Healthcare Logistics: Filling a New Prescription for Supply Chain Improvement

The way healthcare organizations source supplies and connect with manufacturers and service providers is undergoing a comprehensive transformation—one that is essential to meet emerging patient demands, address healthcare legislation, support an overall focus on improving patient care, and reduce healthcare costs.

Gartner’s 2016 Healthcare Provider Supply Chain Outlook report spotlights a few of the most prominent issues and initiatives. In particular, the study notes that healthcare industry leaders are primarily looking to align their objectives with the strategic goals of an integrated delivery network (IDN), prioritize standardization, and tackle pharmaceutical costs.

“Healthcare supply logistics is complex—and every IDN is different,” says Eric O’Daffer, healthcare supply chain researcher with Gartner. “Still, the biggest shift for organizations with foundational maturity is the focus on reducing complexity and total cost to serve across the supply chain. They’re looking to leverage capabilities and develop two-way communication upstream with clinicians who have historically made decisions independent of the supply chain.”

UPS sees similar trends in the industry. Hospital systems are redefining procurement and supply chain via economies of scale previously found only in the largest national systems, according to John Menna, vice president of global strategy, healthcare logistics with UPS.

“One trend is for hospital systems to invest in building and buying out clinical locations that are closer to the patient, which widens the scope of logistical complexity for their supply chain executives,” Menna says. “The goal of providing more patient-centric care requires building a supply chain network that meets the needs of not only the institutional hospital, but also the ambulatory, clinical, and homecare settings.”

As a whole, healthcare organizations are especially focused on supply chain management, product selection/utilization, and standardization. “They’re developing relationships with suppliers,” O’Daffer says. “They evaluate data to fully understand the intersection of logistics and total delivery costs to measure right price, right time, and service cost collections, and then design a supply chain network that supports adherence.”

The underlying prescription for today’s advanced supply chain approaches—regardless of the healthcare organization’s scope and scale—is technology, with a strong dose of data and analytics.

One decade ago, many organizations negotiated and managed logistics almost as an afterthought—a necessary evil to make sure products were available as needed and to avoid supply chain fire drills.

Today’s healthcare supply chain is different, finds the Gartner study, noting that the healthcare supply chain is shifting away from provider or group purchasing organization (GPO) sourcing and toward total cost to serve.

“Healthcare companies place growing emphasis on inbound freight, internal logistics network expenses, inventory holding costs, loss/expiration, and, most importantly, service levels at the point of use,” O’Daffer explains.

One leader in supply chain management efficiency is Mayo Clinic. Its health system is large and geographically disparate, serving more than 70 communities in Minnesota, Wisconsin, Iowa, and Georgia including 19 owned hospitals in Minnesota, Iowa, and Wisconsin, as well as two owned hospitals in Phoenix and Jacksonville, Fla.

Gartner lists Mayo Clinic as the top company in its Healthcare Supply Chain Top 25 for 2015 list, largely due to its total cost, quality-care approach. Mayo Clinic is in the midst of a multi-year, multi-pronged supply chain transformation designed to shift its supply chain from a material management-focused organization to an enterprise supply chain system.

The organization’s improvements began 17 years ago with a robust strategic plan. “In that time, we’ve gone from a decentralized organization to one of shared resources and a particular focus on data that our practice can use,” says Bruce Mairose, vice chair of operations for Mayo Clinic Supply Chain Management. “Our goal is to transform the healthcare supply chain delivery process by enabling the dialogue. From that dialogue, we’ve invested in technology and enabling processes. We do not make decisions about products, but rather present relevant information to the practice to support their decisions.”

Today, the Mayo Clinic supply chain provides contracting services to 66 IDNs and 180 hospitals within those IDNs. “Our fundamental challenge is to change the dynamics of the relationship with suppliers,” he adds.

The organization changes those dynamics through several programs. For instance, in 2007, Mayo Clinic Supply Chain Management group took control of its inbound freight spend by dealing directly with key shipping partners. The group raised the visibility of its freight spend through better analytics, helping cut freight costs by 25 percent.

More recently, in March 2016, Mayo Clinic and Vizient introduced a web-based analytics and reporting supplier service called Reveal as part of its services to the Upper Midwest Consolidated Services Center (UMCSC). Reveal emphasizes data analytics to improve transparency, reduce unnecessary resources, and target opportunities for greater sales potential.

Participating suppliers that have contracts with UMCSC are able to see the total product market by item at the SKU level, by individual member, and by share. So suppliers see where they have contracts and their competitors’ market shares.

“It’s a never-before-possible look at their customer markets at the line-item level,” Mairose says. “Reveal is the first phase of a series of multiphase tools that we believe will transform the healthcare supply chain and inspire more dynamic supplier/provider arrangements.”

Centralized for Distribution

Some healthcare organizations take a slightly different approach, opting to streamline supply chain services through a consolidated service center (CSC). More than 40 CSCs currently operate in the United States, Gartner reports, representing an estimated 10 to 15 percent (by revenue) of the total medical-surgical distribution market.

In today’s market, there are two main types of CSC. A self-managed IDN, such as Intermountain Healthcare, relies on an internal GPO and, typically, offers extensive services beyond supply distribution. An outsourced IDN relies on a third-party logistics (3PL) entity to set up and/or manage the CSC in partnership with the provider.

Livonia, Mich.-based Trinity Health recently opted for a hybrid 3PL approach. The healthcare group is one of the largest multi-institutional Catholic healthcare delivery systems in the nation. It serves communities in 21 states from coast to coast with 90 hospitals and 120 continuing care locations—including home care, hospice, PACE (an All-inclusive Care for the Elderly program), and senior living facilities—that accommodate nearly 2.1 million visits annually.

Trinity chose the CSC approach because of the challenges associated with an extended network. “It’s still a fragmented supply chain world,” notes Clay Johnson, vice president of supply chain operations for Trinity Health. “The traditional healthcare supply chain is built to perpetuate multiple distribution channels and intermediaries that deliver to our hospitals, clinics, and physician offices. It’s the way the industry was founded and remains so today.

“Right now there are too many handoffs, too many places to get products, and too many choices,” he adds.

For Trinity, improving supply chain efficiency begins with reliable information and accurate data. “We wanted to take control of our bill of materials,” Johnson says. “We wanted to create a single point of entry for all manufacturers, and a lower cost-to-serve for everyone associated with the supply channel.”

Like many healthcare networks, Trinity realized that the fragmented supply chain forces hospitals to create storerooms to hold safety stock and often scramble to acquire products that go on backorder. The CSC approach will help mitigate that problem by reducing service and product variation, creating consistent ordering patterns, and establishing direct manufacture-to-warehouse relationships, according to Johnson.

After evaluating 18 different 3PL providers inside and outside the healthcare market, Johnson and his team chose XPO Logistics, headquartered in Greenwich, Conn., to lay out the warehouse footprint, manage the real estate, handle the transportation, and help integrate the warehouse management system (WMS) and demand management system (DMS).

Johnson acknowledges that establishing a CDC will not solve all the fragmentation problems. “To make the warehousing system work, we have to re-engineer the supply chain process in healthcare, gain trust from our caregivers, and prepare accurate forecasting through good data and information,” he notes. “Through the Trinity Health warehousing network, we’ll be able to track products from point of origin to point of consumption. We’ll know how much of a product we use and how much we buy at a patient encounter level.

“The availability of that data opens up the possibility for crucial conversations with clinicians and physicians around utilization, waste, and, of course, cost,” Johnson adds. “Physicians are responsive to good data and information. Our job is to control the supply chain, build trust, and change behaviors at all stages of the supply channel.”

Trinity will begin shipping to its first hospital from its new warehouse in November 2016.

Supply Side Connections

Suppliers are also working to create solutions that support IDNs and improve supply chain management for healthcare customers by consolidating shipping and better understanding overnight versus procedural needs.

One way is through micro-distribution and field stock location (FSL) solutions that enable healthcare companies and providers to keep inventory closer to the point of care and provide greater supply chain visibility and high-cost product access.

For example, UPS’s medical device customers are able to tap into a multi-client, healthcare-compliant distribution and warehousing facility—strategically located near UPS’s air hub at Philadelphia International Airport—that offers comprehensive medical device replenishment services such as decontamination and instrument inspection to support distribution services to hospitals. This facility is fully integrated into UPS’s overall transportation and FSL network, making it possible for healthcare manufacturers and distributors to reach more than 80 percent of U.S. hospitals within four hours.

Value-added service centers might provide more return on investment than warehouses to healthcare organizations.

“Deploying value-added service centers can enable products to be assembled or enhanced to create efficiencies within the care setting,” says Kevin McPherson, vice president of healthcare for GENCO, a FedEx Company. “A value-added service center might prepare individual case carts for surgical procedures, blister pack bulk tablets, or perform biomedical engineering activities.”

Imagine an IoT of Health

An Internet of Things (IoT) approach to help solve supply chain inefficiencies offers many benefits, according to Jean-Claude Saghbini, chief technology officer and vice president of inventory management solutions for Cardinal Health, a healthcare services company based in Dublin, Ohio.

“We need to bridge the gap between technology, data, and analytics to truly transform the supply chain into a strategic business asset,” he says. “We have the technology to reinvent and vastly improve the healthcare supply chain today. Healthcare systems can utilize an intelligent supply chain as a strategic business asset to reduce the total cost of care, and we can help them achieve their goals.”

Saghbini believes an IoT approach can accelerate the transfer and analysis of big data, and support real-time decision-making on issues such as consumption, product availability, and approaching product expiration—and he’s putting that theory to work at Cardinal Health.

In 2013, Cardinal Health acquired WaveMark technology, an acquisition that brought advanced RFID point-of-use and data analytics capabilities to the organization. Cardinal Health also continues to invest in advanced data capture and analytics that can be integrated with other data platforms for valuable insights to improve decision-making.

“Our cloud-based supply chain solution hinges on its robust advanced analytics package, which allows healthcare providers to have more visibility into their supplies, and how to manage inventory over time to reduce waste,” Saghbini explains. “The solution is enabled by an RFID technology platform.”

The Same Source of Truth

The evolution of the supply chain and IoT has changed Cardinal Health’s relationship with suppliers. “To create an end-to-end connected supply chain, we need all stakeholders—manufacturers, providers, and distributors—to access and leverage the same data, the same source of truth, as they optimize the supply chain,” Saghbini says. “This evolution will only strengthen our relationships with manufacturers and suppliers.”

Saghbini is particularly excited about the potential of IoT to support and improve the operation of the medical device and implantable supply chain.

“Medical devices and implantables are ripe for an IoT approach,” says Saghbini. “It’s an area we will evaluate as we explore new solutions to accelerate the transfer and analysis of big data and support real-time decision-making on issues such as consumption and impending product expiration.”

Similarly, GENCO’s McPherson points to an IoT solution that could enable patients to directly procure medical devices and prescribed medications remotely—at home via a computer or smartphone—rather than moving through traditional healthcare channels, such as doctors’ offices, pharmacies, and hospitals.

“That technology has the potential to drive serious change in healthcare fulfillment,” McPherson says. “It can bypass the older, multi-stage model where a device goes through various layers of procurement before it reaches the patient. IDNs need to be receptive to the technology and prepared for the changing environment.”

IoT capabilities in the form of mobile technologies that capture demand signals at the point of care are also becoming more prevalent. For example, storage cabinets equipped with RFID barcodes and smartphone applications can record medical supply consumption and automate replenishment.

“Automation helps streamline procurement,” McPherson says. “Package sensing and tracking technology also are used extensively to transport life-critical and temperature-sensitive drugs, enabling close oversight of in-transit times and ensuring compliance.”

Temperature-Sensitive Supplies

A vital part of healthcare supply chain networks is the transportation of temperature-sensitive and critical products. These products require a supply chain that is seamless and integrated, and adheres to strict product safety and security protocols.

Numerous innovative controlled room temperature transportation solutions have emerged over the past few years, impacting both small-package transportation and freight forwarding.

“To get cold chain right, companies need qualified and validated solutions that they can execute over and over for high-value, vital healthcare products,” says UPS’s Menna. “Companies are leveraging innovative cold chain packaging and temperature-monitoring devices specifically engineered to ensure product protection throughout the supply chain.”

One example of enhanced patient convenience is Exact Sciences, a medical diagnostics company based in Madison, Wis. Its innovative colorectal cancer home testing kit requires time-sensitive logistics to get the kit to the patient’s home, and then get samples from the home to the test laboratory.

“Many people typically would not get screened for colorectal cancer partly because of the procedure’s invasive nature,” says Menna. “But now, with the patient’s ability to conduct the test in the privacy of the home, assisted by smart, effective logistics, more people won’t have to fear the testing for one of the most curable types of cancer. In this case, an effective supply chain network helps set the stage for early detection and better care.”

Looking Ahead

Even as leading healthcare organizations transform and streamline the complex supply chain network, business logistics managers will have to retain a level of flexibility in the process, gain executive buy-in, and find a way to demonstrate total cost to serve—something that many have not had to do in previous management scenarios.

“Along with standardization and consolidation, it’s important for hospitals to have a realistic handle on GPO and supplier performance—it’s a big piece of managing cost performance,” says James Spann, Jr., global practice leader of supply chain and logistics with Simpler Consulting, a Truven Health Analytics Company, a global management consultant.

Spann also emphasizes the need for executive-level buy-in, especially for smaller hospital networks. “Large healthcare networks have a supply chain leader at the boardroom table,” he says. “The average community hospital led by a manager or director may not have that C-suite visibility—and they should if they want to achieve supply chain efficiencies.

“They also need physician integration and alignment as a part of the supply strategic approach,” he adds. “If they have to move backward to gain buy-in, they will encounter roadblocks and obstacles.”

“At the supply chain level, healthcare organizations have to get good at change management, how they measure service, end-to-end costs, and how they educate senior leadership on the role supply chain plays in total quality and cost of care,” O’Daffer says. “They have to move from ‘we saved x dollars on a product’ to ‘we reduced the supply chain cost per adjusted admission and patient activity.’

“That’s hard to do and there are some data barriers to success,” he adds. “New innovation will focus on the ability to capture these costs.”