Nailing down the value in the value-add

Today’s distributors aren’t just box-movers. But contracting executives must choose selectively from their suppliers’ value-added offerings.

Good prices, honesty, responsiveness, excellent fill rates, accurate invoicing – these are still the bedrock of successful IDN/distributor relationships. But today’s distributors can bring a lot more to the table, given their expertise not only in logistics, but in data collection, analysis and consulting. The question contracting executives must keep asking themselves is, “Is there value in the value-adds?”

Kim Barnard, director of materials management for Affinity Health System, Menasha, Wis., for example, applauds Medline Industries for its honesty and willingness to work hard. The distributor delivers products five days a week to Affinity’s central warehouse in Menasha. Affinity then delivers supplies in low-unit-of-measure to its three hospitals, surgery center and more than 20 clinics.

Affinity takes advantage of Medline’s Complete Delivery System (CDS) for its labor & delivery, open heart and total joint programs, in which the distributor packs disposable, procedure-specific items into one carton. And the IDN has benefited from Medline’s clinical expertise in improving efficiencies in Affinity’s custom pack program.

But about a year and a half ago, Barnard and her staff evaluated whether it made sense for the distributor to provide even more services, such as distribution in low-unit-of-measure directly to the IDN’s many facilities. “When we took [the distributors’ additional] costs into account, as well as the staff we have and our expenses (for example, the lease for our warehouse), we saw we were doing much better” than the distributor could, she says. In fact, she points out, Affinity’s central warehouse holds approximately 3,500 SKUs and turns inventory 16 to 17 times a year.

Lifespan, Providence, R.I., has gone through similar analyses, says Nick Dominick, vice president for imaging services, cardiac services and supply chain operations. Lifespan comprises five acute-care facilities serving Rhode Island and New England. Its prime vendor – Warwick, R.I.-based Claflin Co. – delivers med/surg products to Lifespan’s warehouse, which in turn breaks it down and distributes in low-unit-of-measure to its facilities.

Although med/surg distributors would welcome the opportunity to deliver in low-unit-of-measure directly to Lifespan’s facilities, the IDN has resisted any overtures. “When we do the analysis, we can do it less expensively,” says Dominick. In a similar vein, the IDN has looked at – but rejected – a couple of distributors’ suture management programs, he says.

Out-of-the-box thinking
“I think all healthcare distributors…are thinking much more ‘out of the box,’ about more than delivering the right product at the right price to the right location at the right time,” says Donald Groth, corporate vice president, materials resource management, Detroit Medical Center, Detroit, Mich. “But you have to assess the value, where you can use [the offering] and where you need it.”

Early this year, the DMC signed a five-year agreement with Cardinal Health, its prime vendor since the late 1990s, after putting the contract out to bid. The agreement calls for Cardinal to continue to provide its ValueLink just-in-time distribution program. Although it wasn’t a make-or-break part of the deal, Cardinal’s decision to build a distribution center within the city of Detroit was an important part of the selection process. “I lobbied very strongly for a facility within the city of Detroit,” says Groth. “[Cardinal’s] bid was based on product cost, fees and service, but their willingness to talk about and consider [the center], and then make a commitment to it, really sealed the deal.”

In addition to ValueLink, Cardinal offers a variety of offerings over and above the movement of products, says Groth. For example, the distributor offers a variety of analytical tools and consulting services to help the DMC improve product utilization, inventory locations and inventory turns. “We’ve used these services outside the traditional storeroom and warehouse, to get deeper into the procedural areas, such as the operating rooms and cath lab,” he says.

A Cardinal employee is onsite full-time to help the DMC implement programs and solve problems. “For example, we’re changing all of our IV solutions and sets throughout the hospitals,” says Groth. “That’s a lot of SKUs.” The Cardinal employee is key in making sure all changes are reflected accurately in both the DMC’s and Cardinal’s information systems. On an ongoing basis, that person makes sure new contracts are implemented smoothly, minimizing pricing and shipping errors, as well as helping address manufacturer backorders before they become a problem, he adds.

Times of transition
Indeed, the time for a distributor to show its true colors is when the IDN is undergoing a major supply chain transition. It is during such times that the distributor can either facilitate the process, or cause the IDN to get hopelessly mired in it. Luckily, Beth Israel Deaconess Medical Center in Boston got a taste of the former when it switched GPOs.

“Our pharmacy was roughly 96 percent compliant with the old GPO,” says Joe Sheil, director of contracting. Roughly $53 million flowed through the wholesaler, Cardinal Health, half of which was on GPO contracts, the other which was not. “You don’t just go to the wholesaler and flip it all over, because there’s a risk of contracts dropping off,” he says. “We worked really hard the last 60 days to make the big switch.” On Sept. 1, the IDN did indeed turn over the entire pharmacy portfolio, representing 84 key manufacturers. “We worked very diligently with the wholesaler and the GPO to make sure all the tiers were correct,” says Sheil. In addition, the distributor needed to ensure that as a disproportionate share facility, Deaconess received discounts on its outpatient drugs through the government’s 340B program.

A similar process took place on the med/surg side. “What has really worked is the support we got from our distributor,” says Sheil. “The willingness to come to the table, to convene ongoing conference calls, and doing what they needed to do in the background to make sure we’re whole.”

Keeping tabs
While many contracting executives choose to do business with one of the Big 3, others have taken a different route. Lifespan, for example, has been doing business with a regional supplier – Claflin Co. – for six years. Dominick likes the fact that he can get on the phone and speak with Claflin President and CEO Ted Almon whenever the need arises. “But we don’t treat them any different than any other company,” he says, speaking of Claflin. “We push them hard, and we hold them to the same standards as we would [a national distributor].”

Indeed, measuring the distributor’s performance on an ongoing basis is one of the preconditions of a successful relationship, according to those with whom the Journal of Healthcare Contracting spoke. But it requires diligence and excellent communication.

“The first problem is agreeing with the distributor on what [fill] rate should be, and what’s included,” says Wendell Osborne, supply chain director, Alamance Regional Medical Center, Burlington, N.C. “If there’s a manufacturer backorder, for example, do they want to back that out?” Like most IDNs, Alamance reviews a backorder list and variance report on a daily basis, and checks in with the distributor – Medline – to fix the problem.

Many IDNs hold regularly scheduled, formal meetings between key members of the supply chain team and their distributor. Alamance, for example, holds meetings of its contracting staff and buyers, and the distributor rep, almost every week. “A big part of our relationship is these weekly meetings,” says Osborne. “That means going over issues before they really become problems.”

At Beth Israel Deaconess, an IDN manager meets weekly with the Cardinal rep to discuss the program. Every month, the IDN and ValueLink team meet to talk about fill rates and other factors relating to just-in-time. For the IDN’s biggest corporate partners – including Cardinal Health, Office Depot and Fisher Scientific – quarterly business meetings are conducted. “We review very carefully these big [relationships], which touch everyone,” says Sheil. “I think that works.”

Affinity relies more on ad hoc meetings of the distributor sales rep and the supply chain staff than on formal business meetings. Nonetheless, the IDN keeps close tabs on key indicators, such as fill rates, requisition-to-delivery cycle time, and requisition-to-purchase-order time. If its primary vendor can’t get a particular item in a timely manner, Affinity turns to Owens & Minor, a strong secondary option.

The sales rep
Though upper-level meetings may be a necessary part of the distributor/IDN relationship, the relationship between the IDN staff and the distributor sales rep is crucial. And that rep most often fills two roles simultaneously – that of problem-solver, and that of bearer of new opportunities.

“The sales rep plays a role in bringing opportunities to the table, as well as implementing new contracts,” says Groth. He or she also makes sure the program is running smoothly. “There is a lot of line activity in a stockless program, so accuracy and timing is key. If you’re off, and that item is on 250 different PAR locations in the system, that can lead to a lot of discrepancies. Our sales rep plays a role in that process.”

“We look for people who are honest,” says Sheil. “We want people as transparent as they can be, given their own [need for] business confidentiality….We [also] look for responsiveness. [That means] the rep is there and answers our calls.” Sheil and his staff also appreciate stability among the sales force. “We don’t like a lot of turnover,” he says.

Affinity expects its distributor sales reps to be on hand if and when problems arise. “We don’t want face time for the sake of face time,” says Barnard. “If you’re going to be in here, we want you problem-solving.” Barnard makes one more request of sales reps, one with which most JHC readers will probably identify: “We don’t want anyone counter-detailing our standardization efforts.”

Although Dominick views distributor reps more as customer service professionals than as detailers of new products, “we do challenge them to identify opportunities, and when they do, to work with our end users to help convert products.”

Wendell Osborne expects reps to be at Alamance weekly to resolve problems. “It’s not only to talk about problems, but to talk about opportunities, to help us lower our costs,” he says. “We’re always looking for cost-reduction opportunities.”