A million dollars, straight to the bottom line. What hospital CEO doesn’t love the sound of that?

At Trinity Health, executives are celebrating the possibility of such financial gain. But these funds aren’t coming from a wealthy benefactor or a research grant. They’re coming from inside — from the health system’s own supply chain.

Innovation has always been at the heart of healthcare. It’s the quality that has pushed continuous improvement in clinical care over the years. And it’s now the driver of major cost savings in operational areas previously overlooked. At Michigan-based Trinity Health, innovation in supply chain management is paying off handsomely.

Headquartered in Novi, MI, Trinity Health is the fourth-largest Catholic health system in the United States. With 17 main hospital campuses and a vast network of member organizations from outpatient clinics to hospice programs, Trinity Health is spread over seven midwestern states.

Trinity Health Director of Supply Chain Operations Jerry Ontko came onboard four years ago and faced a situation typical to most large hospital systems — highly decentralized operations and little focus on leveraging the supply chain for cost savings.

"At that time, our priority was getting the right materials to the right place at the right time, no matter what it took," Ontko explained. "We clearly needed a smarter way to work — a way that would help us proactively address the opportunities for tighter supply chain controls and cost reduction."

You can only manage what you can see

Distribution is one of Ontko’s areas of responsibility. "When we looked at various opportunities for expense control, inbound product transportation costs stood out as a fairly large spend," he said. "We polled the hospitals to assess the volume we were dealing with, and they reported that they were receiving between 50 and 500 packages per day. We assumed we were looking at about $500,000 annually in inbound supply transportation costs — and we thought we could do better."

But Ontko’s team wanted to be sure they had a full picture of what was coming into each hospital. "You can’t manage what you can’t see," he explained, "and we really didn’t have a handle on the scope of the issue. So we called on UPS to help us assess actual volume and costs."

In late 2003, UPS worked with Trinity Health on a validation exercise to gather inbound package transportation data from several hospitals. Using TrackPad technology on loan from UPS, Trinity Health was able to find out exactly how many packages were arriving daily and evaluate what was paid in freight costs. By extrapolating that data across the entire system, Trinity Health also compared current costs to what those costs would be under a volume-based shipping contract.

The results were illuminating. It turned out that the hospitals were actually receiving between 100 and 200 packages per day and, based on the information validated by the test, the health system’s estimated total transportation costs were actually in the $3 million to $5 million range per year.

"When we realized what we were being charged using published rates, versus what our costs would be under contracted rates, we knew we had a huge opportunity," said Ontko. "With these validated figures in mind, we conservatively thought we would gain about $600,000 in savings in inbound freight costs by implementing an inbound supply transportation program under a volume-based shipping contract. We set our target stretch goal at double that — $1.2 million in savings."

A program designed to save big

Trinity Health selected UPS as its partner in its inbound freight program. Working closely with UPS Senior Account Manager Shannan Norwood, Ontko’s team implemented a freight collect and third-party shipping agreement designed to dramatically reduce costs, with contracted savings on each shipment.

According to Norwood, shipping "freight collect" means the vendor doesn’t pay to ship its products. "Instead, Trinity Health’s UPS account is charged for freight — at a reduced contracted rate," she said. "Shipping ‘third-party’ allows a vendor to ship products to a location different from the one on the account being charged. This gives individual hospitals the flexibility to order products, have them shipped to satellite locations, and still reap the benefits of the UPS contracted rate."

The program was set to launch in the spring of 2004, and Trinity Health implemented several UPS technology solutions to facilitate it. Several hospitals were outfitted with UPS TrackPad technology to process inbound shipments faster and more efficiently. Trinity Health also began to use the web-based UPS Quantum View Manage solution, which delivers real-time data about where packages are in the UPS system and enables Trinity Health to accurately track package volume — and costs. Trinity Health also uses a variety of UPS outbound package solutions.

To establish the program, Norwood and Ontko knew they needed a comprehensive plan to educate both the health system’s employees and suppliers. Employees needed to be informed about the new inbound freight program so they could take full advantage of it. And suppliers needed to be asked to participate and convinced that shipping under the UPS contract was workable and in their best interests.

Educating employees

There are more than 44,000 full-time equivalent employees at Trinity Health. It was imperative to get the inbound freight program message out to those involved in ordering, shipping and receiving packages because employees’ knowledge of the program and their participation in it would be crucial to its success.

Ontko designed a two-pronged education approach, coupled with training and support supplied by UPS. To educate Trinity Health leadership and supply chain partners, Ontko shared details of the program in his department’s Supply Chain Monthly publication. To educate the other employees involved in ordering, shipping or receiving packages, Ontko’s team used data supplied by UPS to launch UPS Awareness Month — August 2004 — with weekly messages highlighting the benefits of using UPS.

The first week’s message explained the difference between freight collect and third-party shipping, contained a list of vendors who had agreed to participate in the program, and gave contact information for Trinity Health’s UPS representatives. Week two featured details of the returns process, including UPS Returns on the Web. The third week highlighted documented savings to date. And week four answered questions collected from employees throughout the month.

"Our mission was to make it clear to employees that all they had to do was request that vendors use the Trinity Health UPS account number," Norwood explained. "It was just that simple."

Among the positive results shared with employees during UPS Awareness Month — just three months into the program:

• Inbound freight collect volume per month grew from 200 packages in April to more than 1,800 packages in July.

• Average monthly freight collect volume grew from 18 packages in April to more than 100 packages in July.

• Freight collect savings by month increased from more than $1,000 in April to more than $7,000 in July.

• One Trinity Health location had inbound freight collect volume of 281 packages per month in July — more than double the Trinity Health average.

• Another location saved more than $1,000 off published rates in July.

"Sharing this information with employees was inspiring," Ontko said. "They could see that the program was working. Even at that point, our actual savings were projected to be 1.5 to 3 times more than published rate costs — and everyone feels good about saving money."

Convincing suppliers

Trinity Health works with more than 2,000 suppliers, ranging from giant pharmaceutical and medical supply distributors to small, specialized vendors. A freight spend analysis showed which suppliers charged freight as a separate line item, and Ontko began by approaching the largest of these, asking them to participate in the Trinity Health inbound freight program.

"I felt strongly that our suppliers deserved a personal call to explain the program and its goals," Ontko said. "Typically I contacted the manager of customer service or someone at that level. We would take the opportunity to review our payment terms, and I explained our inbound program. Most of our suppliers have been fine with it and are happy to work with us to accommodate our program."

Some of the savings have been remarkable. One vendor was charging Trinity Health 2.9 times published rates. Another was charging 1.6 times published rates.

"My goal is to get about 80 percent of suppliers on the inbound freight program," said Ontko. "And my experience tells me that this is a reasonable goal — about 20 percent of those I’ve approached don’t comply."

In some cases, suppliers are either unable or unwilling to participate. Among the objections:

Technology — The supplier’s technology simply can’t support a freight collect program. In these cases, Ontko has worked with them to arrange discounted freight pricing to match the inbound freight program rates, yielding the same savings.

Policy issues — Some suppliers already had contracts with shippers other than UPS, and complying with the Trinity Health program would put their own contract volumes at risk. In some cases, the discussion stopped there. In others, UPS talked directly with the suppliers to see what could be worked out.

Trinity Health’s two largest suppliers are distributors, one providing pharmaceutical supplies and the other medical-surgical supplies. Neither was hesitant about joining the program, but neither participates fully because so much of their supply — approximately 90 percent — is shipped by private fleet.

"Traditionally, these major distributors of pharmaceuticals and medical-surgical supplies bundle their distribution costs into their product, consulting or account management fees," said Ontko. "In the future, this will probably change. Industry pressure will persuade them to break out distribution cost details at some point."

But for now, Ontko is concentrating on the fastest path to value, and continues to work his way through the long vendor list. "At this point, it’s smarter for us to concentrate on suppliers that identify their transportation fees — it’s the quickest way for us to see results."

Easy Money

The results have been remarkable. Now 1.5 years into the inbound freight program, Trinity Health has reaped nearly $800,000 in savings. Sharing results with executive leadership is a key part of Ontko’s strategy. "Our efforts are part of the strategic plan for overall corporate growth," he said. "What we save in freight can be spent on a new MRI or a new community program. So we make a concerted effort to demonstrate our savings. We publish our monthly numbers by product, by product category and by discipline for both corporate management and hospital executives."

Ontko’s advice for others considering a similar program? It’s worth the effort. "This is easy money," he said, "but if you haven’t done it before, the process may seem overwhelming," he said. "It’s not that difficult to pick up the phone. You just have to have the resolve and focus. Here’s an opportunity that’s traditionally been overlooked, and yet the results are tremendous.

"The concept is definitely attracting more interest in the industry," he added, "We’re not the only ones doing it — although I think we may be the only ones doing it ourselves."

At this point, Trinity Health’s $1.2 million target stretch goal is not far away. "Through our program, we’ve freed up cash, enabled the hospital system to grow, and had a major impact on increasing and stabilizing our corporate margins — a rare accomplishment in healthcare," Ontko noted. "It’s gratifying to know that what we’re doing is having such a positive impact." HPN