A simpler solution for direct manufacturer shipments: 5 Qs with Cardinal Health's director of supply chain solutions

The current state of direct manufacturer shipments is a lot like grocery shopping 100 years ago, according to Paul Farnin, director of supply chain solutions for Dublin, Ohio-based Cardinal Health.

"Back in the old days, when you went shopping, you'd go to the baker and then the butcher and then the deli," he said. "Of course nowadays, we go to one grocery store to buy everything we need in one location."

Unfortunately, the same cannot be said for direct manufacturer shipments. Many hospitals must manage thousands of individual shipments from numerous manufacturers everyday, which creates a highly complicated, time-consuming process, according to Mr. Farnin.

He spoke with Becker's Hospital Review about the challenges of direct manufacturer shipments and how hospitals can simplify the process.

Editor's note: Responses have been lightly edited for length and clarity.

Question: How are direct manufacturer shipments a problem for the supply chain?

Paul Farnin: A typical hospital has dozens — if not hundreds — of manufacturers who ship directly to the facility. This creates a lot of individual shipments that come into the hospital receiving dock every day. If you multiply that out by hundreds of vendors sending one or two shipments each, you now have thousands of boxes coming in from UPS or FedEx every day, or multiple times a day. So, the process for hospitals to receive those products, sort through them and get them to the right product user is complicated at best.

Sometimes unit of measure can also be an issue. The hospital might want to order one medical device at a time, but the manufacturer only sells it in a box of 10. Hospitals need a solution that offers a lower unit of measure option.

Q: What are some benefits of reducing direct manufacturer shipments?

PF: The obvious benefit is reducing the number of touches, or processing time, for these orders and simplifying how the products come into the hospital and get redistributed. I think there are also more subtle benefits around order to cash. Think about the behind-the-scenes activity of placing those orders everyday, including the paperwork and invoicing associated with this process. Ultimately, there are a lot of people involved in that, and there is a lot of room for error.

I think there is a possibility for some freight savings, as well. Courier delivery services are great, but a lot of those products are coming in by second day air or overnight delivery, which are premium shipments. A lot of those manufacturers say shipping is free, but I would argue that shipping cost is baked into the product price. Ultimately, someone is paying for that.

Q: What departments are more likely to benefit from reducing the shipment volume that goes direct?

PF: The operating room is the No. 1 consumer of direct products. No surprise there — the OR is the highest cost center, the highest revenue center and has the most volume and activity for everything. The catheterization laboratory might be the second largest user of directs. Due to the nature of these departments and the services they provide, a lot of the manufacturers they deal with for high-end physician preference items, such as specific medical devices or implantables, only ship direct through FedEx or UPS.

That being said, I'm not anti-direct. There are some items that should stay direct. My question to our customers is, "Are there some items that could come into the hospital a better or different way?" So, it's not an all-or-nothing proposition. It's an opportunity to move some items from direct to different solutions.

Q: What are some of the obstacles to reducing the number of direct manufacturer shipments in the supply chain?

PF: One of them is consignment. Hospitals often stock manufacturer-owned inventory in their department and they aren't billed for it until they use it. In some departments, like the cath lab, up to 50 percent of the inventory could be manufacturer-owned. If something is on consignment, the manufacturer is responsible for determining how much inventory to place there and how it comes into hospital, since they own the inventory. We want to challenge that premise. Again, not all consignment is bad, but maybe over time that level of consignment may have expanded or gotten a little out of skew. So we're looking to challenge or reduce some of that consignment.

Q: How is Cardinal working to simplify the direct manufacturer shipment process?

PF: For most of our hospital clients, we're already delivering their medical-surgical commodities on a Cardinal truck. So, we're working with them to develop a new solution for direct shipments. In the new solution, we would be adding those direct items onto an existing delivery. There's practically no expense there, because the truck is going to the hospital five days a week, regardless. This gives hospitals the ability to get products next day, where the industry standard for directs is two days.  

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