The current healthcare environment is dynamic and challenging. Hospital System leadership needs to develop a strategy to improve care while reducing costs.
Everything is on the table. With 40% of the delivered care costs coming from the supply chain, leadership is looking for lower cost solutions. Healthcare supply chains will need to leverage internal and external scale and alternative approaches to evolve to effectively and efficiently enable world-class care.
The passing of the Affordable Care Act is placing operating margin pressure on healthcare providers due to lowered reimbursement rates. This pressure, along with an increase in patient volume, has stimulated consolidation in the industry. Healthcare providers are looking to grow top-line revenue, consolidate and improve market share, and redistribute care to lower cost settings. The week of March 28, 2016, noted nine separate recent hospital transactions and partnerships. A recent study identified 26 hospital and health system transactions in the first quarter of 2016, a 13 percent increase compared to the 23 transactions announced in the first quarter of 2015 (Kaufman Hall analysis)1. As one client put it, "hospitals are buying, selling or don't know that they will be selling".
Each independent hospital of the newly formed system has separate and different operations, IT platforms and processes. Like all integration efforts, these newly formed hospital systems are challenged with leveraging scale by eliminating duplication and getting to a single standard approach. High Performance Supply Chains are focused on a single approach for systems, inventory replenishment approaches, and organizational structures.
The hospital supply chain coordinates the flow of healthcare supplies that originate with manufacturers and proceed through distributors, hospital receiving docks, hospital storerooms and ultimately, point of care. A typical hospital supply chain structure consists of a central storeroom that stores medical/surgical supplies in bulk and makes daily deliveries of logical or low-unit of measure (LUM) quantities from the storeroom or wholesale distributor, to replenish unit-level distribution points. The consolidation of many hospitals and clinics into a single system increases the supply chain complexity but offers an opportunity to leverage scale and consider alternative approaches including the development of a hospital owned and run warehouse or Consolidated Service Center (CSC) (Journal of Business Logistics: The Emergence of Consolidated Service Centers in Health Care). The CSC's will enable lower cost operating models with the goal of maintaining or improving the service to the clinicians and patients. The supply chain leadership is looking to deliver the near term cost savings while developing flexible strategies that can grow with the system and deliver long term value.
There are a number of viable alternative operating models options ranging from 100 percent outsourcing to 100 percent In-sourcing and many options in between. The outsourced or "contracted" model will be easy to deploy but will come with appreciable concern over total cost as well as current and future contract leverage. The insourced model is a viable solution that is gaining traction.
The healthcare industry is viewed as a supply chain laggard. As a result, there is significant commercial interest in the vertical. Equipment vendors are offering to design warehouses for their potential customers. Major third party logistics providers for other industries are looking to get into the healthcare market place (Trinity Health Will Centralize Control of its Medical Supply Chain) and are offering to build a "free" warehouse for their customers. Due diligence is prudent as free design services from vendors will result in solutions which include the vendor's technologies and "free buildings" will typically come with a significant term commitment to allow for full recovery of any investment.
Properly designed, a new Hospital System supply chain will enable:
• Ability to source products directly from the manufacturer
• Development of an efficient operating model to leverage the system scale
• Standardization of products and work processes across multiple hospitals
• Improvement of service levels to the clinical staff and patients
• Recapture of scarce hospital space for clinical revenue generating functions
• Increase of Supply Chain Resiliency
The Hospital System supply chain leadership team needs to challenge the status quo and develop a CSC strategy to meet the expected institutional and system growth, which can be fluid. The team will need to leverage LEAN tools and industry best practices to develop a comprehensive understanding of material and process flows from receiving through put-away, storage, unit-based picking and ultimately to the points of care. The team should benchmark other hospitals and commercial distribution operations to understand and leverage world-class operating strategies and technologies.
Industry Best Practices to Consider:
• Utilize a 3-5 year Planning Horizon: Define a planning horizon for the CSC and the business case analysis that considers the Hospital System growth. The supply chain strategy and resulting infrastructure should be aligned to the system's business plans. Other industries such as automotive, consumer packaged goods, retail, life sciences utilize a 3-5 year planning horizon.
• Develop a CSC Vision: CSC planning should include the development of a Long Range Vision. This effort will anticipate the potential integration of incremental shared services. A number of healthcare systems with a CSC in place are adding incremental functionality (LUM operation, custom surgical pack kitting, unit dose packaging, retail and/or mail order pharmacy, compounding, homecare, records storage, food commissary, disaster preparedness, etc.). A Long Range Vision will help to define an effective roadmap to minimize throw-away costs.
• Develop a Real Estate Growth Plan: The CSC Strategy should be used to inform a facility or campus growth strategy before the real estate lease or purchase contract is signed. Lease terms can be 3-5 years with options but the location and the strategy should be based on a longer term planning horizon. Most/Many large industrial clients utilize a 10 year planning horizon for locating a facility, especially if considering purchasing a building.
• Utilize Facility Master Planning: The CSC design process should be based on a proven world class distribution center design approach. Once the "mission" of the CSC is defined, the team can utilize the industry best practice of facility "Master Planning". This is a proven, data driven, engineered approach which develops and evaluates design options on the basis of financial, strategic, tactical and operational criteria to assess and determine recommended processes, technologies and size of the building.
• Leverage LEAN thinking & Best In Class Automation The CSC provides the scale/volume to potentially justify a new approach. The design of the CSC should look to maximize the operational efficiency in each function and as an aggregated operation. The design process should leverage analytical models and tools to effectively select appropriate technologies, accurately define the engineered standards and productivity levels for current and future operations, perform the business case analysis to recommend a system which will meet financial criteria and strategic objectives. Examples of industry proven technologies to be considered and evaluated for the operation include: static, mechanized and automated storage technologies; mechanized and automated picking technologies and systems such as pick to light, voice picking, pick to belt, robotics, horizontal and vertical carousels, conveyor, pick cart systems, put systems, RFID enabled inventory systems, and others.
• Leverage a Warehouse Management Systems (WMS): Warehouse Management Systems (WMS) are heavily utilized in industry and offer a significant opportunity to effectively manage inventory and operations. The design of the operation and planning of workflows of functional areas should incorporate the WMS capability.
• Centers of Excellence: The Hospital System's volume offers an opportunity to challenge the typical hospital departmental thinking and constraints to develop a highly effective solution for functional shared services (LUM, Surgical Kit assembly, Pharmacy operations, Central Sterile, etc.). Utilizing the concept of Centers of Excellence in industry has resulted in the development of extremely successful innovative operations. Example: St. Onge Company leveraged scale for a large pharmaceutical client designing the world's largest automated mail order pharmacy which processes over 1.2MM Rx per week, 80% untouched by human hands, achieving better that 6 Sigma in quality.
• Utilize Rigorous Business Case Analysis: There may be a desire to jump to a higher level of automation in your CSC. It is important to note that software systems and automation enable process; they are not the process. There are many vendors that are willing to sell their products. Automation should be applied to optimized processes and justified through industry proven rigorous business case analysis. Industry typically looks for a 3 year ROI (Return on Investment). Automation, where not justified, will burden your system with unnecessary complexity and overhead.
• Maintain Contracting Flexibility with Third Party Logistics (3PL) Service Provider: The large 3PL contractors can help a hospital system to quickly build capability in the short term. These organizations have experience in real estate, hiring and operations planning. If opt to contract with a 3PL, make certain to maintain contract term flexibility, own the WMS, and separate the building contract and the operating contract. If the relationship fails, you want to be able to replace the operator without having to move your whole operation.
The current healthcare environment is dynamic. In addition to the consolidation of hospitals into healthcare systems, the care models are changing to meet the population needs within their communities. The move to an off-site operation needs to be founded on sound business case modelling and a long term strategic view. The strategic approach should include planning for growth beyond distribution into system based Centers of Excellence. Future supply chains will need to leverage internal and external scale and alternative approaches to flexibly evolve to effectively and efficiently enable word class care.
Due diligence and detailed engineering, leveraging industry planning best practices, is essential to making an informed business decision that enables an effective supply chain strategy. No single solution is ideal in all regards; rather, supply chain professionals and hospital leadership need to comprehend and qualify each alternative and evaluate their advantages and disadvantages before deciding upon the strategic direction that is most beneficial for their system. To make a prudent decision, evaluate each alternative financially, operationally and strategically.
For more information, contact:
Sean O. O'Neill
Vice President - Principal
Direct Office: (717) 505-8032
Cell Phone: (717) 424-2491
soneill@stonge.com
Sean O'Neill is a Principal and Healthcare Practice Lead at St. Onge Company. Prior to initiating St. Onge Company's Healthcare Services in 2004, Sean was responsible for the design and implementation of over 20 Distribution Centers, totalling over 6 million square feet under roof, for J&J, Becton Dickinson, Quaker Oats, 3M, Glaxo, Pfizer, Bed Bath & Beyond and others. He has been developing standards which leverage industry best practices and apply them to Healthcare. His team has been involved in the strategy development, detailed design and/or optimization of Consolidated Service Centers for ROi Sisters of Mercy, ChrisitanaCare, Rush University Medical Center, University Health System, St. Luke's, Dana Farber Cancer Center, BJC Healthcare, Dallas Children's and others. St. Onge Company's capabilities in Hospital Supply Chain Consulting include applied automation, operations research and industrial engineering or LEAN design services to enable worldclass care. Please visit our website: www.stonge.com.
References:
1Becker's Hospital Review: Kaufman Hall: Hospital M&A activity up 13% in Q1, Tamara Rosin , June 08, 2016 (https://www.beckershospitalreview.com/hospital-transactions-and-valuation/kaufman-hall-hospital-m-a-activity-up-13-in-q1.html)
Wall Street Journal: Trinity Health Will Centralize Control of its Medical Supply Chain, By Loretta Chao, March 10, 2016 (http://www.wsj.com/articles/trinity-health-will-centralize-control-of-its-medical-supply-chain-1457643981)
Journal of Business Logistics: The Emergence of Consolidated Service Centers in Health Care, Yousef Abdulsalam, Mohan Gopalakrishnan, Arnold Maltz, Eugene Schneller, November 13, 2015. (http://onlinelibrary.wiley.com/doi/10.1111/jbl.12107/abstract)
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