Thinking About a Consolidated Service Center?

sponsored by DHL

Part 1: Know what you want to accomplish; know how to demonstrate the value

Jim Olsen, Lloyd Gravois, Steve Kiewiet

Perhaps you have been thinking about opening a consolidated service center for supply distribution to your acute and non-acute facilities, biomedical repair, courier services or lab. Perhaps your boss has asked you to look into it.

Maybe you could operate it with your own staff. Maybe you could outsource it to a third-party logistics provider.

Either way, it’s a big step. Ask those who have done it.

The Journal of Healthcare Contracting did just that recently, when Publisher John Pritchard engaged in a discussion with four supply chain executives with experience in consolidated service centers.

Though consolidated services centers are as unique as the IDNs they serve, the four executives shared lessons learned, which might provide a roadmap for others who are considering a similar journey:

  • Know what you want to accomplish upfront. Define whom will you serve. What services will you provide? How will you begin? What considerations should you make in anticipation of expanding your service offerings?
  • Clarify the value proposition. How will this improve service to your end users? How will it contribute to better patient care? How will it ultimately result in cost-savings for your IDN?
  • Understand that some services may be better left to other professionals. Can you really deliver laundry services more efficiently than those who are in that business? Can you provide lab services to your farthest-flung sites? Are you better off outsourcing the operation of the consolidated service center to a 3PL provider, or doing it yourself?
  • Check out what others are doing, but be prepared for false starts and detours. And expect surprises, such as a hospital acquisition, implementation of a new IT system or a change in your IDN’s executive leadership.

Participating in the discussion were:

Steve Kiewiet, vice president, supply chain operations, BJC HealthCare. With 15 hospitals and multiple non-acute-care locations, BJC services residents in the Greater St. Louis, southern Illinois and mid-Missouri areas. Kiewiet spent 10 years as a hospital corpsman in the U.S. Navy before entering healthcare distribution and manufacturing. He joined BJC in December 2012.

Lloyd Gravois, assistant vice president logistics, pharmacy and supply chain, Ochsner Health System, New Orleans. Owned as it is by 1,200 physicians, Ochsner is more a group practice than a hospital, said Gravois, who started his career with Cardinal Health. Ochsner grew dramatically following Hurricane Katrina in August 2005, when the health system Ochsner assumed ownership of 10 New Orleans facilities that had been forced to close because of the disaster.

Jim Olsen, senior vice president, materials resource management, Carolinas Healthcare System, Charlotte, N.C. Olsen has enjoyed a long career in healthcare supply chain management, beginning with central supply, in both the for-profit and non-profit sectors. When he joined Carolinas 20 years ago, the system comprised four hospitals. Today, it comprises 42 hospitals and a total of 900 locations.

Getting started
There’s no set way to launch a consolidated service center. It depends on the capabilities, resources and needs of the IDN.

BJC, for example, began centralized inventory management and self-distribution on a small scale, but in a high-cost product area – stents, guidewires and other cath lab supplies. “We wanted to be very disruptive in this area,” said Kiewiet. Next up? Interventional GI, endoscopy and OR. “We believe we can manage the inventory appropriately enough that we can take over the managed and consigned inventory, essentially eliminating the sales rep from the transport side of the equation.”

Gravois said that initially, Ochsner’s plans for a consolidated service center included laundry, lab, pharmacy, as well as med/surg. “But it came back to, ‘If you can’t do it cheaper than someone else, don’t do it,’” he said. With that in mind, he scaled back his expectations accordingly. Another potentially limiting factor to consider was the geography to be serviced by the consolidated center. For example, he had to ask himself if it would be reasonable to provide pick-up lab service to and from far-flung facilities. The answer? Probably not.

Gravois intends to use Ochsner’s consolidated service center to implement what he calls “logical unit of measure” – that is, the right amount of products at the right place and time. “We are building our model now,” he said. Ochsner is using a national distributor for medical/surgical supplies, and another for pharmaceuticals. Gravois’ staff delivers products in low-unit-of-measure to approximately 60 non-acute sites.

For Olsen, consistent quality and control of product and services are the keys to a successful distribution center. Carolinas operates an 80,000-square-foot distribution center, which serves its 12 Charlotte-based facilities. The center does about $120 million of business in inventory.

Carolinas used to provide laundry services from the center, but pulled the plug on that operation, deciding an outside firm could do it more cost-effectively. Today, clean laundry arrives at the distribution center in bulk, then gets sorted and distributed with supplies. Carolinas also experimented with servicing offsite facilities, including physicians’ offices, from the center, but decided that doing so stretched staff and resources too thin, said Olsen. A distributor currently handles the physician office business.

Carolinas enjoys one advantage over many health systems whose executives have contemplated opening a consolidated service center. “The city decided to put the Carolina Panthers [football team] stadium where our warehouse was,” said Olsen. In return, the IDN was able to acquire another facility for a dollar.

The value proposition
To successfully present the idea of a consolidated service center to the executive board, supply chain leaders must be able to clearly communicate the value proposition to the board and then to the rest of the IDN clinical and administrative team, according to the panelists. That may call for some educating along the way.

BJC’s supply chain team built its business case for a centralized distribution system around inventory management and reduction of waste. “Up to that point, the board wasn’t used to seeing business cases built around that,” said Kiewiet. In fact, inventory wasn’t closely tracked prior to that time.

“We talked about expiration and obsolescence,” he said. “I started the conversation around the fact that everything we buy that doesn’t get used in the delivery of care is waste. We documented waste, and when you do that, you see a lot of eyes opening.”

What sealed the deal, perhaps, was the BJC team’s argument that better visibility into inventory can lead to better patient care. By tracking inventory storage and movement, “I can just about guarantee we’re not using a recalled product in any procedure. Before, we really couldn’t prove or document that.”

Olsen agreed that healthcare financial executives tend to think about the cost of capital – which has been low – far more than they think about the cost of obsolescence. “The key thing is to keep people focused on total cost; that’s when you can change people’s minds,” he said. Duplicative activity, as well as discarded, unused and outdated supplies, constitute waste – and waste is cost.

Gravois pointed out that in order to successfully sell the board on a consolidated service center, supply chain must tell the story in a way that the board can understand. He and his team have done just that. But they got a boost when the systemwide safety nurse backed their plan based on her belief that the center would improve service levels to the nurses on the floors. “To her, that added up to safety,” he said. “And she has become an advocate.”

Editors note. August JHC: Planning a consolidated service center? Expect the unexpected.


Build or buy?

Control’s the thing, regardless of who operates the service center

Regardless of whether the health system manages the consolidated service center itself, or whether it outsources that function to a third-party-logistics provider, the keys to a successful operation are consistency and control, according to supply chain executives who participated in a DHL/Journal of Healthcare Contracting discussion earlier this year.

“Whether you own it or outsource the work, third-party logistics and self-distribution are the same,” said Steve Kiewiet, vice president, supply chain operations, BJC HealthCare. “There is a legitimate business rationale for either approach.” The fact is, even in a 3PL environment, the health system still exercises control, “because I set the parameters in which things work,” he added.

Said Jim Olsen, senior vice president, materials resource management, Carolinas Healthcare System, Charlotte, N.C., “It all boils down to, can you develop a business relationship with a 3PL that provides what you need?” Such a relationship starts with the health system knowing firmly what it needs from the 3PL, he said. That knowledge only comes through careful planning and experience.

Lloyd Gravois, assistant vice president logistics, pharmacy and supply chain, Ochsner Health System, New Orleans, added that the health system’s decision to outsource the operation of the consolidated center or manage it internally depends on the expertise it has in-house. The decision simply comes down to this: “Can your team do it, or do you need somebody with experience to do it?”