experience focused on supply chain,
allows ADP to focus on its core competency of program administration rather than
supply chain.
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Executive Summary
Recommendation Summary and Rationale
The table below outlines the rationale for each proposed recommendation.
Recommendation Summary
3
Pricing and Funding:
ADP should implement a new pricing and
funding approach, leveraging newly
developed framework and decision
criteria.
PwC
Rationale
PwC recommends the new pricing and funding approach for the following
reasons:
•It values the manufacturer’s price for the device independent of the vendor’s
costs to the client, and does not assume the vendor cost is proportional to the
manufacturer’s price of the device or that devices with a higher manufacturer’s
price require greater resources on the part of the vendor.
•It is an approach which establishes price by valuing the inputs and does not
assume a flat defined mark-up.
•It is a sustainable process for determining optimal pricing/funding approaches per
device category.
•It allows for ongoing market/spend analytics to continually identify purchase price
savings for ADP and its clients.
•It clearly establishes the services/offerings that are included in the price, and a
process to ensure these are being provided to clients.
40
Executive Summary
Business Case for Change
By implementing the recommendations, it is expected that ADP would realize both financial and qualitative benefits. In order to
identify the magnitude of the financial benefits, a detailed savings analysis will need to be performed. The following are some
qualitative benefits that are expected to result from implementing the recommendations:
•Provides the ability to address concerns identified by the Auditor General.
•Provides ADP with the assurance that procurement activities are consistent with Ontario’s Procurement Directives.
•Whether implementing Option 3a or 3b, ADP will benefit from supply chain leading practices that will improve supply chain and
pricing efficiencies.
•Allows ADP to focus on its core competency of program administration rather than supply chain.
•Clients will pay fair market prices.
•Increased focus on contract / vendor management to advocate for the customer and ensure customer service requirements are
being met.
•Vendors will receive a margin that is reflective of market realities.
•Vendors will realize internal efficiencies by eliminating administrative tasks of negotiating with and purchasing from the
manufacturers.
•Financial benefit for vendors who won’t need to pay fees to buying groups to get discounts from manufacturers.
PwC
41
Executive Summary
Other Recommendations for Consideration
As part of the review, opportunities were identified within areas that were not in the scope of the assignment or were longer term in
nature. These opportunities are outlined below for ADP’s consideration:
•
Investigate the long-term possibility of adding warehousing, logistics and inventory management services to the SSO, by
conducting a business case to validate the cost-effectiveness and feasibility of this option. We stress that this option would be a
consideration for the future.
•
Pool volumes and consolidate spend with other provinces (e.g. AADL, RAMQ, etc) to drive further reductions in purchase prices
from manufacturers.
•
Pool volumes and consolidate spend with other organizations (e.g. WSIB, Veterans Affairs, etc) to drive further reductions in
purchase prices from manufacturers.
•
Investigate the prospect of partnering with a Group Purchasing Organization, e.g. HealthPro, Medbuy.
•
Consider implementing an equipment refurbishment program and / providing equipment on loan.
•
Measure and audit end-user device usage compliance (e.g. CPAP) to justify funding.
•
Conduct a review of ADP’s end-to-end process to identify opportunities for improvement. Making internal process improvements
has the potential of reducing manufacturer/vendor administrative costs and ultimately the pricing.
•
Conduct analysis on replacement periods to determine device longevity and set requirements as part of the tendering /
requirements building process. Establish clear guidelines on replacement periods and communicate to manufacturers, vendors
and clients, and clearly indicate in the product catalogue.
•
Consider improving the frequency and robustness of vendor audits including more frequent and detailed vendor site visits.
•
ADP should consider hiring a Financial Analyst to be the point-person for program analytics. Responsibilities should include:
•
•
•
•
•
•
PwC
Working with the FMB to develop accurate budget s and projections.
Track budgets and actuals at the device level and make recommendations to address budget shortfalls.
Working with the SSO to develop a forecast at the device level to facilitate accurate demand and supply planning.
Working with the Testing / Verification Unit to identify trends and areas of risk.
Monitoring the financial health of the ADP program on an ongoing basis.
Conducting ad-hoc analytics based on the requests from Program Staff.
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Executive Summary
Future State Impact Analysis
Below is a description of the benefits that will be realized by ADP and its key stakeholders as a result of implementing the
recommendations.
Beneficiary
Impact
Description
ADP
Reduced Financial Risk
•
•
•
•
Compliance with
Procurement Directives
• Will provide ADP with the assurance that procurement activities are consistent with
Ontario’s Procurement Directives.
Supply Chain Expertise
and Leading Practices
• Through its partnership with an SSO, ADP will benefit from supply chain leading
practices (e.g. processes and technologies such as e-Procurement) that will improve
supply chain efficiencies and drive value for clients.
• Allows ADP to focus on its core competency of program administration rather than
supply chain.
Long Term Initiatives
• Scalable solution that provides ADP with the flexibility to consider centralized
purchasing, warehousing, logistics and refurbishment / recycling of equipment as a
potential long-term strategy.
Reduced Financial
Exposure
• Clients will pay fair market prices and will benefit directly from cheaper pricing.
Improved Customer
Service
• Increased focus on contract / vendor management to advocate for the customer and
ensure customer service requirements are being met.
Equitable Pricing
• Ensures consistency in purchase pricing and a margin that is reflective of market
realities.
Cost Savings
Efficiency Gains
• Improved efficiency by eliminating administrative tasks of negotiating with and
purchasing from the manufacturers.
• Do not need to pay fees to buying groups to get discounts from manufacturers.
Clients
Vendors
PwC
High degree of savings
Provides the ability to address AG concerns.
Robust pricing process that drives value.
Frequent market / spend reviews ensures ADP is paying competitive prices.
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Executive Summary
Future State Risk Assessment
Incremental risks associated with implementing the recommendations were assessed on their likelihood of occurrence and
potential impact, and corresponding mitigation strategies have been developed to combat the risk exposure. The risk
assessment scales are as follows:
Probability Scale:
Probability
Definitions
Description
1
Unlikely
The risk is seen as unlikely to occur within the time
horizon contemplated by the objective.
2
Likely
The risk is seen as likely to occur within the time
horizon contemplated by the objective.
3
Certain/imminent
The risk is expected to occur within the time horizon
contemplated by the objective.
Impact
Definitions
Description
1
Negligible
The risk will not substantively impede the achievement
of the objective, causing minimal impact to the project.
2
Moderate
The risk will cause some elements of the objective to
be delayed or not be achieved, causing potential impact
to the project.
3
Severe
The risk will cause the objective to not be achieved,
causing negative impact to the project.
Impact Scale:
PwC
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Executive Summary
Future State Risk Assessment
Incremental Risks
Probability
Impact
Mitigation Strategy
Financial Risk
Risk that a partnership with an
SSO is not a cost-effective
option.
2
3
• Conduct a detailed business case and risk assessment to validate
the costs and benefits of implementation and an assessment of
the risks.
• Establish baseline metrics so that the estimated financial benefits
can be tracked and measured.
• Leverage proven project management techniques to identify
issues as they arise, and develop contingency plans.
• Engage in communications to understand concerns and make
modifications as required in order to present the most realistic
reflection of the future state.
Accessibility Risk
Risk that any consolidation of the
vendor base would negatively
impact access to products and
services.
1
3
• Prior to engaging in any rationalization activities, conduct an
accessibility analysis to determine the appropriate number of
vendors by product category and by region / city. This will provide
ADP with a clear understanding of the appropriate number of
vendors, and address the potential risk of limiting access within
the province.
Client Choice Risk
Risk that any consolidation of the
product catalogue or
manufacturer base would reduce
client choice, contributing to
decreased client satisfaction
levels.
2
3
• Clarify strategic objectives to ensure balance and alignment
between maximizing client access and choice with driving value
for money.
• Maximize client choice by allowing client to pay more if they want
to upgrade to a model/product that isn’t funded by ADP (must be
based on approval from the authorizer).
Product Availability Risk
Risk that implementing the
competitive tendering approach
with manufacturers would cause
them to leave the Ontario
market.
PwC
1
3
• ADP (Option 3a) or SSO (Option 3b) to conduct a detailed spend /
market analysis to validate the tendering strategies by product
type. Where there is risk, other strategies will be employed.
• Implement the revised pricing & funding approach which accounts
for market dynamics. Revisit the criteria on a consistent basis and
modify product-specific approaches as required.
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Executive Summary
Future State Risk Assessment
Incremental Risks
Probability
Impact
Mitigation Strategy
Service Level Risk
Risk that implementing the
recommendations would
negatively impact service levels
to vendors (e.g. deliveries due to
consolidated purchasing).
2
2
• Develop a communication plan that outlines the need for
constant communication with all ADP stakeholders from an
early stage to address concerns and to develop mitigating
strategies.
• Validate purchasing process with vendors prior to
implementation.
• Provide training and communications to ensure that all
stakeholders understand the impacts of the
recommendations as well as any required changes.
Vendor Diversity
Risk that a high degree of vendor
diversity would limit any
rationalization activities.
1
2
• ADP (Option 3a) or SSO (Option 3b) to conduct an
accessibility analysis and ongoing market assessments,
which will lead to greater understanding of the manufacturer
and vendor base and identify limitations or risks at an early
stage prior to conducting any rationalization activities.
PwC
46
Executive Summary
Implementation Roadmap
The following outlines a proposed two year program of initiatives to implement the recommendations to drive the benefits. Actual
timing will vary significantly based on external factors, e.g. provincial election, internal ministry approval processes, etc. The
implementation plan is structured into 2 phases, Design and Implement, to minimize risks and deliver a quick ROI.
Implementation Activities
2011
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Design Phase
• ADP and Ministry review of report and sign-off on recommendations.
• Clarify strategic objectives to ensure balance and alignment between
maximizing client access and choice with driving value for money.
• Develop a pricing review schedule for all devices.
• Conduct market research to understand how device pricing fluctuates,
and overlay the findings against the vendor /manufacturer cost data.
• Conduct jurisdictional price benchmarking against other provinces .
• Formalize funding and pricing guiding principles which support ADP’s
strategic objectives, and communicate to key stakeholders.
• Conduct a detailed business case and risk assessment to validate the
costs and benefits of implementation.
• Present business case and funding request to Ministry (for SSO) and
secure approvals and funding.
• Develop detailed business requirements and issue an RFP to identify and
select an SSO.
• Conduct stakeholder mapping exercise.
• Conduct change readiness assessment.
• Define communication objectives and principles, develop communications
plan /strategy and issue communication to key stakeholders.
PwC
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Executive Summary
Implementation Roadmap
Implementation Activities
2012
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Implement Phase
• For Option 3b, establish a steering committee which
will provide policy guidance to the SSO .
• Implement internal ADP (Option 3a) or SSO (Option
3b) model.
• Implement revised pricing / funding framework and
decision criteria.
• Conduct an accessibility analysis to determine the
appropriate number of vendors by product category
and by region / city.
• ADP (Option 3a) / SSO (Option 3b) to conduct a
comprehensive market/spend review for all 26 device
categories to validate the extent of ADP leverage in
the market and the optimal pricing/funding approach
for each device category.
• ADP (Option 3a) / SSO (Option 3b) to conduct a
comprehensive review of the product catalogue.
• Prior to sourcing process, establish clear
requirements as to what services are to be included in
the price (both manufacturer and vendor).
• ADP (Option 3a) / SSO (Option 3b) to begin
sourcing/contract management activities (tendering,
surveys, RFI’s) by device category. Prioritize based
on value, existing contracts, etc.
• ADP (Option 3a) / SSO (Option 3b) to conduct
ongoing monitoring of market/spend to validate the
application of the pricing / funding models per device
category and revise as required.
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