For Dennis Mullins, developing a consolidated service center just made sense. The senior vice president of supply chain for Indiana University (IU) Health hospital system said they already use centralized purchasing and contracting for its 15 hospitals, but supplies are handled by third party distributor Medline. They made the decision to do self-distribution, as it has the potential to save them millions of dollars yearly, and provide patients with better (and cheaper) healthcare.

To make sure that cutting out the middleman is the right decision for your health system, it’s important to do some homework. Here are some critical factors that Mullins and Sindi Kelly, director of consulting at healthcare performance improvement company Vizient recommend analyzing before taking the plunge to a new - and riskier – model.

5 factors to consider when analyzing your distribution system

1. Financial analysis
   Kelly starts her analysis with a five-year forward-looking financial review. She determines the hospital system’s baseline, with current distribution costs. She looks at the system’s finances, not their budget. She considers the costs of a lease, technology purchases, inventory variances and needed capital equipment. She then projects costs and savings over five years, working with distributors to determine the cost if the system retains a third-party distributor versus changing to a consolidated services center model.
2. Volume
   One perspective is to look at the amount a system spends per year on supplies. While there’s no set number, some think that a system should spend at least $30 million a year on supplies to make it worthwhile. Volume is not the sole deciding factor, though.
3. Culture
   Part of company culture is assessing current employee skill sets and talents, along with corporate processes and technologies. A hospital can have a large volume of supply needs, but if its technology and people aren’t in place, and the hospital isn’t willing to invest in them, self-distribution can fail.
   
   Another consideration is how well integrated the facilities are. Mullins says IU Health has 15 hospitals and about 450 other healthcare facilities including surgery centers and outpatient clinics. They’ve been an integrated delivery network for six or seven years, which he says is young. The system is still working through cultural changes, including standardizing supplies.
4. Technology
   Are the hospitals all using the same ERP? It’s harder to aggregate the data if they’re not. During the planning process, Mullins visited one hospital that bought a warehouse management system and operated it outside the hospital ERP system. The hospital lost the ability to have line item purchasing detail.
5. Location
   Hospitals located too far apart make distribution difficult from a centralized warehouse. There may also be regulations if going across state lines or even within a large state. Kelly says she worked with a system in a large state that couldn’t fully self-distribute because the hospitals were more than a 10-hour driving distance from the warehouse.
   
   With Department of Transportation limits for how long truck drivers can be behind the wheel, self-distribution didn’t work for all of their hospitals, so they went with a hybrid model. Those within a 10-hour driving distance used the consolidated service center. Hospitals outside that used a distributor and just in time model.
   
   One consolidated service center works for IU Health, which has 15 hospitals within 100 miles of each other. A dozen of them are within 50 miles of their Plainfield, Indiana warehouse. One other reason they chose that service center location is that it’s close to FedEx and UPS centers, making it easier to receive shipments.

How to successfully create a self-distribution system

Don’t skip the due diligence when creating a consolidated service center, or you risk failure.

“I’ve seen consolidated services centers open and the staff not know how to use the system, and quickly revert back to using a distributor because their patients aren’t being taken care of,” Kelly said.

If self-distribution is deemed right for the healthcare system, hospitals should take special care of their implementation and consider three questions:

Do I need to hire consultants?

After the analysis is done and the decision is made to start, the hospital system needs to build, buy or lease a warehouse, purchase racking and technology, and hire and train talent. Those without the ability to do any part of this process in-house may want to hire consultants.

“More often than not, hospitals don’t have the bandwidth to do this on their own,” Kelly says. They barely have enough bandwidth to handle their own operations, she says, so many use consulting support to do the review process, then for the planning, designing and implementation. Experts can be brought in to help mentor and train the hospital staff.

Mullins said they used their distributor Medline’s personnel for project consulting. Medline also manufactures products and IU Health will continue buying $30 million in annual supplies from them. “They’ll lose some business from a volume perspective, but they understand,” Mullins says.

Can I connect with other hospitals who have done this?

Take the time to network with other hospitals that have gone through this. Mullins said the IU team visited other systems with service centers, including Mercy in St. Louis, HCA in Nashville, Orlando Health and a few others.

“We toured those facilities to see how they’re doing it, what mistakes they made, and what they’d do differently,” he said. From networking they learned that other systems wished they focused more on change management.

As a result, IU Health is emphasizing communications so that no one is surprised by the changes. The communications team is a key player in the process. Kelly recommends finding other systems with a similar culture, so you’re comparing apples to apples.

Are my supplies standardized?

IU was already centralizing purchasing and contracting before beginning this process, but all distribution went through Medline. During the integration process, they realized that very few of their supplies were standardized. If supplies aren’t standardized, you lose most of your investment return, says Kelly.

Some hospitals use the self-distribution model to drive that standardization process. And many hospitals think they are more standardized than they actually are. Kelly said that one client found nine different hair combs in their system. The information wasn’t visible prior to starting their self-distribution analysis. She says many hospitals tell her they’re 80% standardized, but when going through the process, they find it’s more like 40%. “That’s always a surprise to them,” she says.

Mullins had a similar experience. IU Health’s research showed they had 5,400 items with stocking volume. When comparing that number to another healthcare system running a consolidated service center, that system had closer to 4,000 items. Mullins realized that IU Health has more standardization work to do. While ideally that would be done before beginning this process, it’s happening at the same time as they plan their service center.

Hospitals can take a few paths to standardize. The most successful systems are those using clinician and physician teams to make evidence-based decisions on what supplies to order. 

How long does the transition to self-distribution take?

Timing to implement a self-distribution system depends on the organization. If the system already has a warehouse and the space to handle the volume, it can be done successfully in nine months, says Kelly. A hospital system starting from scratch, with no warehouse, will need at least 18 months.

Mullins said they started the process about two years ago. The 35,000-square-foot office space in their 300,000-foot warehouse building opened in August. The warehouse and its phase I distribution activities won’t open until next spring. Not all the IU Health hospitals will come online the same day. They’ll be phased in, with inventory assessed for each. They’re trying to work through the bulk-ordered inventory now.

“It’s capital out the door already,” Mullins said, and they’re expecting a 20% reduction in inventory between now and next year.

The IU Health initial costs were higher because they purchased a robotics system for picking a high velocity of supplies, though they anticipate this will create greater savings as well. The robots will be functioning later this year.

Mullins said the robots will be especially helpful in the warehouse system’s second phase, when they’ve added on surgical centers and other smaller health offices. Those facilities will get supplies in small boxes, not pallets, so a fast robotic picker will be especially helpful. He says IU Health will be the first using the robotics system.

Mullins is excited about the consolidated service center model and its anticipated impact at IU Health. As for the future of self-distribution for other health systems? “The majority will move to a model like this,” Mullins said.