Improving proximity to manufacturers and decreasing the links in the supply chain result in meaningful cost savings with no negative side effects.
An increasing number of hospital systems and IDN's are successfully navigating the waters of self-distribution. Entering a world once only reserved for large distributors, Arizona-based Banner Health is one such example. Banner operates 29 acute care hospitals including three academic facilities and other related health entities and services in seven states serving over 300,000 members. The organization was named a Top 5 Large Health System three out of five years by Truven Analytics (formerly Thomson Reuters).
Mike Halmrast, a 20 year veteran and Senior Director of Contracting of Banner Health, shared with us the organization's approach to self-distribution now in what he describes as "phase 3."
"We have been self-distributing to our Phoenix facilities for over 10 years," Halmrast said. "Our Vice President of Supply Chain had successfully accomplished the task for his previous organization. We were confident improving the proximity to manufacturers and decreasing the links in the supply chain would result in meaningful cost savings with no negative side effects, and in some cases improvements in product quality and utility."
Phase 1 - Taking ownership
Banner started its transition to self-distribution in a 60,000 square foot section of its warehouse and took full ownership over approximately 2,000 products within it. While Halmrast and his team prepared to bring on the internal staff required to manage the warehouse and self-distribution program in its entirety (approximately 200,000s.f.), the distributor continued to receive, pick and deliver products to Banner's care facilities.
"The importance of a solid partnership with your distributor cannot be underestimated in the early stages of a self-distribution initiative," he said. "Excellence in that relationship is critical to helping you learn to crawl before you walk before you run ensuring zero disruption in the flow and fill rates of products to the point of care."
Phase 2 - ERP and global sourcing implementation
Any hospital or IDN taking on self-distribution will need ordering, tracking and reporting processes and systems for them. There are also processes required for facilities to request products. Lawson Software helped Banner's internal team determine what worked best for them.
This change needs to be seamless. Facilities need to be able to request products easily, with high visibility on products scheduled for next delivery and fill rates at least as high as previously experienced. There are also reporting expectations (including items not filled and acceptable substitutes) for which distributors are traditionally responsible. Hospital and IDN executives become responsible for those in self-distribution.
Once the inventory management and reporting systems were up and running it was time to formally take on the warehouse and distribution staff, managing the facility, operations and staff entirely with Banner's own resources. It was also at this time that Banner initiated a global sourcing program with ASP Global.
"Our global sourcing program started with basic commodity products: general med-surg, exam gloves, ISO gowns, slippers, belong bags, baby wipes and the like," Mike said. "These are proven quality products that produce the biggest bang for the buck. Layer two of the global sourcing program includes tourniquets, stethoscopes, pill cutters and other general products for which there is not considerable clinical preference. The overall spend on second-level, globally sourced products might be lower, but the percentage savings is still significant with quality maintenance or improvement included."
Mike reports savings of 30% - 40% on items in Banners global sourcing program and savings of 5% - 10% on most other categories since self-distribution went live. He also says comparable unadjusted fill rates increased from 93% to 99%, a huge improvement that prevented over 9,000 'stock-outs' per year.
"We manage to levels at higher rates than distributors may," Mike said. "With any potential disruption in supply, we can also bring replacements directly into our warehouse immediately ensuring there is no delay in delivery to our care teams."
Phase 3 - Value-based customization
Now that that the systems and process are "run-in," Mike and his team are taking self-distribution to the next level of value-based customization and utility: custom procedure trays.
"Because we have brought in and own all of the needed components of our procedure trays, we are starting to customize them at the clinicians' requests if a different product resides 'within our four walls,'" Mike said. "Some of those components are globally sourced, but the greatest value in this is provision of preferred products to those delivering clinical care and very high visibility into the components of those trays and the associated cost down to the individual item."
In 2014, Banner Health was recognized as having one of the top-25 most successful supply chains in healthcare by Gartner, the world's leading information technology research and advisory company.
For those IDN or hospital CFOs or supply chain executives evaluating their readiness for self-distribution, Mike advises gaining a large enough footprint within a small enough geography, maintaining an outstanding partnership with your current distributors and supply partners, close consideration of transportation logistics between your warehouse and end-user facilities and regular meetings with your largest manufacturers are keys to smoothing your path to self-distribution.
About the author
Lorne Tritt is Founder and CEO of ASP Global. With headquarters in Atlanta and operations in the Pacific Rim, ASP is a leader in global sourcing strategies and programs that enable IDNs, hospitals and large group practices to take advantage of lower costs and improved quality in hospital medical supplies available through direct sourcing, an efficient supply chain model and the global marketplace.
The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.