First Aid for the Hospital Supply Chain

Tags: Inventory Management, Supply Chain Management, Health Care Logistics, Transportation Management, Specialized Logistics

Hospitals are aching to cut costs and increase efficiencies. Some supply chain management therapy might be just what the doctor ordered.

More to the Story:

Healthcare reform, a growing number of regulations, skyrocketing operational costs, and increasingly stringent insurance reimbursement guidelines put significant pressure on healthcare providers. For many, implementing cost-cutting measures and improving operational efficiencies have become mandatory regimens.

"For a long time, hospitals made money in spite of themselves," says Chip Geiger, purchasing manager at Illinois-based Rockford Health Systems, which combines the resources of Rockford Memorial Hospital, a tertiary care hospital; and Rockford Clinic's primary and specialty doctors. "But in the current economic and regulatory climate, we have to operate with more business savvy."

Many healthcare providers have identified supply chain operations as an area with significant potential for improvement. Here are five cures for common supply chain ailments that can help put hospitals on the road to improved operational and financial health.

Stitch Up the Knowledge Gap

1. Stitch Up the Knowledge Gap

Advanced supply chain operations can significantly improve a hospital's financial performance. To achieve that positive outcome, however, the healthcare provider must take control of its supply chain strategy and proactively manage the process. Yet many hospitals lack the logistics know-how to accomplish these feats.

The hospital supply chain manager's role can vary significantly from other industries, tending to focus more on contracts and purchasing, and working with suppliers to negotiate better pricing for items such as medical devices and surgical implants.

"Many hospitals don't know where to start making supply chain improvements, because their staff isn't familiar with the sophisticated logistics tools and strategies other industries use," says Ira Tauber, chief operating officer for Reading, Pa.-based healthcare logistics provider Triose. "They know how to negotiate the price of a product, for example, but not how to calculate the total landed cost."

To launch initiatives such as improving freight management, hospital supply chain managers may need to research industry best practices, or enlist help from a third-party provider or consultant.

2. Write a Prescription

Formulating a plan is a vital component of improving hospital supply chain operations. That's exactly what Rockford Health System did to treat its inefficient freight management processes.

Rockford Health System is the largest health system serving northern Illinois and southern Wisconsin. It comprises a tertiary care hospital, outpatient clinics, an in-patient hospital offering rehabilitation services, and a visiting nurses association. To gain a more complete and accurate picture of its freight costs, the company worked with a consultant to review its supply chain processes (see sidebar below).

"We weren't tracking or reporting freight expenses, so we had no visibility into how they were impacting our overall bottom line," recalls Geiger. "We estimated we were spending $149,000 on freight annually.

"But once we standardized our reporting, and began pulling the right numbers, we discovered our annual freight costs were closer to $350,000," he says. "That is a huge difference. We knew transportation represented a substantial opportunity for savings."

Rockford's goals included connecting finance and accounts payable personnel with purchasing staff, and devising a method to track and better manage costs. It addressed these needs by implementing Triose's freight management solution, which encompassed negotiating preferred carrier rates and contracts; training and educating vendors and monitoring compliance; supporting purchasing and materials management personnel; auditing freight bills; and managing shipment information.

During the first implementation phase, Rockford used the freight management system to handle 43 percent of its freight spending, and saved $51,866. Today, it manages nearly 70 percent of its spending with the Triose system, and has saved more than $500,000 on freight costs over the past five years.

"With consistent processes in place, I now have confidence in my numbers," says Geiger. "I can hone in on what we are spending, and work toward increasing savings."

3. Get Your Eyes Checked

Lack of supply chain and freight spend visibility can limit a hospital's ability to operate efficiently. This was the case for Baystate Health, a Springfield, Mass., not-for-profit healthcare system that operates three 800-bed hospitals. The company averages 1,500 shipments weekly—mostly inbound—and works with more than 5,000 vendors.

In 2007, Baystate conducted an audit to identify how much it was spending on shipping. The management team was shocked to learn its annual freight spend was nearly $1 million. They set out to evaluate those costs for potential areas of savings, and establish more spending accountability and visibility. But with more than 1,450 separate departments generating freight charges, setting up an improved billing system proved a challenge.

"Baystate knew it had a problem and an opportunity to save money, but had no idea how to attack it," recalls Tauber. "The team had zero visibility into shipping information.

"They realized that implementing a freight management program would put some controls and processes in place, and address the various departments and staff that impact shipping and logistics," he adds.

In 2011, Baystate began working with Triose to implement an inbound freight management program and customized billing method that would meet the needs of the hospital system's accounting department. Triose customized an integrated billing solution that allowed for accurate allocation of freight costs to departments at multiple levels, saving hours of manual processing. The initiatives also resulted in reduced costs and improved vendor compliance.

"The ability to assign charges at the cost-center level provided huge visibility improvements," says Todd Bailey, manager of warehousing and transportation at Baystate Health.

During the first year of using the Triose program, Baystate saved $265,000 on freight spend, cut more than 20 percent of its shipping costs, and achieved 70-percent vendor compliance.

As a bonus, the solution also helped ease chaos on Baystate's shipping dock by enhancing scheduling visibility. In the past, trucks arrived all day, and shipment receivers constantly ran back and forth to the dock to accept orders. Today, most shipments to the hospital arrive all at once each morning on one truck.

"All our shipment information is more streamlined now," says Bailey. "We aren't losing freight or receiving late shipments. Nothing in our shipping process negatively affects the continuum of patient care."

4. Put Freight Spending On A Diet

Hospitals generally deal with high freight costs because of the nature of their operations. Most shipments are inbound, and a large percentage ships via expedited service. In Rockford's case, for example, about 83 percent of shipments were either overnight or second-day.

"In healthcare, many products are too expensive to hold in inventory," explains Geiger. "Our staff can go online to order products as needed, and those orders go directly to vendors."

This means 2,000 Rockford employees may be ordering products and supplies at any given time—an approach that can lead to excess inventory and poor purchasing visibility. Implementing better controls helps trim the fat.

"Facilities have to determine which items they truly need to receive overnight, and which ones can wait," says Geiger. "Sometimes an item is needed for surgery scheduled for the next day, but other times the shipment can travel via ground, which significantly reduces shipping costs."

5. Improve Your Flexibility

Hospital supply chains must be able to adapt to changing needs, while still delivering reliably. Consider Stryker Medical, a medical equipment manufacturer that faced an efficiency problem requiring some supply chain agility.

Stryker's inventory consists of thousands of large items such as hospital beds and furniture, stretchers and transport devices, ambulance cots, and evacuation equipment. In the past, it manufactured and stored all products at its headquarters in Kalamazoo, Mich.

Large items were often loaded onto trucks with little planning about their destination. Many times, those trucks left the dock carrying only 12 to 15 items, generating multiple truckloads to one destination.

In addition, the company annually ships more than 3,000 trial units, which prospective customers can test to facilitate the purchasing process. Delivering those items can be complex, because many require special care and coordination. Additionally, delivery and setup must be completed quickly, with minimal disruption to healthcare operations.

Stryker's previous carrier was inflexible, and could not always meet the company's special delivery needs. As a result, delivery times were difficult to schedule, coordinate, and predict. Stryker needed to reduce manual tasks, store and track inventory, and ensure on-time delivery.

"Working with hospitals is complex because they often change their requirements with little notice," says Matt Bielanski, logistics team leader for Stryker Medical. "Many transportation providers can guarantee a delivery date or time, but are reluctant to change at the last minute, or ensure their driver can meet with a sales rep to coordinate prior to delivery. But, because our business centers around customer need, the availability of special staff, and access to additional labor to transport patients or equipment, carrier flexibility is critical."

Stryker Medical began looking for a new transportation provider that could partner with its sales force, work professionally with customers, and maintain flexibility in the face of rapid changes. The company chose Chattanooga, Tenn.-based third-party logistics (3PL) provider Kenco.

Kenco helped Stryker develop a ZIP code-based transportation management system (TMS) that streamlined deliveries. It also helped develop a distribution network that has grown to include nine regional distribution centers. Today, all of Stryker Medical's equipment is still built in Kalamazoo, but it is then matched up with complementary items and moved to one of the DCs, which are strategically located to provide one-day transit time to 85 percent of the U.S. population.

"Kenco helped us determine ways to put more beds and stretchers on trailers so we could reduce the number of shipments we moved," says Jim Krawcyzk, senior director of customer care for Stryker Medical. "The 3PL also configured racking systems and special handling equipment within the trailers to help move beds and stretchers with minimal damage. The TMS helps us coordinate shipments, and regional distribution centers make it easier for us to get products to customers more quickly."

Today, Stryker has reduced the number of trucks it uses per delivery, and consolidated trial unit storage. In total, the company saves $1.6 million annually through reduced fuel, labor, and outsourcing.

"Even as our volume has grown, overall freight spend has remained flat, thanks to innovative problem-solving and data analytics," says Bielanski. "From a qualitative point of view, our sales force has seen a great increase in the responsiveness of our downstream supply chain."

To coordinate deliveries, Stryker Medical sales representatives contact the closest regional DC. "Our sales reps have developed good personal relationships with the drivers and staff at each regional distribution center," says Jeffrey Vander Ploeg, director of distribution and logistics at Stryker Medical. "We have solved 99 percent of our delivery coordination issues."

"Stryker's on-time delivery rate falls just below 100 percent, and the regional DCs allow us to retain a small business approach that serves hospitals' unique delivery needs," Bielanski says. "They enjoy doing business with us because we make it easy." Kenco's solutions have also helped Stryker present a more professional image to customers.

Hospitals across the board are now looking at transportation and logistics costs as a key driver of economic stability.

"All hospitals are being pinched for costs, and many are moving to 3PLs to mitigate transportation and logistics expenses," says Krawcyzk. "In our case, we were able to clearly demonstrate the value of using a third-party logistics partner to manage and deliver our products. Many hospitals and healthcare systems are turning to outsourcing logistics because it helps them address their cost issues."

With reform still in its infancy, it's likely that today's healthcare systems and hospitals will continue to face cost-reduction pressure for years to come. Those that can streamline logistics and boost their supply chain strength will improve their chances of a healthy future.