Panacea, propaganda, pipe dream or something in between?

Imagine if Homer Simpson served as a healthcare supply chain executive. In today’s budget-pressured, cost-conscious market he just might be apt to exclaim, “Here’s to consolidated service centers: The cause of, and solution to, all of the healthcare supply chain’s problems.”

Granted, Homer fails to epitomize even the most unqualified healthcare supply chain executive, nor would he adapt one of his own famous quotes about a certain libation to an operational concept for which selected healthcare supply chain executives either have a healthy respect (those who have successfully accomplished it) or a fearful disdain.

Among the nation’s estimated more than 5,500 hospitals, according to the most recent figures from the American Hospital Association, Central or Consolidtated Distribution Centers (where suppliers deliver bulk product to a single location and workers there break bulk to deliver or “self-distribute” in lower units of measure to member facilities) may number in the low hundreds, but Consolidated Service Centers (which extend beyond distribution and reach into other service-related areas) barely break out of the double-digit range.

Plenty of myths about CDC and CSC operations abound, a portion of which spring from unrealistic expectations.

Perhaps among the biggest of myths of a CSC are how easy it is to locate an available warehouse, pay for it, move stuff into it and “recreate” the necessary infrastructure that surely will work better than the problem-plagued supply chain operations that existed at the individual facilities previously.

To quote actor Gary Cole as character Bill Lumbergh in the film, “Office Space,” nearly two decades ago, “Mmm, yeaaaah, I’m going to have to go ahead and ask you to come in on Sunday, too. M’Kay? Grrrreeeeaat.”

Healthcare Purchasing News reached out to supply chain executives involved in CDC and/or CSC operations from either a provider or supplier perspective to shed some light on how they really work and why.

Myths versus reality

Myth: Every provider system should do a CSC.

Myth: The cost savings will be dramatic and there is a positive ROI on the project.

Reality: Actual implementation is much more difficult and time consuming. It’s not just like running a warehouse. The benefits in fact may be more strategic than directly financial such as helping with continuity of supply during these times of drastic shortages. Systems often hurt their operations by making them “heavy” with supervisory personnel. An efficient, well-run CSC should need very few exempt positions to operate it.

James Wetrich, FACHE, CEO, The Wetrich Group of Companies

Myth: CSCs are not feasible and those who have tried it have failed.

Reality: Incorrect. In the last few years, the number of CSCs in the U.S. has grown to more than 70 from about 23.

Myth: CSCs only work for providers that have dozens of hospitals and other care provider facilities. It must be big to be feasible.

Reality: Of the approximately 70 CSCs in the U.S., a number of them have fewer than 12 primary care and other care venue facilities. These smaller models have proven to deliver compelling ROIs and payback that are comparable to the larger CSCs (proportionately).

Myth: CSCs cannot be successful without maintaining a relationship with a GPO.

Reality: Many CSCs operate without a relationship with a GPO, contracting directly with suppliers, achieving substantial savings via competitive item costs. Of course, some CSCs retain a GPO relationship to handle categories of products they are not interested in managing.

Myth: CSCs cannot gain pricing from suppliers that are attained by GPOs; they just cannot compete.

Reality: They can and do compete and frequently get better pricing than GPOs. CSCs that procure supplies for an IDN that sets up, owns and operates the CSC and their provider facilities, are actually capable of offering suppliers greater committed volume than voluntary GPOs. The IDNs that operate a CSC own the hospitals and other provider venues and they can choose to make CSC contract compliance mandatory.

Myth: There is one best-practice model CSC.

Reality: If you’ve seen one successful CSC, you’ve seen one. While the principles and concepts used by successful CSCs are very similar, there is no one-best CSC model that fits all providers. Each one should be customized to be the best possible fit for that provider.

Myth: CSCs need dozens of highly trained and experienced professionals to operate a contracting component of a CSC, so that means as many people as GPOs.

Reality: Not true. Most CSCs operate with much smaller staffs than GPOs, for the contracting part of the CSC. They don’t need staff because their scope of work is different and the number of suppliers and items they manage is much smaller.

Myth: CSCs that set up “self-distribution” need to buy/build or lease huge buildings that are very costly to build, buy and operate.

Reality: Actually, once engineered to accommodate only the products used by the CSC facilities – established through value analysis driven item standardization, the CSC distribution facility will likely be much smaller to store and deliver only those SKUs to meet the provider facilities with the supplies they need. Note that a CSC that includes more services than supply procurement and distribution will need more space to accommodate those services.

Myth: Distributors can manage the inventories needed much more effectively and efficiently than a CSC.

Reality: Not necessarily. The distributor must carry many different products, sizes, packaging levels, etc., to meet the needs of the total number of potential customers in its geographic area. Demand for the products might not be predictable, requiring the distributor to carry many tens of thousands of different products and quantities that far exceed that of the CSC, which serves only its owned customers.

Myth: Once a provider sets up a CSC, there is no way to reverse that decision if it does not meet expectations and return to a conventional GPO and supplier model.

Reality: This is not true. There are IDNs that have done that. Buildings and storage/material handling equipment can be sold, if they are owned, and cancelled if rented or leased. Suppliers are extremely interested in gaining back the business formerly done by the CSCs.

Myth: CSCs cannot handle implant products.

Reality: Incorrect. CSCs do this now. They also handle drug repackaging, sterile reprocessing, case cart assembly/filling, and a long list of other services that can be consolidated and centralized.

Jamie Kowalski, CEO, Jamie C. Kowalski Consulting LLC

Myth: CSCs automatically lead to cost savings and operational improvement.

Reality: First off, very few, if any, organizations start with a CSC. They generally start with a Centralized Distribution facility, either with the use of and help from a traditional distributor or on their own. Components such as Pharmacy, kitting, Sterile Processing, etc., are usually added incrementally over time.

Myth: A CSC or Distribution Center run by a distributor is in the healthcare organization’s best interest.

Reality: Remember that whenever you are hiring someone who can deliver the service(s) you wish to consider implementing to help you in the decision-making process, they are inevitably going to take you down the road toward a solution with them as the winner.

Myth: Consolidation is easy and you already have the people you need to get the job done.

Reality: Consolidation requires an elevation of your game – from self-contracting to logistics to you name it. Every element of the job becomes more complicated and more demanding when you decide to go the CSC route and chances are more than very good that you will be required to add resources with a higher level of expertise than the folks you currently have.

Myth: Anybody can do it – all you need is a building, some trucks and a staff.

Reality: This is so untrue that it barely rates thinking about. You need to know your operation in exquisite detail, coupled with a similar knowledge of your organization’s financial state and long range plans. CSCs are not built on egos. They are built on accurate data and real expertise. Any built on egos alone are doomed to fail.

Fred Crans, Healthcare Consultant, Business Development, Sedlak Supply Chain Consultants

Sidebar: CSC truths worth noting