Given that hospitals and other Healthcare facilities exist only to provide care to patients, it can come as a surprise to know that supply chain cost is typically the second largest expense such facilities incur, exceeded only by the cost of labour. Perhaps even more surprisingly, efforts to reduce healthcare supply chain costs were slow to gain momentum, at least compared with the inroads made in other industries.

Today though, the ball is well and truly rolling, as hospital and healthcare executives feel the pressure of rising costs and seek ways to do more with less.

This article briefly overviews some newer features of both state-run and private health organisations’ supply chains, with the emphasis on hospital supply, in an age where limitless funds are definitely no longer a feature.

Hospital and Healthcare Supply: The Need for Change

The traditional hospital and healthcare supply chain model is fragmented, hampered by conflicting goals and (in the main) operated under the auspices of nobody in particular. Orders are typically placed by different factions within a single facility, and fulfilled by multiple manufacturers, wholesalers and distributors.

In this traditional model of hospital and healthcare supply, the facility’s loading dock fills up fast each day, with bulk deliveries and small orders arriving constantly, which must then be put away in a warehouse or distributed around a campus.

The sheer variety of product ranges and the SKUs they comprise makes the healthcare supply chain a very complex environment.

On the one side there is the medical aspect, which calls for various specialised logistics approaches, and on the other, the hotel/catering aspect. Patients after all, must be fed and looked after for the duration of their stay in a healthcare facility.

As the necessity for meeting demand is similar in both government-run and private healthcare, there is not too much difference in the way each sector operates the supply chain. Both types of administration labour under similar pressures too, which is why healthcare systems around the world are now paying more than lip service to supply chain simplification and improvement.

Trends in Hospital Supply Chain Transformation

This new-found focus on supply chain improvement has given rise to an increasing trend toward centralisation and customer-centric thinking. While approaches may differ from country to country and from one organisation to another, the common driver is a need for hospital and healthcare supply chains to be more efficient: to cost less and provide better service.

Perhaps the cost aspect needs little explanation. However, the need for better service is similarly driven by the need to achieve more with fewer resources. It’s widely recognised that internal hospital logistics is even more complex than the external side, and that medical staff spend disproportionate amounts of paid time performing logistics activities—time which would be better used to provide patient care.

Centralisation then, is all about taking procurement and logistics out of the hands of medical professionals and placing it under its own governance structure.

The extent to which healthcare systems are centralising distribution varies, but in most developed countries at least, hospital supply chains are transforming, with the following two models for example, becoming more prevalent.

Vendor-managed Inventory

While this form of inventory management may not totally transform a healthcare supply chain, many healthcare providers have turned to VMI as a way to improve service and cost performance. VMI entails the provision of staff by vendors to work inside a customer’s hospital, taking care of order processing, materials management and logistics.

Vendors’ own employees take responsibility for checking inventory levels, ordering materials as necessary, and directly replenishing inventories within individual care units.

This is a customer-centric approach to hospital and healthcare supply chain operation, since it reduces the need for supplies to move in and out of a central store or warehouse. VMI can be applied to many material categories, including pharmaceutical supplies, consumables, food, medical devices and pathology supplies.

Self-distribution

It seems that hospital supply chain planners have been watching and learning from other industries, as some organisations in the United States and United Kingdom especially, have switched to self-distribution models.

Self-distribution (a term which seems to have been coined specifically for the healthcare sector) works in a similar way to retail distribution, in that the healthcare organisation maintains a central distribution centre.

The distribution centre/s becomes the central point at which all inbound supplier shipments arrive. Different material types are then consolidated and shipped to the organisation’s hospitals and other medical facilities. In some operations, delivery drivers even offload shipments and then distribute individual orders to the various points-of-use in the hospitals.

Self-distribution is practiced by at least 40 large healthcare systems in the United States, and by the United Kingdom’s National Health Service (NHS), as well as other organizations in Europe and Canada. The NHS has outsourced its self-distribution network to a 3PL provider, as have some of the hospital groups in the United States. Other healthcare providers have chosen to create their own logistics divisions to run their self-distribution operations.

Fleet Ownership and Outsourcing in Hospital Supply Chains

Healthcare organisations appear to be divided regarding the pros and cons of owning supply chain facilities and assets. The aforementioned NHS for instance has partnered with a large logistics-service company, which owns the distribution centres and transport fleets that supply NHS hospitals.

In Canada too, at least one large hospital group has chosen to outsource its supply chain operations, while some health systems in the United States have done the same.

On the other hand, a number of the larger US healthcare providers have opted to buy or lease their own distribution centres and run their own truck fleets. The decision to keep distribution in-house seems largely to be based on a wish to stay in direct control of issues such as legal compliance, especially with regard to pharmaceutical supply.

However some organisations also claim that insourcing the hospital supply chain is the way to make substantial cost savings. This was the experience of the Mercy Health System, one of the largest healthcare providers in the United States. Mercy chose to insource storage and transportation, and claims to have saved 15 to 30% annually on logistics and distribution costs.

Outsourced or Insourced: The Healthcare Supply Chain Question

Utah-based health system Intermountain Healthcare is another provider to take the in-house option. Intermountain decided to open its own supply centre to service its network of 22 hospitals and more than 200 clinics.

Rather than outsource the operation, Intermountain chose to keep control of all procurement and supply activities. This enabled the company to encourage all departments to collaborate and create a standardised, but tailored logistics network, taking advantage of synergies and achieving a premier standard of service. According to one Intermountain spokesperson, supplies are delivered “virtually to patients’ bedsides.”

On the other hand, the UK’s National Health Service has gained similar advantages by partnering with a 3PL. The relationship has been so successful that the 10 year-old contract has recently been extended for a further two years.

Clearly then, it’s possible to improve hospital and healthcare supply through self-distribution, and the choice to insource or outsource will depend upon the preferences and policies of each healthcare organisation.

Either way, after a slow start, health authorities and private healthcare systems around the world are learning to capitalise on the value provided by an efficient, centrally controlled supply chain.

This is an important evolutionary step, and one which isn’t confined to distribution methodologies, models, and ownership options either. It actually extends all the way through to technology choices, such as bar code and RFID tracking to improve inventory management.

Scanning For Improvement in the Hospital Supply Chain

Hospital and healthcare service organisations are beginning to catch on to the many benefits of scanning technology. Barcode scanning is becoming a commonly used method of tracking inventory and for those organisations that have embraced it, has resulted in reduced inventory losses and obsolescence, and helped to promote a shift from push to pull in supply chain strategy.

Because of the greater cost of RFID, growth in adoption has been slow but steady for logistics and supply chain purposes, but has been enjoying a greater rate of take-up for patient care and tracking of equipment inventories in operating theatres.

That said, more than 100 hospitals in the United States are using RFID in some areas of supply chain management. There and elsewhere, RFID is being used in the distribution of pharmaceutical supplies as well as other commodities such as linen. Concerns over the cost of implementation are eroding as hospitals recognise the massive savings potential offered by RFID, and the cost of scanning technology continues to come down.

Some Scanning Success Stories

One Kansas hospital has realised significant benefits from applying RFID tags to all inbound inventory items with a value greater than $5 (US). Scanning portals are installed throughout the hospital to record the whereabouts and movements of all tagged items.

Through the use of this system, the hospital has transformed the management of supply and inventory and is enjoying the following advantages:

• A significant reduction in on-hand inventory value
• Medical staff no longer need to manually scan barcodes
• A dramatic reduction in stock-outs
• Traceability of items from receipt, to storage, to bedside and ultimately, to disposal
• Elimination of manual expiry date checks in pharmaceutical stores

Other hospitals are using RFID systems based on “smart cabinets”, which record tagged items as they enter and leave the cabinets. This type of system has become particularly popular in the management of pharmaceutical supplies, which require a high degree of diligence in terms of distribution and dispensing.

However, RFID has also proven its value in managing other types of hospital inventory. For instance, BJC Healthcare, a 12-hospital system operating in Missouri and Illinois, installed a solution including more than 70 smart cabinets in a pilot project at one of its hospitals.

The RFID platform is used to manage a range of medical supplies and is just the beginning for BJC, as they expect to install the cloud-based system across all their remaining facilities by mid 2017. Initial results have been impressive, including a recorded 23% reduction in the amount of on-hand inventory at the pilot site.

Anyone uncomfortable about the cost of implementing RFID can take comfort from BJC’s confident projections. The company expects to see a return on investment within 18 months, and to achieve savings of nearly $70 million over the next 10 years.

Cutting the Cloth With RFID in Europe

Perhaps surprisingly, the management of hospital linen via RFID is a strong trend, driven by the immense losses that hospitals and other healthcare facilities incur every year. It’s not totally clear why so much linen goes missing, but apparently it does.

One hospital laundry service in Wales, which looks after the cleaning of linen for the NHS, was dealing with the loss of hundreds of sheets and hospital gowns, to the tune of almost £400,000 per year. This provider, along with others in the United States, France, and Italy, has turned to RFID as a solution to the problem of lost linen.

Small RFID tags are sown into sheets, gowns and other linen items, enabling them to be tracked as they move between hospitals and laundry centres. Not only have losses reduced as a result, but hospitals are processing laundry faster, and there are far fewer cases of sheets and gowns being left inadvertently inside laundry bins and storage areas.

It was a similar story for a French laundry service provider, responsible for cleaning linen from 20 hospitals in the Paris area. This company was spending €250,000 per year on replacing lost bed sheets. While the cost of RFID implementation is still higher than many organisations would like, it’s not difficult to see the business case for investment in these particular scenarios.

Linen in the Healthcare Supply Chain

Linen management in general presents an interesting issue for hospital and healthcare supply chain leaders. Concerns often exist regarding which types of hospital supplies can or should be transported together. Contention over this matter can present an obstacle to transport efficiency, especially in health organisations where physicians and medical staff are involved in logistics decision-making (which is probably most of them).

Used linen must be sent out to laundries for washing, but because it might be soiled or contaminated in various ways, clinicians can understandably be concerned about allowing used linen to be transported on the same vehicle as other healthcare materials.

However, with the right precautions and protection, this doesn’t need to be a problem. Some organisations have overcome concerns and have found ways to consolidate shipments composed of multiple product types, including linen.

Intermountain healthcare for example, runs a 31,000 square-metre supply centre centre, which is also home to a central laundry serving the groups healthcare facilities.

As much as possible, Intermountain consolidates all the supply needs for each healthcare facility into a single shipment: a process which involves cross-docking materials from multiple categories including clinical; pharmaceutical, lab supplies, linen, and food, as well as maintenance and repair equipment, computer supplies, printed forms and even laptop computers.

Combining laundry transportation with other hospital supplies appears to be the exception rather than the rule though. Health authorities largely choose either to contract linen services to a third-party provider or to own their own laundries, which are rarely co-located with other supply or logistics functions.

Still, the need to reduce costs is a strong incentive for change. It’s possible therefore, that new self-distribution and outsourcing ventures will explore potential synergies in merging linen services and other hospital supply activities under one roof.

Certainly the Intermountain supply centre is being hailed as a shining example of supply chain excellence. Among other accolades, the company’s innovative approach took its operation to number 3 in the 2015 Gartner list of top 25 healthcare supply chains.

From Dock to Bedside: Best Practices in Hospital Goods Receiving

As mentioned earlier in this article, a lot of logistics activity takes place inside hospitals, so internal logistics activity is a prime target for organisations seeking to reduce supply chain costs. The goods-in dock may be just one touch point in many before inbound deliveries arrive at the locations where they are required.

Internal logistics problems are exacerbated by the fact that most activity is conducted by medical staff—people who are skilled in caring for patients, not in logistics efficiency and best practice. That’s why many healthcare organisations are finding ways to take logistics tasks out of clinicians’ hands.

Leading institutions are turning to robotics technology, implementing automated guided vehicle (AGV) systems to distribute inbound goods from the unloading dock to points-of-use. Traceability is usually provided by barcode technology, but more hospitals are graduating to RFID for the benefits of hands-off scanning, which is also more compatible with automated transport systems.

If robots and RFID are at the cutting edge of hospital goods receiving though, what about healthcare providers for whom such technology is simply not yet affordable?

According to the experts, best practice still requires the ability to bring technology—albeit at a less advanced level—to bear. Suggested best practices for receiving at the hospital end of the healthcare supply chain include:

• Provide a facility for internal customers to check on the status of inbound deliveries
• Make use of advance shipment notifications (ASNs)
• Utilise security monitoring systems and control access to unmanned hospital loading docks
• Order and receive inventory in low units of measure wherever possible
• Implement systems for process automation, which should support electronic records that follow inbound goods through each handoff
• Integrate a track and trace system with the hospital’s main business management platform (ERP for example)
• Utilise handheld barcode scanning and electronic signature-capture to eliminate manual data entry (or RFID if feasible)
• Work with suppliers/self-distribution management team to extend delivery service to points of use/care

The more that can be done to remove medical, nursing, or clinical personnel from the receiving process, the better. Not only does this give them more time to focus on patient care, it also reduces the risk of inventory hoarding and shrinkage, which tends to be a costly issue for most healthcare organizations.

5 Examples of Effective Healthcare Supply Organisations

To conclude this round up of the state of healthcare supply chains, the following profiles outline a few organisations notable for their effective distribution operations. These might serve as a source of ideas for any healthcare chain seeking to drive improvements and savings in both external and internal logistics activity.

Intermountain Healthcare, Utah, United States

• Type of Operation: Privately held healthcare system. Self-distribution using own assets.
• Size of Operation: Serves 22 hospitals, 200 clinics, 26 retail pharmacies, and home-care services.
• Fleet Strength: 85 vehicles—ranging from small courier vans to heavy articulated tractor/trailers.
• Number of SKUs Carried: 5,000-plus.
• Materials Carried: pharmaceuticals, consumable medical supplies, laboratory samples, linens, equipment, food and catering supplies, printed forms and office consumables.
• Hospital Shipment Processes:
  • Barcode scanning
  • Delivery to point-of-use/care
  • Transmits packing slips electronically to hospitals
  • All product categories consolidated into single shipments where possible
  • Low unit of measure inventory management

Trinity Health, United States

• Type of Operation: Privately held healthcare system. Self-distribution using own distribution centres (run by a 3PL).
• Size of Operation: Serves 93 hospitals in 21 states.
• Materials Carried: pharmaceuticals, consumable medical supplies, equipment.
• Hospital Shipment Processes:
  • Low unit of measure inventory management
  • Delivery to point-of-use/care
  • Just-in-time hospital delivery

National Health Service, United Kingdom

• Type of Operation: Public health organisation. Self-distribution using 3PL operator.
• Size of Operation: Serves 450 hospitals across the United Kingdom from 8 regional distribution centres. Also provides home delivery for NHS patients.
• Fleet Strength: 120 large goods vehicles.
• Number of SKUs Carried: 600,000
• Materials Carried: pharmaceuticals, consumable medical supplies, equipment, food and catering supplies.
• Hospital Shipment Processes:
  • Tail lift delivery only (to ward and care unit entrances)
  • All product categories consolidated into single shipments where possible

3SO Hospital Shared-services Organisation, Ontario, Canada

• Type of Operation: Division of public health organisation. Self-distribution operation completely outsourced to 3PL.
• Size of Operation: Serves 7 hospitals.
• Number of SKUs Carried: 3,000-plus.
• Materials Carried: pharmaceuticals, consumable medical supplies.
• Hospital Shipment Processes:
  • Delivery to hospital loading docks.
  • Shipment cross-docking and consolidation

Sisters of Mercy Health System, St Louis, United States

• Type of Operation: Privately held healthcare system. Self-distribution using own assets.
• Size of Operation: Serves around 45 hospitals and 700 clinics
• Fleet Strength: 125 vehicles—ranging from small courier vans to heavy articulated tractor/trailers.
• Number of SKUs Carried: 8,000-plus.
• Materials Carried: pharmaceuticals, consumable medical supplies, laboratory samples, linens, equipment, food and catering supplies, mail and parcels.
• Hospital Shipment Processes:
  • RFID and Barcode scanning
  • Delivery to point-of-use/care
  • All product categories consolidated into single shipments where possible
  • Low unit of measure inventory management
  • Materials management in hospitals, including management of smart cabinets

Concluding Thoughts

The one thing which stands out very clearly when researching government-run and private healthcare supply chains, is the burgeoning trend in self-distribution with centralised warehousing. There seem to be few healthcare providers wishing to continue working with fragmented distribution channels—quite understandable given the massive portion of spend that hospital supply chains generate.

This suggests it will only be a matter of time before the majority of health organisations around the world shift to insourced or outsourced self-distribution, handling materials from different categories under a central umbrella.

Of course for those healthcare organisations choosing not to embrace self-distribution, it should still be possible to consolidate supplies to some degree by working with their wholesalers or distributors.

In any case, it would seem that the most successful hospital and healthcare supply operations are born from strong collaboration between logistics and medical professionals, with the goal of alleviating concerns and freeing hospital staff from the distractions of logistics.

Best Regards
Rob O’Byrne
Email or +61 417 417 307