Self Sufficient

Next step for Sisters of Mercy: Private label brand.

The Sisters of Mercy Health System in St. Louis is venturing where few other IDNs have attempted to go … again. The 19-hospital IDN, with its annual purchasing volume of $530 million, has already eliminated its GPO and distributors, opting to self-contract and self-distribute. Now, it has created its own private label brand.

“One of the things we have done – as with group purchasing and distribution – is to take product and process, and dissect the individual components,” says Vance Moore, president of Resource Optimization & Innovation (ROi), Mercy’s for-profit supply chain operating division. “We have addressed a lot of the process costs by insourcing activities, and taken a lot of the margin that other intermediaries built into the process. And we’ve been successful. But we’re not finished. Why not apply the same logic to the product side of the business?”

Taking out cost
The cost of a product (excluding distribution fees or GPO administrative fees) includes the cost of raw materials; labor, machinery and manufacturing facilities; marketing and sales; product liability insurance; and more, says Moore. Some of those costs can’t be avoided. But ROi figured that others could be reduced, if ROi shouldered some of them.

For example, if ROi accepts bulk shipments of products, with no chance of returning them to the manufacturer, the manufacturer avoids costs – and can pass some savings to the provider, says Moore. And by selling a large volume of products directly to the provider, the manufacturer avoids sales and marketing costs. What’s more, since ROi has the facility to store a large volume of products, it can serve as a holding area for manufacturers whose products are seasonal; in other words, the IDN can store the manufacturer’s products during the slow-selling season, and release them to the manufacturer when demand picks up. “Now, we’re starting as a provider to integrate our sales with the manufacturer’s activities,” says Moore. “That’s unprecedented. And it puts me closer to the guy making goods.”

Mercy hopes that its private label, called “Mercy -The Mark of Quality” – will help the IDN standardize products across the system. “We subscribe to the [W. Edwards] Deming principle, that uncontrolled variation is the enemy of quality,” says Moore. “If we buy functionally equivalent products from five different vendors, and if they cause practice differential, is that good?” Reducing variation also increases volume, and with it, lowers prices, he says. The IDN also hopes that the private label will boost the Mercy name in the markets it serves, and reinforce the IDN’s image as a quality provider.

The first products manufactured under the private-label brand were already in use at Mercy’s facilities. They include gauze packing strips and Xeroform gauze manufactured by Princeton, N.J.-based Derma Sciences Inc. Mercy is considering other Derma Sciences products for the program. Additional clinical products from other manufacturers – such as wound care products, EKG chart and monitoring papers, and IV start kits – are under consideration for future inclusion.

“Will the Xeroform and packing strips bring better quality to patient care? It’s a stretch,” says Moore. “But if you look at it as Step 1, then it makes sense. I don’t want to cause ripples in the industry, but here’s the way I look at it: If it makes sense, we’ll do it; if not, we won’t. We want manufacturers to challenge us and say, ‘We would love to talk to you about manufacturing a product in this category.’”

The IDN hopes to source at least some of its private-label products with local manufacturers, that is, those located in its service areas of Missouri, Oklahoma, Arkansas and Kansas. “That’s an underlying philosophical approach of ours,” says Moore.