Bigger IDNs, bigger likelihood of CSCs

Consolidated service centers are growing in number and in size. So are the services they offer. But supply chain executives contemplating a CSC should proceed with caution. They’re not for everybody.

Jamie C. Kowalski Consulting, LLC, and PerformanSC Supply Chain Ltd, released the 2018 edition of their research on CSCs, based on input from healthcare supply chain professionals that use a CSC model for their supply chain and other support services. It is the fourth such report published by Kowalski and PerformanSC since 2012. TECSYS Healthcare, a supply chain software company, sponsored the 2018 edition of the survey. In 2012, 24 CSCs were invited to complete the survey. For the 2018 survey, the invitees numbered 70.

Much has changed since 2012, says Kowalski. Many older CSCs were developed by IDNs with fewer than eight (or so) facilities in a single metropolitan area, with the sites being close together. Today they are being developed for 30, 40, 70-plus hospitals, plus ambulatory surgery centers, long-term-care facilities and other primary care venues, which might cover a dozen or more states.

Preparing for growth
IDNs that have operated CSCs for a number of years remain focused on continuous improvement in terms of financial performance and quality of service, says Kowalski. Many are preparing for growth, that is, adding new providers to their customer network as a result of IDN mergers and acquisitions. They are also adding more support services. The survey team counted more than 20 unique services offered by the country’s CSCs.

“If IDN mergers and acquisitions continue the rapid pace they are on today, I believe there will be continued growth in CSCs,” says Kowalski. But supply chain executives should note that the time from start (strategy, feasibility study and design) to opening a CSC can be 20-30 months.

Warehousing and distribution of supplies remain the foundation of most CSCs, says Kowalski. But many have decided to take advantage of relatively cheap (compared to hospital) real estate and add square footage for such activities as records storage, linen processing, and even office space. Pharmaceutical distribution is growing as CSCs learn the do’s and don’ts of licensing and other regulations, including IV mixing and unit dose packaging. Lab products, on the other hand, are frequently carved out for a lab specialty distributor, rather than handled by the CSCs, he adds.

CSCs come in many shapes, colors and models, says Kowalski:

  • Some use a third-party-logistics provider to manage warehousing and distribution, others do it all by themselves.
  • Some rely on a med/surg distributor to handle certain products or act as a backup, while others are totally into self-distribution.
  • Some rely on their GPO for contract pricing for some percentage of the products they buy, while others prefer self-contracting.
  • Some – particularly, larger IDNs – may offer different centralized functions out of multiple buildings.

“There’s no one ‘pure’ way of doing this,” he says. “Each IDN has to decide the best configuration of the model for themselves. But the core principles apply to all CSCs: consolidation, standardization (of products, suppliers), some degree of centralization, and integration. Plus they have to be run like a business.”

Stay away
That said, an IDN should resist building a CSC if any of the following are true:

  • The corporate culture of the IDN is risk-averse, or is incapable of driving product and process standardization.
  • Supply chain lacks a solid strategic plan.
  • The IDN has failed to commission anyone with knowledge of the CSC model to conduct a thorough feasibility study.
  • There is no compelling ROI or payback for the required investment.
  • The IDN simply lacks the talent to develop the right plan and execute it.

What’s more, IDNs should probably resist the temptation to commercialize their CSC operation, that is, act as a “distributor” to facilities that are not part of the IDN. “It’s a matter of overhead,” says Kowalski. That includes salespeople and SKUs. “Most CSCs typically handle 7,000 to 15,000 SKUs. But a distributor can have 100,000 SKUs in the warehouse. Think about the cost of that inventory. It’s big.”

Of course, the future will bring with it some wild cards, he says. For example, what impact will companies such as Amazon have on the supply chain and on CSCs? They could be a factor, though to this point they have demonstrated their expertise primarily at handling and delivering small packages, not pallet-loads of IV solutions.

As healthcare CEOs, CFOs and others learn about the CSC model and see the success stories – which outnumber the failures – the risk-aversion factor will likely be reduced, says Kowalski. And as the industry gains more experience, the likelihood that a new CEO – that is, someone who was not involved in the original strategy – will close the CSC, will diminish.

For more information on the survey, contact Jamie Kowalski at jamie.kowalski@jckcllc.com