Back in the late 1970s, freight and shipping procedures seemed so complicated that only the seasoned postal executives in the mailroom apparently could handle it.
At least one of the market leading shipping companies wanted to burst the stereotype and turned to television commercials to do it.
“A lot of people think using Federal Express is complicated,” the commercial begins, “but really, it’s so simple, even a [insert executive title here] can do it.” Then you see a succession of executives — from a young vice president with a chiseled smile to the stuffy president to the crotchety old chairman of the board — demonstrating how easy it is to send a package somewhere overnight.
Federal Express (now known as the more simplified and catchy FedEx) then closed with one of the more popular slogans in the freight and shipping business: “When it absolutely, positively has to be there overnight.”
From that memorable commercial, two blossoming business challenges emerged.
- Anybody in an organization really could send anything they wanted anywhere they wanted … overnight.
- Somehow the determination and discipline of what precisely needed to be sent somewhere overnight became foggy, fuzzy, gray and murky, not unlike handing a teenager a credit card with an available balance and instructing him to be responsible as he leaves the house with his friends.
Not surprisingly, Federal Express profits increased, along with shipping costs, and by the early 1980s, FedEx wisely switched to the fast-talking “Motormouth” John Moschitta Jr. as its new spokesman to help businesses keep up with the “fast-moving, high-pressure, get-it-done-yesterday world.” FedEx, along with the U.S. Postal Service, declined to speak with Healthcare Purchasing News on general freight and shipping trends for healthcare organizations.
But HPN wanted to explore just how far hospitals have progressed in the “Next Day Air” and “Priority Overnight” craze within the last nearly four decades since those commercials aired on free TV. Rather than ask seven logistics executives about how fiscally responsible hospitals were operating in this area, HPN added some caveats to gauge progress with more pinpoint precision.
For a hospital that may be effectively and efficiently managing its freight and shipping expenses, what percent of its shipments should be Next Day Air or Priority Overnight? Ideally, HPN was looking for a number, or even a percentage of expenses or even a percentage range.
Instead, HPN received a range of viewpoints that made this more of a squishy exercise than anticipated.
Several were direct and to the point.
“In MedSpeed’s world of intra-company logistics,” said Jake Crampton, Founder and CEO, MedSpeed, LLC, “less than 15 percent of [spending] should be on urgent or on-demand services. The majority of intra-company logistics can often be conducted on a predictable scheduled basis, which produces the best balance of quality and cost effectiveness.”
Gerry Romanelli, Chief Commercial Officer, TRIOSE Inc., responded a bit more conservatively. “Ideally, less than 10 percent of shipments in a system should be sent/received via a premium service level like Next Day Air or Priority overnight,” he insisted. “This can vary especially when considering the location of a system, but the goal should always be to plan for the most cost-efficient shipping. Surgery schedules are considered to be a big driver of early a.m. priority services for inbound freight. but surprisingly, administrative functions are the biggest culprit as the super utilizers of the premium outbound service levels when sending documents. In both cases education, planning and shipping system controls can quickly reduce the percent of priority shipments.”
So last-minute paperwork issues can trump panicked demands for different-sized implants for surgery the next morning?
“Yes, typically, the administrative roles are allowed to select the level of service without consideration of the cost,” he said. “We have worked with many healthcare systems where the administrative departments have selected Next Day Air service to send documents to a building in the same county or city.”
Really?
”It is usually just a lack of education,” he continued. “Regardless of the industry, if you give someone shipping options they will often select the highest level of service if they are not educated on the cost impact. I had a bank that was sending Next Day Air packages to different floors in the same building.”
Foggy bottoms
Others declined to estimate a percentage or even percentage range due to so many variables that can influence decisions.
“In our experience, this depends on many variables, including but not limited to agreed-upon service levels, product mix and/or shelf-life, and the balance between supply and demand,” noted Norman Brouillette, Vice President & General Manager of Technology and Healthcare, Ryder System Inc. “Each network is analyzed to determine the critical design parameters [that] drive service level mix, while also enabling visibility to continuous improvement opportunities to drive out waste.”
Nancy L. Pakieser, Senior Director, Industry Development, TECSYS, echoed the complexity in decision-making because it “covers so many factors, [such as] overall supply chain expertise and maturity, volumes of procedures, geographic locations/demographic mix, organizational size, etc., that there is no ‘magic target’ number. However, leveraging data is a step toward better performance in this area,” she said.
“As organizations begin to expand supply chain into a serious collaborative role with clinicians, they will adopt more mature supply chain practices [that] will, in turn, enable them to address the generally high Next Day Air or Priority overnight burden they carry,” Paskieser continued. “By leveraging consumption data, generally collected at the point of use, they can start to apply an analytic approach to measure various factors that impact performance. One area they can look at are their planning cycles and demand generation/forecasting by service line or clinician. In this way they can determine if there are outliers in the cost incurred to support the delivery of care, such as inbound freight costs, and take a proactive approach in addressing it.
“Understanding the environment they are working in and the root cause for the higher cost will empower them to identify appropriate mitigation tactics,” she added. “The needs of a large, 400-bed metropolitan, Level 1 trauma center in a densely populated area with high violence and the immediate device needs to support this constituency will be very different from a small, rural, geographically remote hospital.”
Bill Denbigh, Director, Business Development and Marketing, TECSYS, didn’t think anything quantitative could be estimated outside of healthcare either. (TECSYS also works with customers in other industries outside of healthcare.)
“There are very few parts of the hospital supply chain that are planned, so [just-in-time] [may] require Next Day Air,” he said. “Using Air services are most often due to causes far deeper than just transportation. How is the forecast accuracy? Are the right goods in stock? Why is the schedule changing at the last minute? Is this a substitution issue? And so on…”
Melissa Laber, Senior Vice President and General Manager, OptiFreight Logistics, Cardinal Health, emphasized the variability as well.
“Supply chain and sourcing strategies look different for every health system and are influenced by factors such as the geography of the health system, supplier/sourcing strategies, the geographic location of selected suppliers, and the types and mix of clinical services provided within the health system,” Laber said. “Due to these factors, it’s hard to have an exact rule for mix of Next Day Air/Priority vs. ground shipments. Overall, the mix of shipments average about 40 percent express and 60 percent ground. However, depending on your hospitals’/IDNs’ services and geography, we have seen a ground service mix as high as 80 percent for lower-cost day-definite vs. time-definite service.
“Service mix has a significant impact on total transportation management costs — same day (courier) should also be considered in the mix,” Laber continued. “The ability to control transportation costs is optimized when both carrier (UPS, DHL, FedEx) and courier options are evaluated together.”
Laber called for a comprehensive strategy to manage this costly process.
“As Supply Chain makes decisions about how to source different products and who to source them from, they need to ensure that the implications of those strategies on other supply chain and logistics processes — transportation, receiving, inventory management, etc. — are understood and rationalized,” she said. “Once a plan is in place, the audit process and other reviews need to be performed to ensure the plan is being executed as designed and, of course, there may periodically be needs or opportunities for changes/improvements. Make sure to include your shipment mode targets when aligning reorder point and stock keeping levels to allow for working capital optimization and shipping cost reduction through proper planning.”
Healthcare organizations might rely on their third-party logistics company to advise them on fiscal discipline and etiquette around responsible use of Next Day Air and Priority Overnight services.
“VPL’s goal is to shift as many orders to ground delivery as is possible while still maintaining the delivery requirements of the customers,” said Don Carroll, Vice President, Business Development, Vantage Point Logistics Inc. “Our healthcare benchmark is 61 percent ground shipments with some of our best-in-class customers exceeding 70 percent. We attempt to keep Priority Overnight and Standard Overnight shipments to a combined total of less than 18 percent of a customer’s total inbound shipments.”
Of course, there might be some valid reasons why the costly shipping services are used more frequently.
“A significant number of suppliers will automatically default their shipments to Priority Overnight,” Carroll admitted. “This is especially true with life science suppliers that ship temperature-controlled items on dry ice. VPL helps our customers focus on these suppliers to have the default shipping service level changed to Standard Overnight and sometimes even 2-Day delivery. Most of the packaging that these deliveries use will maintain the proper temperature for up to 48 hours, so Priority Overnight delivery is not generally a necessity to maintain the quality of the product being shipped.”
But don’t presume the default decision is motivated by profit, according to Carroll.
“VPL believes a supplier defaulting to Priority Overnight is motivated less by profit and more by the assurance the shipper believes it provides in delivering the product in a timeframe that will maintain the appropriate temperature of the product while in transit,” he noted. “This is particularly true of shipments packed in dry ice. These deliveries make up less than 5 percent of a managed program, but they tend to be heavier than average, and when you add in the dry ice fee assessed by the carriers these deliveries can become quite expensive. We have yet to see a small parcel carrier attempt to adjust service-level pricing to compensate for any shifts away from Priority Overnight to either Standard Overnight or even 2-Day service options.
“Most competent third-party freight management programs can provide their customers with a complete accounting of which suppliers would be good opportunities to change default shipping service levels,” Carroll added. “VPL prefers to work directly with a customer’s contract managers — or their GPOs — to help them negotiate the appropriate freight and shipping terms.”
Rick Dana Barlow | Senior Editor
Rick Dana Barlow is Senior Editor for Healthcare Purchasing News, an Endeavor Business Media publication. He can be reached at [email protected].
