Orlando (Fla.) Health shut down its consolidated service center last year. Now the procurement leader at the 58-site system is not sure that was the right call.
“Was it the right decision? We don’t know,” said Kathleen Gathers, corporate director of procurement at Orlando Health, during a panel at Becker’s 14th Annual CEO + CFO Roundtable in Chicago. “I think we’re probably regretting at this point.”
Ms. Gathers said the system is still uncovering hidden fees the service center had absorbed. The center handled allocations, back orders and short shipments better than its distributor does now. Departments that once got supplies the same day or next day no longer always do. And the system’s own hospitals now compete with each other for allocations. She said the center was undersized and that a properly sized, well-run one brings value.
Supply chain leaders across several panels at the event split on whether owning distribution pays off. Even those who do not own a warehouse described paying for resilience in other ways.
The case against building
Bill Moyer, senior vice president of care delivery support operations at Detroit-based Henry Ford Health, took the opposite view.
“I think a CSC is a very costly easy button,” he said. He put the cost of building one at $50 million to $100 million, plus continued spending on automation, robotics and AI to keep it current. Health systems with transparency into their supply chain and a handle on hidden fees can build resilience through distributor partners instead, he said.
Mr. Moyer said a center can make sense in some places. He pointed to Salt Lake City-based Intermountain Health, which serves a large region with few distribution partners. But he questions the return over time. “I’m not sure if the juice is worth the squeeze,” he said.
Eric Trich, chief supply chain officer at UChicago Medicine, said the answer depends on why a system wants one. If the goal is to move medical-surgical supplies better than a traditional distributor, the question is whether there is a gap in the market, and UChicago Medicine’s region does not have one. Using a center for central-fill pharmacy or another strategic need changes the math, he said.
Akron (Ohio) Children’s Hospital looked at building one and decided it did not fit its size, said the system’s chief supply chain officer. It partnered with a medical-surgical distributor instead.
The case for owning it
Tom Labotsky, former chief supply chain officer at Minneapolis-based Allina Health, said the reason to build has shifted. Systems once built service centers to avoid distributor markups. Now resilience is the main reason. “The control of the inventory, the control of the risks are better served if you are able to invest in a CSC,” he said. Allina never built one because of the cost.
Chicago-based Northwestern Medicine broke ground on its service center about two and a half years ago, said Sabina Baiji, who oversees the system’s supply chain operations center. The center handles IT equipment and pharmacy distribution. It lets Northwestern contract directly with manufacturers without a distributor or wholesaler in the middle, which she said has led to cost savings and lower inventory at its sites.
Standing it up required standardizing processes systemwide, including moving to one uniform formulary, Ms. Baiji said. Change management was the hardest part. The center shifted the team’s question “from how do we handle this, to how can we prevent this,” she said.
What’s in between
Several systems have built models that fall between full ownership and relying entirely on a distributor.
Los Angeles-based UCLA Health secured a warehouse in October 2019, originally planned as a consolidated service center for emergency supplies, and opened it during the pandemic. Michael Baca, senior director of supply chain logistics, said the warehouse now holds items that go on allocation, high-freight products and “go/no-go” items that clinicians say they cannot work without.
For those critical items, UCLA keeps a 30-day supply in its warehouse and another 30 days with its distributor, giving it 60 days to react to a back order. Moving low-cost, high-volume items into the warehouse cut UCLA’s line-item charges by about 30%, he said. When a shortage ends, the item goes back to the distributor so inventory does not pile up. His advice to anyone considering a warehouse: “You must have a warehouse management system.”
New York City-based Mount Sinai Health System worked with its distributor to set up a service center dedicated only to the system, said Carlos Maceda, chief supply chain officer. That lets Mount Sinai protect its inventory and hold more than usual.
Tampa, Fla.-based Tampa General Hospital relies on a distributor and is looking for “something in between” owning a warehouse and depending entirely on a third party, said Mark Campbell, chief supply chain officer. The system has worked with its distributor on creative arrangements to fill the gaps. Its CEO’s mandate is to never cancel or delay a procedure because of supply.
Making the math work
Mr. Campbell said Tampa General’s CFO made the case for more inventory before he could. Holding extra stock costs money, but less than substitute products and expedited shipping, which are real costs systems already pay.
Mr. Maceda said proving a return is harder. Resilience investments often do not reach seven figures in total, he said, but a quiet six months can make them look unnecessary. He compared it to cybersecurity: “What’s the ROI of cyber?”
Mr. Labotsky said systems that do not own distribution should hold distributors accountable for how many days of vital products they keep on hand. Mr. Moyer argued the problem is bigger than any one system. Hospitals compete with each other for the same supply, he said, and the industry needs to work with manufacturers rather than just “buy more stuff.”
