Collaborative Distribution Centers: JIT with Benefits

As healthcare emerges out of pandemic conditions, supply chain issues are still triggering for hospitals. Some overcompensate by hoarding supplies, but there's been an overcorrection of hospitals now stockpiling many times their traditional inventory needs. The conventional wisdom is, let's not get caught short of products with a just-in-time (JIT) inventory system.

That's a mistake. Inventory stockpiling isn’t good practice the majority of the time. It's not good use of resources to plan solely for a rare event. You want to protect yourself and make a capital investment, but leaders must decide - do you want to solve for a problem you may have once every 50 years, or do you want to solve a problem you have every year??

Overcorrections Shouldn’t Drive Long-Term Strategy

Although the industry overcorrected, there's still a good middle-ground option to come back to. When things run normally, which is most of the time, JIT and Low Unit of Measure (LUM) delivery offer high value.

Usually, if you order in bulk from your distributor, you specify the case quantities that suit your needs for the next few weeks. With LUM distribution, instead of ordering six cases of something to last a month, you order what’s needed today. JIT allows hospitals to reduce on-site inventory and streamline delivery processes.?

Utilizing a LUM program may sound expensive for smaller hospital systems, but the practice has advantages. As this McKesson article points out, “This LUM method has multiple other benefits, like lower inventory holding costs, less labor and reduced waste.”

Alternatives to On-Site Inventory Stockpiling

There are alternatives to maintaining high volumes of on-site inventory. Some larger hospital networks, for instance, have established their own self-distribution centers, but it's capital-intensive to build, manage and stock off-site centers. Few hospitals have the cash or stomach for it.?

Healthcare supply chain distribution is hard work and low-margin. It doesn't make a lot of money. Hospitals often just hit the “easy” button and have a distributor take care of everything. Some distributors did perform well during the pandemic. Others not so much. Each distributor has their own way of doing things, and most times, you get the product, but sometimes not.

Imagine if you have to call the distributor on Christmas Eve. You're not going to get anybody. But when you have more control over that inventory and the distribution process, you can pick up the phone at 11PM when you need something. It's your shop. You own a piece of it, so of course you will get what you need.

Regional Distribution Collaborative: Self-Distribution without Major Investment

Another way of looking at a solution is the model of the Regional Purchasing Collaborative (RPC). With RPCs, member hospitals come together to accomplish something none could do alone. Many hospitals already use this approach when it comes to purchasing clinical supplies. Why not for their distribution, too??

Raising $20 or $30 million to open a distribution center might be no problem for large healthcare networks, but it’s a big ask for many hospital systems. However, sharing the cost as a collaborative makes it more doable. Instead of one hospital footing the bill to build a distribution center, the load (including startup costs and ongoing expenses) gets split among member hospitals. Coming up with five million dollars each is within reach when hospitals team up.?

Members go in as equity owners with a share in the collaborative. The collaborative maintains its own set of books and financials separate from hospital members. An optimal site can be chosen for the physical center, with no more stockpiling at hospitals. Working as a collaborative adds efficiency to every point of the process.?

Combine Contract Volume with Distribution Collaboration Strategy?

A collaborative distribution center is an innovative way for healthcare supply chains to consolidate and control product distribution and sourcing, but that’s not the end of the story. For a self-distribution center to work takes lots of purchasing volume passing through. Why not capture those contract opportunities, too??

A collaborative can lead to combining product purchases for better contract leverage. A smallish hospital going into the distribution business will probably not have enough volume on their own for much contract leverage. By joining a collaborative distribution center, five or six hospitals with similar volume could work together for better contracts.?

Reframing Cost of Distribution as a Collaborative

Cost of distribution refers to the product markup that keeps a distributor’s lights on. When hospitals use a distributor for supplies, they pay the cost of the product plus an x-percent markup. With some distributors, that might be cost plus 2% – a pretty competitive markup. As a customer of the distributor, you don't own any part of that mark up nor any other revenue associated with your distribution transactions.?

Now if you're running your own distribution center, your markups are higher – maybe cost plus 6.5% – because you have to pay for employees, work space, inventory – all the things that generate cash for the business. The difference is, if you own some of the distribution business as a collaborative member, you're getting cash back.?

For example, you pay 6.5% up front for a product, but after you as the distribution business collect that cash back from suppliers in the form of rebates or tracing fees, that's going to net down that 6.5% cost to 3%.?

Members tap into rebates, tracing fees and other revenue-generating activities by having a stake in the distributorship. The owners can take what they make for the quarter or year and distribute that back to the membership.?

Distribution Collaborative Risk: Not Understanding the Economics

This collaborative self-distribution model has its risks as well. Everyone must be committed and “play well together” to make it work. Most importantly, every hospital in the collaborative needs to grasp the economics of it. In every institution, the C-suite and the supply chain must understand how the money flows and how the income works to appreciate the full value.

Make JIT a Commitment, Not an Experiment

Optimizing the clinical supply chain is something you eventually should do anyway. Why not get proactive, make a commitment, and do something now? Reach out, and we can share some ideas and first steps.