Hospitals are desperate to reduce expenses and improve efficiency. It’s possible that some pharmaceutical warehousing management therapy is just what the doctor ordered.
Healthcare reform, an ever-increasing number of rules, ballooning operational expenses, and increasingly stringent insurance reimbursement guidelines all place a strain on healthcare providers. Implementing cost-cutting initiatives and increasing operational efficiencies has become a must-do for many businesses.
“For a long time, hospitals generated money despite themselves,” says Chip Geiger, purchasing manager at Rockford Health Systems in Illinois, which combines the resources of Rockford Memorial Hospital, a tertiary care hospital, with the primary and specialty doctors of Rockford Clinic. “However, given the current economic and regulatory environment, we must act with greater business acumen.”
Many healthcare providers see supply chain operations as an area where they may make major improvements. Here are five remedies for common supply chain maladies that can help hospitals achieve better operational and financial health.
1. Fill up the Gaps in Your Knowledge
A hospital’s financial performance can be considerably improved through advanced supply chain operations. However, in order to reach that favorable outcome, the healthcare provider must take charge of its supply chain strategy and manage it proactively. However, many hospitals lack the logistical expertise to pull off these feats.
The function of a hospital supply chain management differs greatly from that of other industries, with a greater emphasis on contracts and purchasing, as well as negotiating better price for things such as medical devices and surgical implants with suppliers.
“Many hospitals don’t know where to begin improving their supply chains because their personnel isn’t familiar with the complex logistics tools and methods used by other industries,” says Ira Tauber, chief operating officer of Triose, a healthcare logistics service based in Reading, Pa. “For example, they know how to negotiate a product’s pricing but not how to determine the overall landed cost.”
Hospital supply chain managers may need to examine industry best practices or solicit the support of a third-party provider or consultant to undertake projects such as enhancing freight management.
2. Fill in the blanks with a prescription
Improving hospital supply chain operations necessitates the creation of a plan. That is just what Rockford Health System undertook to address its inefficient freight management operations.
Northern Illinois and southern Wisconsin’s largest health system is Rockford Health System. It includes a tertiary care hospital, outpatient clinics, a rehabilitation in-patient hospital, and a visiting nurses association. The company worked with a consultant to analyze its supply chain operations in order to have a more complete and accurate picture of its freight expenses (see sidebar below).
“Because we weren’t tracking or reporting freight charges, we didn’t have any idea how they were affecting our total bottom line,” Geiger says. “We estimated that we spent $149,000 on freight per year.
“However, after we standardized our reporting and started getting the appropriate statistics,” he continues, “we discovered our annual freight expenditures were closer to $350,000.” “That’s a significant change. We were well aware that transportation provided a significant cost-cutting potential.”
Connecting finance and accounts payable workers with purchasing staff, as well as finding a system to track and better control expenses, were among Rockford’s objectives. Triose’s freight management solution was implemented to address these needs, which included negotiating preferred carrier rates and contracts, training and educating vendors, and monitoring compliance, as well as supporting purchasing and materials management personnel, auditing freight bills, and managing shipment information.
During the first phase of implementation, Rockford saved $51,866 by using the freight management system to handle 43 percent of their freight spending. It now uses the Triose system to control about 70% of its expenses and has saved more than $500,000 in freight costs over the last five years.
“I now have trust in my data because I have consistent systems in place,” adds Geiger. “I can focus on where we’re spending our money and aim to increase our savings.”
3. Have Your Eyes Examined
A hospital’s ability to operate efficiently is hampered by a lack of visibility into its supply chain and freight spend. This was the case for Baystate Health, a not-for-profit healthcare system based in Springfield, Massachusetts, that operates three 800-bed hospitals. The company handles over 1,500 shipments per week, the majority of which are incoming, and works with over 5,000 vendors.
Baystate conducted an audit in 2007 to determine how much it spent on shipping. The management team was taken aback when they learned that the company’s annual freight expenditure was approximately $1 million. They set out to assess such costs for potential cost-cutting opportunities, as well as to increase spending accountability and transparency. However, with over 1,450 different departments generating freight charges, setting up a better billing system proved difficult.
“Baystate understood it had an issue and a chance to save money, but it didn’t know how to tackle it,” Tauber recalls. “The team didn’t have any access to shipping information.
“They realized that putting in place a freight management program would put some controls and processes in place, as well as address the numerous departments and people who have an impact on shipping and logistics,” he continues.
Baystate began working with Triose in 2011 to develop an incoming freight management platform and a bespoke billing approach that would fit the accounting department’s objectives. Triose created an integrated invoicing solution that enabled for correct freight cost distribution to departments at many levels, saving hours of manual labor. Reduced expenses and increased vendor compliance were also achieved as a result of the activities.
“The ability to allocate charges at the cost-center level improved visibility tremendously,” says Todd Bailey, Baystate Health’s manager of warehousing and transportation.
Baystate saved $265,000 on freight expenditures in the first year of implementing the Triose program, lowered shipping costs by more than 20%, and achieved vendor compliance of 70%.
In addition, the solution improved schedule visibility on Baystate’s cargo dock, which helped to reduce confusion. Trucks used to arrive throughout the day, and shipment receivers would run back and forth to the port to accept orders. The majority of shipments to the hospital now arrive on a single truck every morning.
“All of our shipment data is now more streamlined,” Bailey explains. “We don’t have any lost freight or late shipments. Nothing in our shipping process has a detrimental impact on patient care.”
4. Go on a Freight Spending Diet
Because of the nature of their operations, hospitals are prone to high freight expenses. The majority of shipments are incoming, and a significant portion of them are sent by expedited service. For example, in Rockford, nearly 83 percent of shipments were overnight or second-day.
“Many things in healthcare are too expensive to keep in inventory,” says Geiger. “Our employees can order things online as needed, and those orders are sent directly to vendors.”
This means that at any given moment, 2,000 Rockford employees may be ordering products and supplies—a strategy that can lead to excess inventory and poor purchasing visibility. Better controls can help you lose weight.
“Facilities must assess which things they absolutely require overnight delivery and which can be delayed,” says Geiger. “Sometimes an item is required for a next-day operation, but other times the cargo can be delivered by land, which saves money on shipping.”
5. Increase your adaptability
Supply chains in hospitals must be able to adapt to changing needs while still delivering consistently. Consider Stryker Medical, a medical device company that had an efficiency issue that necessitated some supply chain agility.
Thousands of huge goods, such as hospital beds and furnishings, stretchers and transport devices, ambulance cots, and evacuation equipment, are in Stryker’s inventory. It used to manufacture and store all of its products at its Kalamazoo headquarters.
Large objects were frequently placed into trucks with no thought given to where they would end up. Those trucks frequently left the pier with only 12 to 15 goods, resulting in many truckloads to one destination.
In addition, the company sends out over 3,000 trial devices each year, which prospective consumers can try out before making a purchase. It can be difficult to deliver those things because many of them demand extra attention and coordination. Furthermore, delivery and setup must be accomplished quickly and with as little disruption to healthcare activities as possible.
Stryker’s former carrier was rigid and couldn’t always accommodate the company’s unique delivery requirements. As a result, it was impossible to plan, coordinate, and estimate delivery schedules. Stryker needed to cut down on manual tasks, store and track inventory, and make sure deliveries were made on time.
“Working with hospitals is challenging since their requirements change frequently and without warning,” explains Matt Bielanski, logistics team leader at Stryker Medical. “Many transportation companies can guarantee a delivery date or time, but they are hesitant to change it at the last minute or guarantee that their driver can meet with a sales representative to coordinate before delivery. However, carrier flexibility is crucial because our company is based on client demand, the availability of specialized employees, and the availability of additional manpower to carry patients or equipment.”
Stryker Medical began looking for a new transportation supplier who could collaborate with its sales team, engage professionally with customers, and be adaptable in the face of rapid change. Kenco, a third-party logistics (3PL) provider based in Chattanooga, Tennessee, was chosen.
Kenco assisted Stryker in the development of a transportation management system (TMS) based on ZIP codes that expedited deliveries. It also aided in the establishment of a distribution network, which now includes nine regional distribution hubs. Stryker Medical’s equipment is still manufactured in Kalamazoo, but it is then matched with complimentary items and shipped to one of the DCs, which are strategically situated to allow one-day transit to 85 percent of the United States’ population.
“Kenco assisted us in figuring out how to load more beds and stretchers on trailers so we could move fewer cargoes,” says Jim Krawcyzk, Stryker Medical’s senior director of customer care. “Within the trailers, the 3PL installed racking systems and specific handling equipment to aid transfer beds and stretchers with minimal damage. We use the TMS to assist us plan shipments, and regional distribution centers help us get products to customers faster.”
Stryker has integrated trial unit storage and reduced the number of trucks it utilizes per delivery. Through lower gasoline, labor, and outsourcing, the corporation saves $1.6 million per year.
“Thanks to inventive problem-solving and data analytics, our overall freight expense has remained flat even as our volume has expanded,” adds Bielanski. “Our sales staff has noticed a significant rise in the responsiveness of our downstream supply chain from a qualitative standpoint.”
Stryker Medical sales representatives contact the nearest regional DC to schedule delivery. “Our sales agents have built strong personal ties with the drivers and staff at each regional distribution facility,” says Jeffrey Vander Ploeg, Stryker Medical’s director of distribution and logistics. “We’ve figured out how to overcome 99 percent of our delivery coordination problems.”
“Stryker’s on-time delivery rate is slightly under 100%, and the regional DCs allow us to maintain a small-business approach that caters to hospitals’ specific delivery requirements,” Bielanski explains. “They like doing business with us because we make things simple for them.” Stryker has also benefited from Kenco’s solutions in terms of projecting a more professional image to consumers.
Transportation and logistics costs are now being looked at by hospitals across the board as a crucial driver of fiscal stability.
“All hospitals are being squeezed for cash, and many are turning to third-party logistics providers to cut transportation and logistics costs,” adds Krawcyzk. “In our case, we were able to clearly illustrate the benefits of managing and delivering our items through a third-party logistics partner. Many hospitals and healthcare organizations are resorting to logistics outsourcing to assist them manage their costs.”
With healthcare reform still in its early stages, today’s healthcare systems and hospitals are set to endure cost-cutting pressure for years to come. Those that can streamline logistics and strengthen their supply chains will have a better chance of a prosperous future.