Healthcare organizations (HCOs) are constantly being tasked to shave costs off the bottom line, and Supply Chain is often one of the best places to start. Over the past decade, as the number of hospitals has shrunk and the number of medium-to-large Integrated Delivery Networks (IDNs) and Regional Purchasing Coalitions (RPCs) has grown, a significant amount of conversation has been devoted to supply distribution costs and how to avoid —or at least reduce —them.
Among the many strategies spoken about are the concepts of “centralized distribution” and “Consolidated Services Centers.” One of the more plausible ideas to land in the Supply Chain Leader’s head is, “If I cut out the middle man, I could save some money.” With fees paid to a distributor ranging from 3 percent to more than 10 percent, an IDN or RPC spending $50 million or more on distributed supplies might expect to garner some handsome savings by taking on the singular responsibility of distribution or the dual responsibility of self-contracting and distribution.
In addition, if the IDN or RPC were large enough and geographically concentrated, another possibility might be to build a Consolidated Services Center (CSC) — a place where a number of Supply Chain-related functions would be housed, saving the duplicative costs of performing those functions at each individual site within the IDN or RPC. Key considerations being both the aggregation of volume and a logistics component capable of providing service to the members.
Functions that might be centralized in the CSC include:
- Commodity supply distribution
- Physician preference item inventory control and distribution
- Print management and production
- Record retention and storage
- Laundry services
- Linen pack preparation
- Durable medical equipment storage and distribution
- Pharmacy packaging and production
- Food services cook-chill production and distribution
- Biomedical repair services
- Storage and distribution of disaster supplies
It should be intuitively obvious to even the most casual observer that there are lots of things to be considered before leaping into the “Consolidated Waters.” Decisions made regarding the expenditure of millions of dollars should be well-thought out and justified, with extensive research and financial modeling, because once made, it is difficult to retreat.
To help with the decision-making process, I have formulated a series of issues and questions to consider and have also solicited input from a group of veteran Supply Chain industry experts—Jay Mitzel, former Supply Chain Executive from TriHealth and Summa Health; Jim Francis, Chair, Supply Chain Management and Chief Supply Chain Officer, Mayo Clinic; John Gaida, who recently retired from Texas Health Resources as Senior Vice President of Supply Chain Management; Bill Mosser, Vice President of Materials Management, FMOL Health System and LogisticsOne; Bob Simpson, President and CEO of LeeSar; and Charlie Miceli, Vice President and Network Chief Supply Chain Officer,the University of Vermont Health Network. All are respected leaders, and all have pondered these same questions. Some chose to move forward and some chose other alternatives.
Let’s get started:
What is your organization type? Are you a small to medium IDN, a mega-IDN, a small RPC or a large Alliance associated with a major group purchasing organization? You will notice that I did not ask if you were a stand-alone community hospital because those entities are rapidly disappearing and it is doubtful that such an entity would have enough non-acute affiliates to justify centralizing any of the functions involved. For every organization type, there are specific considerations, many of which are addressed with the ensuing questions. The biggest difference between IDNs and RPCs/alliances is the question of management and ability to drive participation and compliance, since many of these organizations have voluntary membership.
What is your Operation/Management structure? Are you highly centralized, moderately centralized or decentralized in your management structure? The answer to this question will tell you a lot before you ever take the plunge. If there is a single bottom line to be managed against and a single decision-making structure, the chances of success will be greater than if decision-making is decentralized among several bottom lines. This is where bigger is far from better. If you are a huge mega-IDN with a distinctly decentralized decision-making style, your chances of getting and keeping buy-in (not to mention compliance) are far less than a smaller IDN with tight decision-making and accountability.
What are you thinking about doing and what do you hope to accomplish? Articulate your thoughts. Write them down. Share them. Hold frequent open discussions with stakeholders and Subject Matter Experts. Don’t be afraid to get mud on your face. The most obvious reasons for doing anything are to improve quality and service while reducing costs. Simple distribution of commodity items, for example, is not so simple when you begin to look at it. Other functions, such as putting in a Pharmacy “assembly line” or centralizing the Sterile Processing function require specialty expertise and must conform to several specific laws and regulations. Twice in his career, Jay Mitzel made the decision to develop a Consolidated Distribution Center because the organization he was working for needed space in their main campus. On both occasions, Mitzel was able to find an acceptable building for a pittance, and on each occasion, he did a careful and thorough analysis of all the costs associated with the opportunity. He saved his organization substantial money. However, he says, “You need to be patient, tenacious and take the long-term approach. You do not reap the economies you expect immediately.”
Why do you want to do these things yourself? Be honest. One of the respondents for this piece (who shall remain unattributed for obvious reasons) said, “These things are usually built around a person rather than doing what the organization needs/wants. You get someone who is passionate about it, sells the idea internally, and they do it — only to wake up one day and the person leaves and the organization is left scratching their head saying, “Why did we do this?” Do not allow your desire to accomplish something spectacular leave your organization in the lurch long after you have moved on.
Jim Francis, of the Mayo organization, offered these comments:
- What is the scope of the CSC? Just supply chain management or a true consolidated service center for multiple shared service activities?
- Is there a clear business case and value proposition?
- Does the organization consider operating a CSC a core competency? Would other healthcare organizations buy distribution services from them? That may lend itself to a joint venture.
- Do subject matter experts exist that can run the CSC with the efficiency and cost effectiveness that a national distributor or 3PL can?
- Is it a sustainable business (long term financial viability) venture? My belief is that it is a hard model to replicate given the years of experience that Cardinal, McKesson, Owens & Minor, etc., for example, have spent fine-tuning a low-margin business. We have a mixed distribution model with a primary distributor that also does LUM/JIT to some of our locations. The primary reason we have a distribution center is our main location is in Rochester, MN, and it is there for inventory management reasons/disaster and business continuity, not that we are experts in running a distribution center.
Ed Hisscock of Trinity Health mentions these considerations: Ensure that you are able to drive SKU reduction and remove variation. Think beyond just medical/surgical products. Simply disintermediating your distributor will not drive a significant return-on-investment. Accurate expression of demand will be a key success factor. Ensure that you have sound point of use systems/processes and comprehensive span of inventory control.
Bill Mosser of FMOL adds these reasons for FMOL adopting a Consolidated Services Center:
- Laundry, mail, specimen collection, records management; etc.
- Eliminates sales rep involvement and interference;
- Aligns partnering goals beyond sales;
- Streamlines P2P and electronic commerce;
- Helps identify mutual benefits and waste beyond product sales;
- Establishes service levels to allow for long term contracting;
- Our Clinical Value Analysis teams (PACs) to see variation and address standardization across continuum of care;
- Streamlines contract compliance monitoring;
- Supports more disciplined new product assessment process;
Next month: Crans highlights and explores seven more issues along the path to CSC operations.
