Providers discuss traditional and unique distribution models
CHICAGO—The decision about self-distribution is a classic make-or-buy. Distributors believe IDNs are crazy to even think about it. Distribution is a low-margin business, they say, and that’s factoring in distributors’ expertise, scale and technology tools. No, hospital systems should stay in the business of taking care of patients, and let the logistics experts do what they do.
Most IDN supply chain executives agree. But there are exceptions, such as Carl Manley, vice president, supply chain, Sentara Healthcare, Norfolk, Va. Manley participated in a panel discussion on self-distribution at the recent Healthcare Supplier/Provider Institute conference. Another participant, Gary Wagner, vice president, supply chain, The Methodist Health System, Houston, Texas, practices what he calls modified self-distribution; while a third panel member, Steve Pitzer, system director, supply chain, CHRISTUS Health, Irving, Texas, operates on a traditional basis, that is, employing med/surg distributors.
Manley is no novice to self-distribution. He’s been doing it for 15 years. The reason is simple, he said. Traditional distribution is a five-step process: manufacturer makes product, sells it to distributor, who sells it to hospital warehouse, which transfers it to hospital storeroom, who brings it to hospital customer. Manley wanted to shorten the process, so the product goes from manufacturer, to IDN warehouse, to the unit, floor or medical practice. “We decided being the distributor ourselves was the best option economically,” he said.
Sentara owns 13 acute-care hospitals and a variety of non-hospital sites. Its 86,000-square-foot distribution center (a rented facility) holds 4,000 SKUs. Approximately $100 million of products are sold through the center annually, and inventory turns are 16.9. “We pick about 2 million lines of inventory annually, and our fill rate is 99 percent,” he said. “Our markup is very competitive to industry.” The center delivers between 13 and 20 truckloads of items every day, many of them in low-unit-of-measure totes. The center delivers to 400 locations, many of them physicians’ offices and other non-acute-care sites.
How does Sentara make it work? First of all, the IDN has critical mass. In fact, Manley says that a distribution-center sales volume of $35 million is the minimal amount to make self-distribution work.
But Sentara has also made investments in people and technology. “We had to go out and hire people with the skills we were looking for,” said Manley. That’s why individuals from companies such as FedEx and Penske Corp. operate the distribution center today. Technology is important too. For example, Sentara invested in a state-of-the-art conveyor system and RF technology. “And we benchmark our performance every day,” he added, monitoring lines picked, errors, etc.
“I tell half the people who ask me, not to do this,” said Manley. “They’re not prepared.” But those who are willing to do the work will be rewarded. Contrary to what many believe, administration is open to discussions about self-distribution. “Anything that affects the cost of delivering care to the patient and getting the patient back into the community is subject to discussion,” he said. If done correctly, self-distribution can save IDNs money, which can be invested in improving patient care. Besides, IDN supply chain departments know their end-user customers better than any distributor, he added.
The future offers interesting options, said Manley. As IDNs grow larger, and join others in regional purchasing coalitions, the economics of self-distribution become even more attractive.
Methodist is a five-hospital system with about 2,000 beds, explains Gary Wagner, who employs what he calls “modified self-distribution.” Owens & Minor plays a significant role in Methodist’s supply chain, shipping direct to as many as 40 locations every day. Wagner’s department, meanwhile, ships on a low-unit-of-measure basis to approximately 450 locations from its 50,000-square-foot warehouse. It also assembles approximately 700 custom packs per day. A physician distributor ships directly to Methodist’s 380 physicians.
“Our process works well,” he says. It’s economical, and delivering on a low-unit-of-measure basis allows Wagner’s department to have daily contact with their customers.
“I enjoy distribution,” joked Wagner. “I just don’t enjoy it quite as much as Carl [Manley].”
Settling for a more traditional model of distribution is Irving, Texas-based CHRISTUS Health. There are some good reasons for that approach, according to Supply Chain System Director Steve Pitzer, who started his career in the wholesale food industry. For one thing, CHRISTUS comprises more than 40 hospitals and facilities in six states and Mexico. “That can be a bit of a challenge when you’re talking about self-distribution,” he said.
Even though the IDN has opted to maintain its relationship with traditional distributor partners, it hasn’t been standing still from a supply chain standpoint. For example, it has adopted a single materials management information system for all its facilities, has automated the procurement process, and continues to work toward standardization and reduction of SKUs.