"Our view is not to compete with distributors and wholesalers," echoed Bill Hook, vice president, healthcare logistics, UPS, Atlanta. "They are faced with a need to change their models. We are likely to work with companies and hospitals to make sure we can enable the customers’ clinical strategy offers the most value to them. That may be with a wholesaler or distributor channel. So we’ll partner with them to enhance their value or go direct from manufacturer if that’s the best value." Typically, manufacturers make the decision to work with distributors, wholesalers and 3PL firms anyway and consult with hospital customers, he added.

Steve Bullard - Pilot Freight Services

Many 3PLs may not even be motivated to replicate the services of med/surg distributors, according to Steve Bullard, director of logistics services, Pilot Freight Services, Lima, PA.

"Every 3PL has its own business model," Bullard said. "From a non-product experience, the problem is that margins are so thin. It may be net cost minus two. It’s difficult for me to see the value for it to work. You’re talking about high-volume, low margin business.

"We don’t do consumables," he added. "We’re into more heavyweight products. No parcels or packages under 50 pounds. That’s FedEx’s and UPS’ venue."

Med/surg distributors not only have the experience in this type of business, but excel in it, too, taking supply chain services right to the patient bedside, according to David Anderson, senior vice president and general manager, hospital marketing and innovation, healthcare supply chain services – medical business, Cardinal Health Inc., Dublin, OH.

"When most healthcare providers look at their supply chain, they’re focused on controlling delivery, freight and warehouse costs, reducing the amount of clinical and management time spent on procurement activities and ensuring product availability," Anderson said. "With decades of experience serving the healthcare industry, distributors like Cardinal Health have highly specialized expertise in delivering value-added services to help healthcare facilities achieve precisely those goals. Distributors are also well positioned to help hospitals improve supply chain management within the hospital, right to the patient bedside."

In fact, some of the largest distributors also offer automated point of use, custom delivery, electronic commerce capabilities, specialized procedure packs, vendor-managed inventory, stockless and just-in-time distribution methods and a variety of other service lines to strengthen supply chains to "reduce stock outs, save significant hospital storage space and free up staff time to focus on patient care," Anderson noted. "In today’s increasingly cost-conscious environment, the reality is that the distribution channel offers the most time- and cost-efficient delivery option for the vast majority of the med/surg products a hospital uses in a given day," he added.

It’s all about focus, according to Diane Gibson, president and founder, Craters & Freighters, Golden, CO.

"We think [3PL] is a niche business," Gibson said. "Many med/surg distributors can get heavy machinery to medical facilities. Once the item is unpackaged from its original packaging materials these medical facilities are at a loss if they ever need to ship the machinery again for repair, refurbishing or redistribution. That is where a sophisticated 3PL company can come in and get the job done. Most traditional med/surg distributors can’t handle every logistical need, such as pick up, pack, crate and ship."

Anderson concurred that 3PL companies have remained a niche market within the med/surg supply chain for years.

"While Cardinal Health serves most of its med/surg customers through a broad-line distributor model, we do offer 3PL services for a small number of manufacturing customers that request them," he indicated. "That said, we haven’t necessarily noticed a significant uptick in use of 3PL services in the med/surg space. I think that’s because for the hospital, physician office, surgery center and other customers we serve, the broad-line distributor model has proven to be very efficient and convenient – and it’s also well positioned to deliver the savings customers are looking for."

Grieger indicated that it’s important to focus on what drives the revenue base. "A med/surg distributor makes money billing the supplier and the hospital together," he said. "Who do you really honor when all is said and done? You have to choose between product-oriented versus service-oriented companies. The difference between a distributor and a 3PL firm is that one bills you for product sales and the other bills you for service fees." As a result, he added, med/surg distributors have to be careful not to cannibalize their own product and customer base, he added.

Anderson foresees 3PL long-term prospects elsewhere, likely in the pharmaceutical space, particularly specialty and biotech pharma, where a growing number of products have more highly specialized handling needs, he added. But Gibson and Hook predict plenty of growth just in doing what they do best.

"Craters & Freighters is growing on the return side, maintenance and repair side and resale, meaning when the product has to go back to the manufacturer to a repair facility or to an after-market buyer, Craters & Freighters has the knowledge and expertise to pick-up from the medical facility, pack, crate, ship and transport to any destination," Gibson said. "There is a large need for reverse logistics capabilities among healthcare facilities. Reverse logistics is especially difficult for many industries in moving assets to and from facilities."

Hook contended that 3PLs generate "double-digit growth" working with manufacturers, but to a "lesser degree" in the hospital arena where they may focus on custom transportation services and some distribution services because of the complexity of hospital environments and the networks they have created. But in terms of understanding the need for delivery speed, 3PLs excel with overnight critical products, particularly in accessing information about the products along the way, he added, hinting that the supply chain is as much about data as it is about product.

Manufacturers offer the key growth opportunities for 3PL firms, Hook indicated.

"What we’re seeing right now is manufacturers of med/surg [products] and equipment have over the last few years been aggressively partnering with 3PLs for distribution of products to customers," he said. "A manufacturer will outsource distribution, order management, billing and accounts receivable so the 3PL becomes a marketing arm by handling supply chain and logistics outsourced to UPS. Hospital may receive product from UPS but don’t realize it’s [a] 3PL [relationship]. In some cases we’ll ship through a distribution channel like Owens & Minor or Cardinal."

Historically, 3PL firms have serviced the healthcare market in two ways – on behalf of the product or equipment manufacturer, which represents the lion’s share of the companies, and to a much lesser extent on behalf of the healthcare provider.

Len Batcha - TechTrans

"Typically in my experience most healthcare facilities do not source the services of a 3PL," said Len Batcha, president, Dallas-based Technical Transportation Inc., which specializes in "large instruments" or capital equipment. "Most services are actually directed by the manufacturer/shipper with the healthcare facility defined as the end customer. The manufacturer/shippers are developing strategies to provide a more complete service approach to healthcare facilities to enhance their position for present and future procurement opportunities."

In fact, for companies like Pilot Freight Services, healthcare represents a considerable chunk of their revenue. "From our perspective, outside of industrial, healthcare represents the largest single growth area," Bullard noted, estimating that 90 percent of that growth stems from high-tech equipment.

"We deal with companies like Philips, GE and Siemens and serve as their front end with clinics and hospitals," he said. "They [stress] non-traditional delivery locations and very customized delivery solutions without disrupting business. No one size fits all."

Manufacturers also want 3PLs to handle the long sales cycles of their products. "Providers like to kick the tires so we develop programs for demo sites," he said.

They also want traction in the area of supporting the ongoing operations of the equipment, including maintenance and repair, as well as stocking parts and making them readily available, in addition to being able to track inventory. "[Some companies] make more money servicing the equipment than selling the equipment so they want to be able to control parts [supply]," Bullard said. "We’ll stock regionally specific parts 24/7 and [offer a] 365-day program to get parts for hospitals. If the hospital has an MRI down, they want it up fast. Because we stock parts locally we can get equipment up and running within four hours.

"Our function is invisible to the hospital side, but it’s central," he added. "The hospital doesn’t care how something gets there just so long as it gets there when promised. For the kinds of products we ship the hospital doesn’t want to be involved. They just want seamless delivery." Bullard indicated that their relationships with hospitals make them an attractive company for other manufacturers.

3PL firms typically offer manufacturers inbound and outbound freight services, including critical or time-sensitive, less than truckload (LTL) deliveries and reverse logistics, as well as equipment set-up; "last mile" delivery, which covers the final leg of a product’s journey to the customer; and vendor-managed inventory.

"As more manufacturing is done overseas, companies are requiring inventories to be warehoused in the states," Bullard said. "So we manage overseas vendors’ products on behalf of those customers."

3PL firms also assist manufacturers that offer replenishment programs for consumables to their healthcare facility customers, according to Batcha. "Due to expiration dates, climate control and limited storage space conditions, a healthcare facility does not want to keep overstock or safety stock as to minimize waste and inefficiencies," he said. "The manufacturer/shipper employs the use of a 3PL to receive and store safety stock and perform periodic replenishment of product at the healthcare facility based on consumption. This allows the healthcare facility to keep a manageable level of inventory on hand at all times, and they do not have to employ labor to mange the inventory or stock their shelves. The manufacturer/shipper also avoids the cost of headcount by outsourcing this function to a 3PL with presence of employees near the healthcare facility."

UPS, for example, also offers product intercept and redirect services, Hook noted. Because of its extensive electronic tracking capabilities, for example, UPS recognizes whether a shipment might arrive late and can notify the customer or make alternative arrangements. "If a product is being shipped from California to a Florida hospital, but a fire or storm may affect the transportation route, we’ll know if it misses a scan along the way and reroute something from another warehouse or from another institution that may have the product on it’s shelves," he said. "You typically don’t find out [about this] until a customer calls and says, where’s my product?"

UPS works with about 130 healthcare clients for distribution, warehousing, transportation and other services. Sixty percent is pharmaceutical; 40 percent is med/surg, Hook estimated. When a manufacturer outsources to UPS and a customer calls, UPS answers the phone doing business as the manufacturer, he noted. "The only difference between us and a distributor is we’re focused on being an enabler," he said. "We don’t want to own inventory to influence a customer’s product to buy. We don’t want to be another step in the chain. Use us then you get rid of your warehouse. Manufacturers use us because they believe it’s more efficient and they can be more responsive."

On the other end of the 3PL spectrum are the few companies that work on behalf of the healthcare facilities, offering similar services but negotiated by and for the providers. Some focus on transportation and warehousing; others, like Bayer’s Healthcare Logistics Solutions, focus on data.

"Our whole slant is helping providers take control of freight information to help them drive freight costs down," Bayer said. "It’s not really our role to take out distributors. We want to help providers take control over their information. They’re paying a higher price for freight than they should, in terms of manufacturer shipping costs." In fact, Bayer estimated that providers who use the company’s HLS MedFreight system can save 40 percent on freight costs alone, an argument so potent that by the end of the month more than 500 hospitals – including some of the leading IDNs – will be using the system endorsed by all of the major GPOs, according to Bayer.

The HLS MedFreight system hinges on what Bayer calls "mode optimization." Essentially, it’s shipping product in the least costly way. Customers can go to the HLS Web site, for example, to access the company database on shipping options.

"Some hospitals and IDNs may know how much they spend for freight as a top line item but aren’t able to drill down for more specific information, such as how much per category or per facility or department," Bayer said. "We’re able to show them they spend X dollars in inbound vs. outbound and X dollars for priority overnight vs. standard overnight, for example. Through the software you can see what an entire organization spent on freight on a regional level down to cost per delivery at an individual facility and even to an individual department. You also can see how different shipping modes would change the costs. We’re able to show them how to get that information in a number of ways to drive costs out.

"We can sit down with materials managers and show them the data. If we know the number of beds in their facility or their volume of products we can figure out their savings," he said. "It’s low-hanging fruit for them. It’s one thing to take costs out of the product, but you can only go so far with that. Another way is to take costs out of the process."

Eventually, Bayer hopes to populate the database with customer’s usage history to help them develop freight management plans – inbound and outbound.

"The manufacturer does a great job of developing and making products, but freight management is not their core expertise," he continued. "We tell providers that they have a great opportunity to manage freight because they’re paying for it anyway."

Bayer admitted that freight management is a tremendous example of what EHCR tried to accomplish, so much that it lured him out of retirement. "Managing freight better could take $300 million to $500 million out of the supply chain," he said. "That’s how inefficient we think this is. You can see a 45 percent to 55 percent cost reduction over and above rate reduction just by managing information."