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How to cure the healthcare supply chain

Aug. 1, 2004
How to cure the healthcare supply chain University Hospitals Health System (UHHS) (www.uhhs.com), based in Cleveland, Ohio, has launched a cooperative

How to cure the healthcare
supply chain

University Hospitals Health System (UHHS) (www.uhhs.com), based in Cleveland, Ohio, has launched a cooperative venture that serves as a model for other large hospital systems throughout the nation. UHHS has 150 locations, including several doctors' offices as well as 30 core facilities — about half of which are hospitals or hospital-sized clinics or other facilities.

UHHS had a need to confront and conquer physical space constraints, explains Steven Standley, UHHS' senior vice president of supply chain/shared services. “In the case of our biggest hospital here — University Hospitals of Cleveland, a 1,000-bed hospital — we were operating out of a space that was more for a 300-bed hospital. Motivation for change was for efficient movement of product, consolidation opportunities and traffic upgrades.”

UHHS' original model was to build a service center, “investing the necessary capital to essentially move ourselves up the supply chain one notch so that we could negotiate all incoming products on a direct basis, eliminating a middle person,” Standley says. “In the reality of hospitals today, it's very hard to segregate that kind of capital away from high technology replacement, new ventures and so forth.”

UHHS buys cooperatively with other healthcare providers through a group purchasing organization (GPO). About 15 years ago the GPO began awarding distribution contracts in addition to writing manufacturing contracts. To set one standard across the U.S. didn't seem right because of various urban and rural service level issues, among other problems. To avoid what he calls “vanilla distribution service levels,” Standley set out to change the model.

UHHS began working with Pharmed Group Corp. (www.pharmed.com), an independent distributor of medical, surgical and pharmaceutical supplies. Pharmed, which focuses on integrated delivery networks for large hospital systems, opened PMG of Ohio, a 60,000 square-foot distribution center (DC) in the Cleveland area, and has begun serving the needs of all UHHS facilities.

PMG is currently outsourcing delivery to a local trucking company, Shamrock, that had a previous relationship with UHHS. Currently operating on a five-day week, as the program gains momentum, the facility will move to a seven-day/18-hours a day operation.

“It's because of our low-unit-of-measure operation,” says Rich Matevish, PMG's vice president and general manager. “The hospital was previously taking bulk boxes, breaking them down and moving product from there. We circumvent that process by delivering directly to the patient unit. That requires us to be open seven days a week.”

Delivering directly to patient units helps alleviate logistical infrastructure problems. Low-unit-of-measure means that Pharmed breaks boxes down to fill specific orders, putting the requested commodities into totes and delivering them to specific sites within the hospital.

“One of the things hospitals generally do badly is to fragment their relations with many distributors,” says Matevish. “Think about a hospital having a supply chain in which they're dealing with 300 different manufacturers and five different distributors. What's genuinely unique about this relationship is that UHHS went the extra step to have everything from every manufacturer and distributor going through one pipeline.”

“The idea of having a central hub is not new,” Standley notes. “Several other hospital systems had tried this, but they kept the facility as a bulk warehouse and didn't really eliminate what was at the hospital. All they did was add another layer, so they could do bulk buys and justify that against a tier discount. They would sit on that asset longer because they did a bulk buy. But they didn't look at the cost of sitting on the asset that long, or the cost to run that bulk warehouse. They added a step in their supply chain that didn't need to be there.”

On its side, Pharmed has implemented Oracle 11i from Oracle Corp. (www.oracle.com) with an integrated warehouse management system (WMS), contracts and rebate system, and order management. “The WMS has been configured around the hospital's needs with low-unit-of-measure, bulk and 3PL,” explains Jay Pierce, Pharmed's president of U.S. operations.

Pharmed operates as supply chain manager for UHHS, handling its inventory. Since both parties feel this is a meaningful partnership, they see the new facility as what Pierce calls a Flexible Service Center.

Although most orders come through electronic data interchange (EDI), Pharmed also takes orders via the phone. It is also setting up a web-based platform to serve as an online catalog so orders may be placed through the web. “Our contract system will talk to theirs in the next interface,” explains Standley, “so that every time we do a transaction, it matches all the way down the transaction stream. In our industry, we may have 30,000 SKUs but carry only nine in inventory because of their usage velocity.”

Designed in four phases over the first five years of the contract, Matevish feels that Pharmed will actually be in the second phase of operations by the end of its first complete year of operation in October. Standley points out that the partners are running a parallel program, using both traditional and pilot methods and only at the large 1,000 bed hospital. He's looking forward to implementing Phase 2 of the project — when a user picks a product it will be communicated back to the Service Center for replenishment, creating a closed loop.

Under the program, UHHS only pays for what it uses and only after it's used. Pierce says a large hospital system benefits by being able to use limited capital for revenue generation and patient services rather than supply chain expenses.

Standley defines the supply chain in healthcare as being purchase price, plus asset or inventory management, plus utilization equaling supply cost. He feels he's solved the first two aspects of the equation — price and management. The goal is now not to save on buying and moving boxes, but to push funds toward the physicians and medicine, “to control the back end of the equation, which is where we should be because that's where we're closest to the clinician.” LT

August, 2004

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