How Self-Distribution Can Cut Supply Chain Costs in Healthcare

Managers who build their own distribution operations and diversify supply chains can reduce costs and optimize efficiency

By Matt Stewart

Healthcare supply chains are constantly under pressure to drive down costs, but recent disruptions have made achieving cost efficiency in the supply chain increasingly difficult. These disruptions often cause a chain reaction that affects patient care and increases operating costs, and they can negatively impact the health system in the short and long terms.

Creating a fully optimized supply chain that can succeed amid disruption – whether that comes in the form of another pandemic, a labor strike, or a natural disaster – requires the right supply chain strategy, proper collaboration, and an agile approach. While this strategy might seem to be easier said than done, the investment in ensuring the healthcare supply chain is optimized to reduce costs, mitigate stock outages, and improve patient care is well worth it.

More space, less risk

Right now, facilities managers are caught between a rock and a hard place. They are often not involved in the overall design of healthcare facilities, and when it comes to supply chain-related space, many organizations reduce the amount of space needed to store supplies. Those designs are often counterproductive in preparing safety stock in anticipation of supply chain-impacting emergencies.

Because patient care space inside health systems is so expensive per square foot, best-in-class facilities managers have begun seeking offsite storage and warehousing solutions that will equip them to self-distribute supplies. For managers who have heard conversations within their organizations about taking on distribution internally, now is the time to jump in. There has never been a better time to locate real estate that will equip managers to warehouse supplies and distribute those supplies within the healthcare system.

Self-distribution cuts back on the cost of key supplies; purchasing in bulk is much cheaper on average than purchasing only the small amounts the hospital or healthcare facility can store. It also cuts back on risk. Facilities managers will have the bandwidth and space to store enough safety stock of supplies from a variety of suppliers, ensuring that the chances of the system running out of the items needed to continue their life-saving work remain as low as possible.

Safety in diversity

Typically, when relying on a distributor, the average health system builds in a layer of insurance against supply chain delays with a holding of three to five days of inventory on average. But that buffer has shown to not be enough, as we have seen during the COVID-19 pandemic.

When disaster strikes, if all the department’s eggs are in one basket – if all needed supplies move through one distributor or warehouse – managers are setting up the healthcare system for failure because one disruption can upset the entire supply chain. This is one time redundancy can be a good thing. By diversifying warehouses and storage sites, managers can cushion the impact of any disaster that might strike.

By diversifying the supply chain and taking advantage of your facilities, managers also can do what vendors and manufacturers might not want to do – take on the activity of carrying approved clinically equivalent substitute items within distribution centers. This strategy gives managers plenty of approved substitutes in stock in case of a massive supply chain disruption that could otherwise cripple the healthcare system.

System-wide alignment

Revisiting storage solutions and diversifying the supply chain are two essential parts of the process, but it also is important to remember that emergency preparedness cannot happen in a vacuum. If operations are siloed from one another, it can be difficult for managers to determine exactly what each facility or department needs to be fully optimized for agility in the event of a disruption.

If facilities, sourcing, and procurement all operate in separate silos, optimization is difficult to achieve. It takes the entire organization putting the proper staff, infrastructure, people, processes, technology, and governance in the right places to truly prepare for emergencies. By having these conversations with facilities and operations teams, as well as the rest of the organization, managers can ensure that the whole organization benefits, and there is a payoff for the supply chain, as well as staff and patients. On average, health systems that take this kind of holistic approach to supply chain management see an 8-10 percent reduction in their total supply costs.

How is this done? By engaging in direct relationships with suppliers, cutting out distributors and removing the middleman. That is the quickest and best way to take the pulse of the supply chain as things evolve, rather than be caught off-guard when a crisis hits and being without the needed resources to continue operations.

Managers who build their own distribution operations, diversify their supply chains, and ensure that none of these changes occur in a silo can reduce supply costs while optimizing supply chains for peak performance. Whether facing an emergency or conducting business as usual, ensuring the supply chain can withstand anything is never a bad investment.

Matt Stewart is CEO of RiseNow, a supply chain consulting firm. Under Stewart’s leadership, RiseNow has become a market leader and experienced substantial growth. Among his clients are PPG, IBM, and Kaiser Permanente.

May 2, 2022

Topic Area: Maintenance and Operations

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