The Self-distribution Shuffle

All agree: Supply chain improvements are needed. But is self-distribution the way to achieve them?

To self-distribute or not to self-distribute? IDN supply chain executives, their CEOs, distributors and manufacturers keep debating the point. But all seem agreed on one thing: Providers and suppliers need to continue improving supply chain efficiencies. Whether that’s through self-distribution, increased automation, more supply chain expertise, or something else – these are the points of contention.
The topic of self-distribution was raised at this spring’s Healthcare Supplier/Provider Institute in Las Vegas. And again in May, when the Health Industry Distributors Association published its “Hospital Procurement Study,” designed to compare the activities and costs associated with acquiring products through a distributor vs. direct from manufacturers.

HIDA study
Providers can realize greater efficiencies buying through distributors than direct from manufacturers, concludes the HIDA study, which was conducted by Pricewaterhouse Coopers. “The results point to greater efficiencies through distributor purchases, particularly in the areas of product ordering and receiving,” say the reports’ authors. “While some high-dollar products do not fit well with the most common cost models for commercial distribution, increasing the share of commodity products purchased through a prime vendor distributor makes sense for most facilities, and many could benefit from investigating a low-unit-of-measure model that transfers additional activities to the distributor.”
The study was based on analyses and interviews with eight hospitals, and a procurement/receiving survey completed by an additional 24 facilities. It factored only the costs related to supply chain staff activities for purchasing and receiving, not the monetary value or price of items purchased.

Two key themes emerged through interviews and data analysis, says HIDA:

• The level of automation used is a key factor in process cost and efficiency.
• The complexity of processes, including the number of touch points and number of activities and steps, is another key factor. Simpler processes increase efficiency.

Procurement and ordering costs
Providers’ procurement and ordering costs are lower with a distributor than with manufacturers, “due in large part to the streamlined purchasing process provided by distributors,” concludes the HIDA report. “On average, the cost to place an order with a distributor is 44 cents per line item as compared to $1.47 with a manufacturer. The higher manufacturer order cost can be attributed to several ‘touch points’ a direct-to-manufacturer purchase order must pass. These touch points involve manual processes, such as requisitioning, adding information to the purchase order, or a review and sign-off process.” The study also found that placing distributor orders took hospitals 27 seconds per PO line, while manufacturer-direct orders required 3.3 minutes per PO line.
Distributor orders are three times more likely to be electronic, which accounts for much of the efficiency associated with working with distributors, according to the study’s authors. “Hospitals use EDI for 96 percent of distributor orders compared to just 33 percent for manufacturer-direct orders.” The reason? “Manufacturer-direct orders cannot be placed electronically unless interfaces exist between the manufacturer and hospital.”
Purchasing products from an item master or formulary is more likely to be accomplished with distributor purchases vs. manufacturer-direct purchases, according to the study. The result is reduced staff time and cost. “Products sold through a distributor are more likely to be items that are already incorporated into the healthcare organization’s [materials management information] system, with established product records linked to established vendor and contract pricing,” write the authors. “This streamlines the requisitioning process and in turn expedites the procurement for these items.”

Receiving costs
According to the study, the cost of receiving goods from a distributor is lower than that of receiving goods direct from the manufacturer. On average, the cost to receive a line from a distributor is 15 cents, compared to 22 cents to receive a line on a manufacturer-direct order. The HIDA study cites two contributing factors:

• Distributors’ usage of advance ship notices. “The data provided can be used by most [materials management information] systems to automatically populate the receiving document based on actual picked quantities, thereby reducing the time and effort required to enter receipts into the system,” say the study’s authors. “This results in a dramatic reduction of receiving and invoice matching problems.”
• Just-in-time or low-unit-of-measure programs. Such programs have allowed hospitals to order and receive products in the appropriate unit of measure for direct transfer from loading dock to point of use, according to the report. “The key benefit to these programs is the elimination of touch points that traditionally included placement of products in the ‘general stores,’ picking the product, and subsequent delivery to the using location.”

Transportation costs tend to be higher for direct-buy products, add the authors. Part of that is unavoidable, as hospitals need to acquire clinically important items on a replacement basis or even for specific scheduled procedures. But there might be room for improvement, they say. “[N]ot all direct-buy products are created equal. Healthcare providers should analyze this spend and the related transportation costs and make sure each type of product is purchased in the manner that minimizes total transportation costs and maximizes efficiency.”

Intermountain
Some providers have a different view on the topic of self-distribution. That much was evident at the Supplier/Provider Institute.
Self-distribution isn’t for everyone, but it works for Salt Lake City, Utah-based Intermountain Healthcare, says Brent Johnson, vice president, supply chain and imaging services, and chief purchasing officer.

Intermountain comprises 23 acute-care facilities and approximately 160 clinics throughout Utah. The IDN was scheduled to open a 180,000-square-foot, self-distribution warehouse this summer. It is part of a $40 million, 300,000-square-foot building that will also house administration, ancillary services and couriers. The self-distribution warehouse will include low-unit-of-measure pick/voice technology. At press time, the center’s staff was testing its IT technology and warehouse management system.
Johnson decided to pursue self-distribution shortly after joining Intermountain in 2005. “We knew we needed to, first, standardize our products, and second, take control of our physical supply chain and take costs out of [it],” he says. But he didn’t feel he could do it alone. So Intermountain issued an RFP for med/surg distribution services, making it clear that the IDN was headed in the direction of self-distribution and needed assistance getting there. Temecula, Calif.-based Professional Hospital Supply (PHS) won the bid.

In preparation for the task that lay ahead, Intermountain hired approximately 25 people to beef up its sourcing and general supply chain operations. Several came from big med/surg distributors. PHS allowed Johnson’s team to examine how the distributor received, stored and shipped products. “Their attitude, flexibility and willingness to help” were – and remain – helpful to Intermountain, he says.

One key to the success of the program will be Intermountain’s ability to incorporate services other than med/surg distribution in the Intermountain Supply Chain Center, as the structure is called, Johnson believes. “If we were going to just build and manage a warehouse for med/surg, we shouldn’t be doing it ourselves. But we will leverage other ancillary services. That’s why we didn’t outsource it.”

Intermountain’s Supply Chain Organization already supports the IDN’s clinics and home care division through two small central warehouses. The IDN has 80 light vehicles and a 120-FTE courier department that support these warehouses, along with the central lab and other corporate light-parcel needs. The warehouse serving the clinics will be absorbed into the new Supply Chain Center, and the warehouse serving Intermountain’s home care operations will transition “as it makes sense,” says Johnson.

To service the IDN’s 23 acute care facilities on a daily schedule, Intermountain will lease five tractor-trailers. “We will also work with UPS and other third-party parcel companies to determine how the most cost-effective delivery can be accomplished – with our services or outside services.”

Johnson expects the warehouse to carry about 6,000 SKUs – primarily standardized, high-moving products. “We will still need a traditional med/surg distributor as a secondary or back-up provider,” he says. “This will be a very important and unique partnership,” he says.

That’s true for two reasons, he says. First, that distributor will serve as a back-up in case of emergencies. And second, it will supply non-A items to Intermountain as needed. “We don’t want to do what a med/surg supplier does now – that is, provide anything someone might need,” says Johnson. For that reason, the Supply Chain Center will stock only the A items, that is, high-volume, high-utilization ones.

Johnson believes that self-distribution is the right choice for Intermountain, but not necessarily for all IDNs. “We have the size, the geographic density, senior leader support, the talent and resources to do this right,” he says.

Nor does he expect all manufacturers to cheer on Intermountain’s efforts. Manufacturers’ concerns about added costs related to self-distribution are valid. “But it’s still the right thing to do for us,” he says.

But he’s not oblivious to manufacturers’ concerns. “We want to work with them and ask, ‘What activities do we require that lead to extra costs on your part?’” For example, it doesn’t make sense for an IDN to demand that a manufacturer provide product to a central warehouse as well as the IDN’s individual facilities. “So we will listen to manufacturers and try to work with them to reduce supply chain costs.”

Self-distribution won’t work without talented, well-trained supply chain professionals to guide it, he adds. And they may be in short supply.

“Supply chain in healthcare has been so dependent on GPOs that there has not been support to invest in strategic talent to help simplify and reduce the complex and high-cost of the healthcare supply chain,” he says. “Whether it’s self-contracting, strategic sourcing, self-distribution, category management, supplier relationship management, spend analysis or total non-labor expense management, there must be experienced, talented, well-paid supply chain leaders to determine what of many supply chain strategies are right for each IDN or hospital organization.

“Relying on the traditional materials manager who came from sterile processing or the warehouse will likely not get the C-suite’s attention to allow great visibility and capability for supply chain value.
“I’ve been very adamant in insisting that every IDN – whether it’s a one-hospital system or a 60-hospital system – needs a supply chain strategy. But you can’t develop a strategy without strategic, analytical talent.

“I’m not saying that everything has to come from outside the industry. You just have to hire better talent, the most analytical people. We can teach them supply chain, but not talent.”

Carolinas HealthCare
Joining Johnson on the panel at the Supplier/Provider Institute were one veteran of self-distribution, and another supply chain executive whose IDN has just begun.

Charlotte, N.C.-based Carolinas HealthCare System has practiced self-distribution for most of its North Carolina-based hospitals and clinics for a couple of decades, points out Jim Olsen, vice president, materials resource management. (Several of the IDN’s hospitals in North Carolina, as well as its South Carolina-based facilities are serviced by Cardinal Health. McKesson Medical-Surgical services physician practices not directly tied to Carolinas HealthCare.)

“The decision [to self-distribute] was made because space on the hospital campus was too valuable to keep a warehouse, laundry facility and other [ancillary services],” says Olsen, who points out that that decision was made long before he arrived at the IDN.

Although cost was – and remains – a big piece of the puzzle, it’s not the only reason Carolinas HealthCare has chosen to continue its self-distribution program. “Self-distribution makes product standardization easier,” says Olsen. When faced with the decision of getting a needed product in a day from the Carolinas distribution center, vs. three or four days from another supplier, clinicians will generally opt for the product they can get quickly, he points out.

Self-distribution is also a plus in disaster situations, he says. For instance, during the H1N1 epidemic in 2009, the IDN found it easier to procure and stock products directly from manufacturers than from distributors.

“But if you’re going to do [self-distribution], you will need to have a very, very strong distribution group,” Olsen says. In many cases, those individuals may lack healthcare distribution experience. But they can be taught the peculiarities of healthcare, he says.

North Shore-LIJ
Meanwhile, North Shore-Long Island Jewish in New York continues to make the transition from a traditional distribution system to self-distribution. The IDN completed outfitting its 84,000-square-foot Integrated Distribution Center on Long Island in December 2011, and continues to bring up its 14 hospitals. In fact, by the end of 2012, service to all but one of those hospitals (Staten Island University Hospital) should be up and running. (Staten Island is scheduled to follow in the first quarter of 2013.)

“Our vision for 2013 is to begin servicing our 300-plus [non-hospital] locations,” says Pinak Shah, senior director, supply chain operations, Integrated Distribution Center.

The decision to open its own distribution center was a result of the IDN’s growth. “When we merged hospitals, we realized we needed to standardize products, so [our clinicians] would achieve similar clinical outcomes throughout the system,” says Shah. But the supply chain team needed to exercise some controls to ensure that nothing was coming through the back door. “You need a building to control that,” he says.

An efficient supply chain is all about minimizing touch points from procurement to consumption, says Shah. The Integrated Distribution Center will help North Shore-LIJ do just that.