Total Fulfillment

A 100-percent fill rate is one of many goals for an innovative partnership between distributor and IDN.

Gary McMann had nearly 36 years of healthcare experience, including clinical (radiologic technology), executive-level management/leadership and consulting, but he still needed a home for his vision: a fully engaged distributor, responsible and accountable for zero stock outages at the patient’s bedside. “[The healthcare industry] needed a program whereby the distributor could become a part of the fabric of the organization,” he says. “But, this seemed like a pipedream to me.” Indeed, he was skeptical about finding a distributor and a hospital system interested in working with him to mobilize his ideas.

Then, in 2006, he interviewed for his current position, director of supply chain operations, at Billings Clinic, a 272-bed community-owned, nonprofit organization serving over 14,000 inpatients and 65,000 outpatients each year. Along with its eight managed facilities, Billings Clinic provides care across a third of the state of Montana and into Sheridan and Cody, Wyoming. “At the time, Billings Clinic was looking for a leader who could re-engineer its materials management department,” says McMann. “I was told by the COO that the executive staff was looking for change and would support me as I evaluated the strengths and weaknesses of the organization and [determine] what changes were needed. This was music to my ears.”

He was also impressed with the organization’s vision: By 2010, Billings Clinic’s goal is to be recognized as the healthcare organization providing the best clinical quality patient safety and service experience in the nation. “This vision was a major factor for me when I made the decision to take this job,” he says.

Although the challenge to revamp Billings’ supply chain department lay ahead, McMann’s job was simplified thanks to a recent survey VHA had conducted shortly before he interviewed. “VHA surveyed all leadership at Billings Clinic [to evaluate] their satisfaction with the current supply chain and leadership,” he says. “This survey provided me with a roadmap, and inheriting a dedicated supply chain staff that was ready for change and eager to contribute ideas [boosted] our chances for success.”

VHA’s survey finding was clear: Satisfaction levels at Billings Clinic were low. Enter McMann. Given his experience in the healthcare industry, he had a keen eye for spotting what worked – and did not work – in supply chain management. “When I [first joined Billings Clinic], I found one major flaw [with its distribution system],” he notes. “Quite a few stockouts were occurring.” To a large extent, this was due to a poorly designed layout at the facility’s local warehouse and receiving area, as well as some inefficiencies in the way we monitored and managed our point of use supply cabinets.

“The current distributor was trying its best to deliver reasonable fill rates, but even if it [managed] to achieve a 100 percent-fill rate, it could not guarantee that the product would make it to the bedside in sufficient quantity to satisfy a zero stockout goal,” he continues. “A lot can happen from the time a delivery hits the loading dock to the time it reaches the patient’s bedside,” he says. “It’s still possible to run out [of supplies], even if the distributor is doing its very best to satisfy the impossible dream of 100 percent-fill rates.”

Impeccable service
McMann and his team negotiated with five distributors, and in the end, “the smallest of all won out,” he says. Kreisers Inc. (Sioux Falls, S.D.), a regional, third-generation family-owned distributorship, convinced him that it could meet the terms of his contract and provide impeccable service. “Kreisers was willing to do what it took, within reason, to provide best-practice medical supply distribution to medical facilities, both large and small,” he adds.

Central to the new agreement, effective June 16, 2008, was Kreisers’ commitment as Billing Clinic’s prime vendor to be accountable for zero stock outages at bedside. It would do so by incorporating a full-time employee in Billing Clinic’s par level monitoring program. “The distributor would have to provide a full-time employee, Monday through Friday, 40 hours a week, to work with our staff and nurses and do what was necessary to ensure we would never run out of a product at bedside,” says McMann. In turn, the new distribution model would establish a financial incentive program for Kreisers, which would not increase current distribution costs, he adds. To accomplish this, Kreisers had to establish a regional-based warehouse in Billings, capable of supporting all of Billings Clinic’s owned and managed facilities “as well as affiliates and other healthcare organizations within the VHA Mountain States region,” says McMann. “In the past, we always [relied on] a distributor based in Denver or Seattle. We needed a regional service center in Billings, which would serve Billings Clinic and all of its current and new affiliates.

“Our par leveling program is, by design, two-fold and requires our prime distributor and Billings Clinic to work in concert,” he continues. “We have incorporated what we consider to be a unique twist to effective inventory management through the efficient execution of both consequential (based on historical usage) and intelligent (based on contrived, actual in-patient data) inventory management. The latter is gathered as a result of real time, daily data gleaned from admissions, patient transfers and nursing bed boards (identify patients requiring above-average medical supply usage). Each in-patient unit is handled independent of the others to ensure individualized par leveling, which would lead to zero stockouts.”

In addition, the Billings Clinic-Kreisers agreement does the following:

  • Establishes low-cost bar code tracking technology for Billings Clinic. Kreisers provides licensing and software, and Billings Clinic supplies the hardware.
  • Reduces prime vendor distribution fees to less than VHA pricing.
  • Establishes the first region-wide distribution alliance designed to reduce overall medical and surgical supply costs through volume discounts and product standardization.
  • Permits Billings Clinic supply chain operations to facilitate product selection, standardization and price negotiation.
  • Ensures that Kreisers will immediately communicate real-time product substitutions to facilitate proactive replacement of backordered products.
  • Ensures that Kreisers will maintain Joint Commission requirements for “sequestered stock.” This includes products that the Joint Commission deems ethical for hospitals to maintain to ensure optimal patient care.

“We will pay a substantial incentive for them not to run out of any product at bedside that moves through Kreisers’ warehouse,” says McMann. “In exchange, [Billings Clinic] gets a full-time Kreisers employee who works with our staff to proactively look for ways to adjust inventory levels using our new consequential/intelligent approach to inventory management.

“We want that full-time employee to get a piece of the incentive we pay (in a quarterly bonus), so that [he or she] works harder,” he continues. And the Billings-Kreisers agreement doesn’t end there: “We let Kreisers recruit one of our best distribution people to serve as its full-time [liaison] at Billings,” he says. After all, who better knows the hospital’s inventory and needs?

McMann is excited about this contract – so much so that he signed on for five years, with an option to renew it for another five years. “Thus far, Kreisers is giving us great service and extremely competitive pricing, and we now have a local distribution center,” he points out. He believes Kreisers’ decision to lease a local warehouse will “put them on the map” in the state of Montana and surrounding areas. “We’re helping Kreisers develop a new distribution model,” he says. This was a calculated risk for them, but one that has potential to pay off for Kreisers and participating hospitals, he adds.

“Other hospitals in the state and region are watching us,” he continues. Some very well may sign on with Kreisers in the future, he explains. For instance, the Montana Hospital Association (MHA) Ventures Network, a 16-rural hospital IDN, already has expressed interest. As part of the new distribution alliance, all participating IDNs must pay an additional 1 percent distribution fee on purchases falling below 80 percent on Kreisers’ core products. “We want to see Kreisers remain strong not only for us but for these smaller rural hospitals in this area,” McMann says. “Rural hospitals stand to benefit from this agreement.”

Doing its part
Perhaps one of the greatest challenges McMann has encountered through his new distribution model has been working with the Billings Clinic staff in the area of product substitutions. “We need their [input] regarding which items are critical to running their unit,” he says. “Then, we need them to tell us what are appropriate substitutions for those items. In the past, we were experiencing up to 20 product outages a day. Our goal is zero. To date, our clinical staff has more than met the challenge, and acceptable substitutions are being added to the Kreisers database daily. Innovative thought, creativity and best in class isn’t a one person show. It takes the involvement, dedication, cooperation and brain power of many superb staff members to come up with a winning formula,” he adds.

If all goes as planned, and more area-wide hospitals sign agreements with Kreisers, McMann hopes to see the distributor further commit to the program by constructing a permanent distribution warehouse in Billings. As for McMann’s and Billing Clinic’s commitment, it’s simple: “We want to do our part to maximize patient outcomes at every turn, keep the cost of healthcare down and help rural hospitals in Montana remain alive and well,” he says. “Keeping these hospitals strong is in the best interest of patients and the overall healthcare system.”

About the Author

Laura Thill
Laura Thill is a contributing editor for The Journal of Healthcare Contracting.