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Does Supply Chain Need a Freight Awakening?

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undefinedWhen it comes to managing freight — including inbound and outbound packaging, shipping and transportation — just how efficient are healthcare facilities in doing it really?

In the short run, overnighting stuff can cover and hide a multitude of inventory management, demand planning or even last-minute, sweat-inducing product needing sins. In the long run, however, (the boundary between short and long runs can be fuzzy and thin) excessive, if not frequent use of overnight delivery services can create a multitude of other sins.

Too much of that blackness leads to red on the bottom line. And that’s bad news for green.

Over the years, Healthcare Purchasing News has explored industry behaviors and practices for effective and efficient freight management, as well as shared insights, tips and tools for changing and improving procedures by some of the foremost experts in the field.

With all of the intelligence HPN has published in past years (be sure to search HPN Online using the terms "freight efficiencies") we wanted to see if any of it has been meaningful enough for readers to apply in real life and take action.

As a result, we recruited a small group of third-party logistics experts to evaluate provider progress in recognizing the traps and tricks suppliers and vendors employ and in implementing appropriate countermeasures, as well as best practices to move forward.

HPN embarked on this project in three ways. First, we asked sources to issue an "unofficial" report card with letter grades, if they felt subjectively comfortable enough, for provider performance — basing the evaluations either on their actual customer base or on their perceptions of provider activity in general.

Then we recruited them to help HPN create a pop quiz to gauge whether providers are knowledgeable enough to know when and where to make changes. You’ll find our first quiz at www.hpnonline.com/inside/2013-07/2013-PS-sidebars.html.

Finally, we tapped them to issue some newsworthy and noteworthy guidelines for process and performance improvement. You’ll find that extensive list atwww.hpnonline.com/inside/2013-07/2013-PS-sidebars.html.

So how are hospitals doing?

Not surprisingly, many providers have much more work to do in becoming more effective, let alone efficient, freight managers.

"With the first of what will ultimately be 75 million Baby Boomers becoming eligible for Medicare, hospitals in the U.S. are challenged to care for a growing number of patients while simultaneously contending with increasingly expensive medical materials and declining reimbursement rates," said Scott Szwast, Healthcare Marketing Director, UPS, Atlanta, providing some context. "It has never been more important for healthcare organizations to take action to create freight efficiencies while maintaining and enhancing their ability to deliver high-quality patient care."

While Szwast acknowledged that improving freight management procedures can "seem daunting," providers don’t have to do it alone.

"You can leverage the expertise of supply chain managers within your network and third-party logistics providers to help develop an effective strategy for improved freight efficiency," he added.

Marc Mullen, Vice President and General Manager, Services and Marketing, Medical Segment, Cardinal Health Inc., Dublin, OH, indicated that providers are making some strides.

"Providers are becoming a lot more efficient in managing their inbound shipping costs," Mullen said. "They are taking control of how vendors ship to them by leveraging some of the industry’s best practices. However, not all customers implement the best practices, not all vendors are following the customer’s shipping instructions, and not all vendor contracts have freight language to create the stop gaps that are needed.

"We see most customers generally have between 65-75 percent compliance on inbound shipping costs with a third-party provider," he continued. "This does not include hidden vendor costs that may go unexamined. Without a third party provider, the compliance rates drop to well below 40 percent."

As a result, Mullen awarded providers an average letter grade of "B-" for controlling their inbound shipping costs.

"On the other side of shipping, outbound becomes even more complex for a healthcare system to manage," he said. "It’s hard to control outbound shipping costs without taking the time to evaluate who is shipping along with their behaviors, processes and technology used. We’ve found in order to be successful throughout a healthcare system, the primary focus needs to be training and communication to anyone shipping. They also need to have clearly defined processes and easy-to-use tools available to them to assist in making smarter shipping decisions.

"We see the health systems who are most effective at controlling their outbound shipping costs leverage all three of these facets of freight management. These providers probably make up about 20 percent of the industry, and the others have progress to make," Mullen noted.

Mullen gave providers a "C-" for managing outbound shipping because "we need more of them taking greater control of the their own health system’s shipping practices," he observed.

Ira Tauber, Vice President & COO, TRIOSE Inc.,Reading, PA, offset Mullen’s evaluation by providing some balance. Tauber actually scored hospitals with a "C-" for inbound shipping.

"Hospitals will always grade themselves higher because it is their belief that they are negotiating good freight terms on the front end, whereas in reality there are no internal metrics that look at freight expense," Tauber cautioned. "Inbound shipping of products to hospitals is largely controlled by the suppliers. Hospitals think that negotiating free freight will automatically lower their costs, but oftentimes free freight only applies to ground shipments. This is only beneficial if the hospital is not using Next Day Air service for the majority of their orders."

Tauber flagged another trap as free freight tied to purchase order limits.

"In a large health system a buyer may call in two-to-three orders a day from a single supplier, but because they are separate orders they will never hit the dollar amount required to trigger free freight," he continued. "Another hidden cost is handling fees. Most hospitals have no visibility as to what they are paying in handling fees. In fact, many believe that they do not pay any handling fees. These fees are generally bundled in with the freight cost and are not specified in contracts."

But Tauber granted hospitals a slightly higher average grade for outbound shipping with a "C."

"Outbound shipping, surprisingly is where the hospital has the least amount of visibility but greatest opportunity to control costs," Tauber said. "Most hospitals recognize outbound shipping expense is a problem, but have a difficult time tracking their outbound shipping costs back to departments efficiently. Lack of education also leads to overuse of premium service levels, such as Next Day Air shipping.

"One of the most common traps in large health systems are the shipping of documents internally from site to site," he continued. "The use of premium service levels is not uncommon. The majority of these shipments are documents that are not urgent. These could be shipped via ground or via the hospital’s courier service at a significantly reduced cost. TRIOSE has seen as high as 60 percent savings from shifting these types of documents to less expensive service modes."

Typically, hospitals are average performers in the freight services arena, according to Mark Hale, Account Executive, Onsite Management Group LLC, Louisville, KY, and colleague Dennis Brown, Shipping/Receiving Manager, OMG LLC. That’s why both overall gave hospitals a "C," admitting that they were being "generous" in doing so.

"An inconsistency in meeting service levels with providers is the greatest factor in only offering a ‘passing grade,’" Hale noted. "Too often the provider does not meet the scheduled pick up or delivery time frames quoted, requiring loading area to be unnecessarily congested and increasing security concerns. In the environment of just-in-time inventory focus, delays can significantly impact an organization. Ensuring costs and billing are issues as well from a consistent basis. Too often we experience damage to materials received via freight and often struggle with resolving the issues with the provider related to the insurance selected." 

Hale and Brown further delineated their inbound and outbound "C" grades with a "C" for service and for technology and ease of doing business, but a "B" for billing accuracy and a "D" for quality.

"Service is the key and feeling as though you are valued as a client and as a priority is lacking often in dealing with providers," Hale added. "The perception is that controlling their costs related to shipping takes precedent over meeting client expectations."

Jake Crampton, Founder and CEO, MedSpeed LLC, Elmhurst, IL, acknowledged that it can be challenging to evaluate providers on freight management because of conflicting priorities.

"At any given time, there are only so many things an organization can focus on at once," Crampton insisted. "Particularly in times like these, when the pressure to do more with less is mounting, healthcare organizations are finding that they have to prioritize and focus their efforts on care delivery more than ever.

"The simple fact is that all transportation, freight and healthcare transportation, the movement of patient and business critical items within a healthcare organization, is not a health system’s first priority," he continued. "Trying to effectively manage these efforts for maximum value and waste removal takes a great effort. As such, many providers are not very efficient at managing these operations — nor should they be. Many transportation activities overlap and oftentimes freight charges are hidden within product fees, thus creating the potential for waste and over payment."

Strategically aligned industry partners make all the difference, according to Crampton. "They oftentimes have expertise, staffing and capital to invest in infrastructure, technology and other areas to streamline and centralize," he added.