Does it make sense to supply your non-acute sites through self-distribution or a non-acute distributor? A veteran IDN supply chain leader shares his perspective.
Sponsored – Henry Schein– June 2024 – The Journal of Healthcare Contracting
David Hargraves has a well-rounded view of the U.S healthcare supply chain. He currently serves as CEO of Pharma Logistics, a leading pharmaceutical reverse distributor. Prior to that, he worked on the GPO side as Senior Vice President, Supply Chain Services at Premier.
Before either of those roles, he helped lead one of the nation’s most renowned supply chain teams at UPMC for nine years. Part of Hargraves’ legacy at UPMC was setting up the distribution center that is still in use today. UPMC has been self-distributed in some shape or form for over 20 years. By bringing products in bulk to the distribution center, the IDN hoped to create greater efficiencies logistically, lower costs with manufacturers and enhance a greater service level with the acute hospitals.
But what Hargraves took away from that experience is that while self-distribution made sense for the large acute facilities, that wasn’t always the case with the non-acute sites. The math didn’t always add up.
“I’ll say this, with one notable exception, no one that I’m aware of does full self-distribution, meaning every item at every level to every facility,” he said. “It’s not economically viable. With the size of the warehouse you’d need to stock every single SKU … it’s just not possible. All IDNs are hybrid to some degree.”
“I agree with David,” said Brad Clark, Vice President of Strategic Accounts, Henry Schein Medical. “At Henry Schein, we have some IDNs that completely outsource their non-acute distribution to us while others leverage us across product categories including medical surgical supplies, equipment, laboratory, pharmaceuticals and/or vaccines. We are built to ship in low unit of measure, directly to the non-acute facilities while also supporting CSCs that are owned and operated by the IDNs. At the end of the day, it comes down to ensuring the right product is where it needs to be while having a distribution partner that provides an overall value to the IDN.”
Factors to your distribution strategy
Indeed, there is more than one way for an IDN to service its acute and non-acute facilities. The most common is a replenishment model, where the IDN brings supplies in bulk to a distribution center where they inventory, pick, and then bring it out to various locations. One of the benefits to this is it eliminates having the asset inventories at every hospital doing the same thing. There’s a benefit to freeing up space within the hospital walls to put it to more use for clinical care rather than storage of supplies.
IDNs may also choose to use cross-docking, where items come in via a common carrier like FedEx and UPS. Healthcare systems can choose to centralize that as well. The general benefit of cross-docking is a reduction of FTE because you don’t need receiving personnel at every hospital location. You can also track supplies better and look for trends to reduce some of the cost.
The question every IDN must ask itself with these models is, can you still service every location? What about the frequency needed? What about distance? How much do they order? Those factors will all be very different for non-acute sites.
As a general rule, if you have a distant location ordering a small quantity, almost no matter what the frequency, sending a lone truck or van out to that site is simply not economically viable.
Hargraves said that when he was at UPMC, there were small locations such as a 30-bed rural facility that were an-hour-and-a half out from the distribution center. It made more sense to keep those with a larger national distributor who might already be operating in the area rather than self-distribute. “Fundamentally, the question supply chain leaders must ask is what’s the most efficient, lowest cost way to get the caregivers the products they need?”
Taking that idea one step further, non-acute facilities such as ambulatory surgery centers, imaging centers, cancer centers, physician offices, urgent care centers, etc., might be physically close to an IDN’s distribution center, but their average order sizes are very different than the 300-, 500-, 800-bed urban hospitals. Think cases and cartons vs. pallets.
Those non-acute locations also typically didn’t have much storage space to put excess inventory, and no supply chain professionals exclusively devoted to receiving the product. Broadly speaking, when Hargraves and his team ran analytics on the costs involved in supplying the non-acute facilities during his tenure at UPMC, they found it was more efficient and less expensive to have a non-acute distributor service the majority of those locations than it was to service them through the IDN’s central distribution center.
Similarly, just as Hargraves and his team discovered the efficiency of having a non-acute distributor service most locations rather than relying on the central distribution center at UPMC, Hargraves is leading his team to transform the pharmaceutical reverse distribution industry. At Pharma Logistics, Hargraves has worked with his teams to materially expand available capacity, deliver substantial cost savings to customers, improve return credit visibility, and ensuring Pharma Logistics continues to maintain the highest compliance standards in the industry.
New care settings
Another factor to consider is that care is moving outside the four walls of the hospital. “In general, it’s a better service for the patient and it’s a lower cost for the health system,” he said. “You add those two things together – it’s better and cheaper – you’re not going to stop that.”
The question is, will distributors and IDN’s adapt? Is that a new service that an IDN self-distributes? Or is there blending and blurring of lines in new services offered by distributors? National distributors have more people, more locations, and are used to doing small order sizes, kitting and customization. “There are some distributors out there doing it already, and some leading IDNs are really breaking ground and moving towards that today,” Hargraves said. “But I do think it’s the future.”
Yes, a big IDN with a distribution center could service its non-acute sites. But for the vast majority of them because of order size, service level, stocking, and the cost to transport, using self-distribution for those sites does not add up. “Your mileage may vary in any given location, but if you look broadly across the U.S., when you just get down to it, it’s more efficient, at a lower cost and higher service level to take care of those through a non-acute distributor.”
Pros vs. Cons
Supply chain leaders should consider the following four factors in their distribution strategy when servicing non-acute sites.
No. 1: Volume. Running a distribution center is a business of scale. You need to have a volume that makes sense for the cost of the building, staff, and equipment inside. Can you properly stock the supplies needed by the non-acute sites and ship them at the right sizes?
No. 2: Standardization. Driving standardization lowers your cost. Is it easier to manage through a national distributor?
No. 3: Location and routes. The logistics of running those routes is a science. Where are you going to run? What size truck do you need? What time of the day are you going to run and deliver it?
No. 4: Cost. Pulling all your data together, what’s the cost to do it yourself vs. your cost to have a distributor do it?