That is, if you’re trying
to do it yourself or even
doing it at all.

By many estimates, hospitals and other healthcare facilities typically ignore, if not overlook, what they’re spending on shipping product out or having products shipped in. They might blame it on extenuating circumstances that require quick thinking and decision-making, such as those stat orders for a looming surgical procedure, or to cover up an "oops" mistake or oversight.

Some may turn to their group purchasing organization to set up a contract with a distributor or third-party logistics organization; others may link up with those vendors directly. But any potential success hinges on the clinicians and staff members actually using the contracts.

So how do you get supply chain management, as well as its customers, to recognize what a financial drain lackadaisical shipping habits are? How do you even get supply chain management to recognize lackadaisical shipping habits, short of the CFO screaming about too much red ink after the fact?

Healthcare Purchasing News tapped into the shipping intelligence of a half-dozen experts to uncover why this issue is so invisible, as well as how and where to keep it on supply chain management’s radar screen.

By definition, there’s a Catch-22 to see-through situations. On one hand you garner a granular view into processes to identify and eliminate errors and promote efficiency. On the other hand, some processes – like shipping – may be so common that they’re transparent in that you overlook or see through them.

Jake Crampton

"Because the top priority is to fulfill the clinical need first, something ancillary like freight/shipping is very easy to overlook, said Jake Crampton, CEO, MedSpeed LLC, Elmhurst, IL. "Moreover, the cost of freight management/shipping is almost always hidden because it is either bundled in with product cost and/or fragmented by functional area. Fragmented intra-system material movement is a common area of untapped opportunity for IDNs because the total costs are diluted by department so they do not come to the attention of either finance or supply chain." MedSpeed provides internal and external transportation outsourcing services to providers that spans the pick-up and delivery of laboratory specimens, medical records and radiology films, to distribution of pharmaceuticals, mail and supplies.

Doug Schwieger

Doug Schwieger, director of marketing and product management for OptiFreight, Cardinal Health Inc., Dublin, OH, concurred that clinical priorities tend to trump what might be ill-considered peripheral operations.

"Hospitals’ primary focus is on patient care/safety and making sure products and resources are available to care for patients," Schwieger noted. "When healthcare facilities try to maintain a high level of service at a lower cost, they tend to focus on the cost of the product and not the cost to move products. Freight management partners with the right expertise, can help provide visibility to these supply chain costs and help manage the program so that hospitals can focus on their patients."

Ira Tauber

But Ira Tauber, executive vice president and COO, TRIOSE Inc., Reading, PA, argued that "no one person has ownership, vision or visibility to all inbound and outbound shipping activity" to make a difference. And this represents something bigger than tapping one person for responsibility.

"As healthcare systems have focused on their core mission, which is patient care, and rightly so, they have relied on suppliers to perform various functions for them, such as logistics," Tauber said. "Healthcare systems are not set up to manage logistics efficiently on their own so they have relied on their vendors to handle shipping decisions and freight costs are added onto the product invoice."

The size of shipping charges remains another visual impediment so that it slips through the proverbial cracks.

"One of the challenges is that individual shipping charges are small compared to the product cost, and when added to the invoice cost they typically get overlooked. As an example, an invoice for $4,000 worth of product, the shipping costs may be as little as $50," Tauber continued. "This won’t get anyone’s attention. In reality the shipping cost might really be as low as $25. This adds up over time. Accounts payable pays the total invoice cost, and this opportunity gets missed. Thousands of purchases occur this way, and the individual costs get buried when you’re managing at a macro and not micro level."

Schwieger agreed.

"Many hospitals do not realize how much they spend on freight each year or how much volume they actually ship," he indicated. "The ability to manage these costs can greatly impact a hospital’s bottom line. The average cost per pack for a hospital not using a freight management provider is approximately $40. With a best-in-class freight management solution, hospitals are able to achieve a cost per pack of less than $20."

Yet locating that individual freight/shipping cost can be needle-in-a-haystack daunting.

"Purchasing does a great job negotiating price, but they may not have the expertise and resources to identify the true shipping costs," Tauber told HPN. "Freight charges are typically pre-paid and added to the invoice, but the vendor rarely states what those actual freight costs or markups are. Compared to other industries, healthcare is behind in this. In the automobile manufacturing and retail industries these freight costs would be known and spelled out prior to any purchasing or product movement. In healthcare however, this has been overlooked and never been a big enough dollar item to tackle in the grander scheme of project initiatives managed internally."

Frank Gillespie

Frank Gillespie, vice president, Non-Clinical Supply Chain, Distribution & Alternate Site, MedAssets, Atlanta, understands this.

"Historically, it has been lower on the priority list," Gillespie acknowledged. "Potential savings in the area of freight are not always easily understood. At many facilities, freight is not broken out as a separate line item on invoices or in a budget. Some facilities see it as a cost of doing business, but that is not the case. Major savings are possible in this area if there is a focus on it."

John Menna

Volume complicates the process in this case, according to John Menna, director of marketing, Healthcare Logistics, UPS, Atlanta.

"The sheer number of vendors a hospital typically works with makes it difficult to implement a program, and even harder to manage program compliance moving forward," Menna said. "The key is having a solution for maintaining full visibility into which suppliers are using a hospital’s program and which ones are not. Some transportation providers offer analytics that provide this type of visibility to hospital supply chain managers."

Eric McGlade

Eric McGlade, vice president of professional services, HLS MedFreight, Westerville, OH, said he thinks people easily overlook shipping for two reasons. "One, people don’t feel they have any control over freight costs, and two, they don’t realize the savings on managing freight costs, and how easy it is to reduce their costs," he noted, estimating that the average annual savings is $20,000 to $25,000 for every 100 beds.

But volume, coupled with internal resource challenges, including management’s low priority and compliance rebellion makes identification, control and management an ongoing uphill battle, Tauber insisted.

"With large purchases and capital items it’s an area we get involved in because shipping costs are usually shown as a line item on the quote," he said. "Typically, shipping may be in the hundreds of dollars. We actually will go out and determine if that is a valid cost or make a lower cost routing decision with one of our carriers. But for day-to-day repetitive purchases, finding the actual shipping costs before the product is shipped is difficult because there is limited data.

"Please keep in mind that there are some vendors that simply will not comply with our routing or even the hospital’s routing requests," Tauber warned. "These outliers range from large scale shippers/manufacturers down to the specialty product manufacturers that dare you to find a functional equivalent. They effectively hold you hostage for shipping as you won’t get them to budge so those costs simply get passed on."

GPOs to the rescue?

Because vendors charge freight on a "pre-pay and add basis," Tauber indicated, healthcare systems may have little to no say in the contractual price – even through a GPO.

"A lot of these contracts are through GPOs where they’ve effectively negotiated the price down to a point where the vendor feels they have no recourse but to add costs to shipping to make up for some of the lower margins on the product price." Tauber insisted. "Very few people in purchasing notice the difference if a vendor increases shipping costs 40 percent to 60 percent to offset pricing discounts."

Schwieger, however, thinks that’s changing – even with unexpected stat orders.

"Many GPOs have negotiated contracts for freight management services on behalf of their healthcare members," he said. "By aggregating volume, freight management programs are able to provide discounts to GPO members.

"There is also a trend where GPOs and their members are requiring vendors to participate with hospital freight management programs as a part of their contract negotiations," he continued. "An effective freight management partner will leverage these contracts and help drive compliance. This effort helps to ensure maximum program utilization for our customers. To deal with unforeseen stat orders, a healthcare facility should align with a freight management partner with a strong rate structure and deep vendor program. This way, a healthcare facility can ensure the vendor is on the program and reduce costs for premium shipping service."

Gillespie recognizes the significance of GPO involvement. "The greatest benefit is that language is inserted into your GPO agreement that is specific to freight management," he noted. "MedAssets has freight management suppliers on contract to help facilities develop plans of action for reducing freight costs. By using the resources within your GPO agreement, you can aggressively and actively make managing freight costs a priority."

But McGlade emphasized that the "core benefit of the GPO is to consistently utilize ‘bill third party’ freight language in their contract with vendors," he said. "This allows the hospitals and freight management companies to clearly understand which vendors are cooperating with hospitals’ request to partner with reducing freight costs."

Stat orders may be just the motivation for a third-party healthcare logistics specialist to be on call, according to Crampton.

"A robust technical solution combined with central oversight of all intra-system movement provides the data points required to not only manage and track stat orders, but to also perform creative routing to reduce and eliminate unnecessary stats altogether," he said. "From service times to service frequencies, data is essential to correct behavior and control costs by either finding less expensive ways to execute these jobs or by converting the stats to scheduled services."

In fact, MedSpeed invested in a comprehensive scan-track technology suite to handle such demands, Crampton noted. "This is a capability an IDN would either have to invest over six figures to obtain or forgo altogether," he added.

Tauber offered a real-world example that happened back in May. "About two to three weeks ago, one of our clients called us with an ‘out-of-the-box’ request," he told HPN. "One of their physicians was performing a surgical procedure in which they were harvesting tissue from one patient to be used for another patient transplant procedure 8 to 10 hours away at a specialty hospital. With this type of request there may be a 40-60 hour window of time for the tissue to be useable. Through our network of service providers we arranged and coordinated it to be delivered in the same-day and were able to do it for much less than alternatives.

"You can’t put a price on something as critical as this," he continued. "However, the costs are typically in the thousands to ship. We typically don’t get involved with these types of requests but this was one of our long-time customers that had no resources to get it done on their own and we needed to come through."

 

Ship-to best-practice tips for you Healthcare Purchasing News compiled a short list of sure-fire recommendations from a series of experts for successfully managing freight/shipping. Here’s what they suggested. • Lower total cost via cost per pack. When analyzing freight expenses, focus on the total cost of purchasing and receiving each product. Take into account any savings the hospital may be receiving through rates, utilization, mode optimization and channel optimization. • Break out freight costs. Freight charges should always be listed as a separate line item to allow the hospital’s finance team to analyze freight costs. The more detailed the invoice, the better. Beware when a supplier promises ‘free freight.’ Delivery is never really free. When a line item for freight charges is not included on an invoice, chances are the freight costs have been included in the cost of the product. • Require hospital suppliers to participate. The more suppliers that agree to use a hospital’s third-party account number when shipping product, the more savings the hospital will reap. • Educate staff. Staff participation in a hospital’s freight management program is key to reducing overall freight costs. Train your staff to consistently use the correct account number when ordering products directly from the manufacturer. Also, regularly share costs savings in order for your staff to better understand the importance of adhering to the hospital’s freight management practices. • Measure performance. Once the organization has established a freight management program, benchmark its performance against that of similar hospitals. This will help the organization identify opportunities for improvement. – Doug Schwieger, director of marketing and product management for OptiFreight, Cardinal Health Inc., Dublin, OH • Start with good data about your freight expense to create a baseline. • Engage, assess and educate the stakeholders – including the purchasing department. • Know your existing purchase terms. • Develop easy-to-gather, easy-to-understand, meaningful metrics to guide you to see if there have been improvements. • Tap the resources of an organization with logistics expertise. – Ira Tauber, executive vice president and COO, TRIOSE Inc., Reading, PA • Create a program to achieve your goals, whether it’s self-managed or through a transportation provider or another third party. • Make sure all of your suppliers and the group purchasing organizations (GPOs) you work with have an understanding of your purchasing strategy. • Ensure that your program is transparent with regard to the discounts you should be receiving, and create a baseline for your current spending and savings. • Implement processes for measuring compliance and savings. • Make sure that your transportation and logistics vendors are passing all of the savings along to your hospital. – John Menna, director of marketing, Healthcare Logistics, UPS, Atlanta • Demand transparency in pricing to understand how prices are derived and enable freight/shipping to become a negotiable line item on a contract. • Work with a transportation and logistics expert to review and analyze intra-system material movement for cost savings and operational improvement opportunities. • Centralize oversight and execution of transportation for accountability and to facilitate efficiency gains. • Consolidate the movement of intra-system transportation by location, rather than functional area, to save both time and resources. • When outsourcing, choose a partner with specialized expertise, healthcare focus and experience working with large integrated delivery networks (IDNs). – Jake Crampton, CEO, MedSpeed LLC, Elmhurst, IL • Make sure that freight is listed separately on your invoices and not absorbed into the price of the product. • Take a look at your GPO agreement as it pertains to freight to better understand it. • Work with your GPO to discover best practices that can help you with freight management. • Insist that freight costs are fully visible to you while working with suppliers. • Work with other members of your team at your facility to educate them on the implications of freight cost as it pertains to your budget. Ensure that controlling freight cost is a priority for everyone. – Frank Gillespie, vice president, Non-Clinical Supply Chain, Distribution & Alternate Site, MedAssets, Atlanta • Start negotiating terms on your contracts to ensure freight is not buried in the price of the product. • Do not ask vendors to ‘bury’ the freight costs into the price of the product. Make them break it out so it is visible, and then ask for the corresponding reduction in the price of the product. This will allow the industry to start down the path of ‘activity-based costing’ like other industries that may have more visibility into their supply chain cost. You can only manage what you can see! • Engage your GPO to ensure third-party freight language is in every contract they negotiate. It makes it easier to hold vendors accountable. – Eric McGlade, vice president of professional services, HLS MedFreight, Westerville, OH

Common freight/shipping errors by supply chain, clinicians What are some of the typical freight/shipping mistakes that drain budgets on one side and pad profits on the other? • One of the largest mistakes for hospital materials managers is not having full visibility across their supply chain. To ensure that they have a true picture of their savings, hospital materials managers should ask questions such as: What discount would they get by going directly through their transportation carriers, compared to what discount their third-party logistics providers receive through the carrier? Also, are they passing along that entire discount to the hospital or taking a large margin for themselves? • If hospitals have an inbound freight management program, they should also know what percentage of their suppliers are compliant with the program – the answer should be at least 50 percent. • To ensure visibility across the supply chain, managers should ask for regular reports on the savings they are getting through their program and schedule quarterly business reviews with their transportation provider. – John Menna, director of marketing, Healthcare Logistics, UPS, Atlanta • Contracting with a vendor for freight terms and not requiring them to use a freight management partner. Healthcare facilities will often spend a lot of time negotiating contracts with vendors, but not put in the necessary controls to monitor compliance. A freight management partner will give healthcare facilities a line of site and control over freight costs and can help monitor contract compliance with vendors. •Supply chain management professionals often focus on discount rates and overall savings numbers, but what really drives permanent cost savings for an organization is the ability to achieve the lowest cost per pack. By focusing purely on rates, hospitals are not able to truly optimize the mode/service level that should be used to lower cost. A successful freight management approach includes a focus on reducing shipment costs with an emphasis on overall cost reduction by focusing on cost per pack. •Hospitals have a tendency to ship most of their small packages priority overnight. It is important to understand that products can be shipped utilizing different service levels and still arrive on time. By using a different service level or mode optimization, such as ground shipping instead of overnight shipping, healthcare facilities can dramatically reduce their overall freight costs. •Not optimizing the supply chain. Supply chain optimization allows customers to understand when it would be more cost effective to order a product through the distribution channel rather than direct from the manufacturer. A solid freight management partner has distribution experience and knowledgeable resources to help hospitals optimize their channel spend between direct and distributed products. – Doug Schwieger, director of marketing and product management for OptiFreight, Cardinal Health Inc., Dublin, OH • Allow manufacturers/suppliers to bundle the cost of freight/shipping into their product costs. • The IDN does not centralize and consolidate its intra-system material movement. • User community (caregivers, nurses, administration, etc.) is either unaware of, or ignores, the transportation schedule and over uses stats. • The IDN allows its clinicians to dictate their needs vs. working together to streamline, which often requires the clinicians to change behavior/plan ahead. – Jake Crampton, CEO, MedSpeed LLC, Elmhurst, IL • Not taking advantage of existing – or pre-negotiated – product purchase terms. • Program needs to encompass all areas of freight and shipping including inbound, outbound and capital and construction logistics. • Program needs to encompass entire health system. • Gather good baseline data before you get started. • Not engaging purchasing, as in buyers, in the process. – Ira Tauber, executive vice president and COO, TRIOSE Inc., Reading, PA The biggest mistakes are made because of a lack of awareness of how freight is managed, and also of the benefits their GPO may be able to bring to them in the area of freight. An example would be not addressing freight in local agreements. – Frank Gillespie, vice president, Non-Clinical Supply Chain, Distribution & Alternate Site, MedAssets, Atlanta Many people think that there is not a big difference in price between various modes of service – and there is. So that means there is potential savings opportunities by selecting a less costly mode that will still get the shipment to its destination in the appropriate amount of time. That leads to a second educational opportunity – which is the fact that less costly modes, such as second-day air and ground, may get the product to its destination within a day, depending where the product is shipped from and to. The key is that robust data is needed to evaluate shipments to determine what mode optimization opportunities there are. I think the last opportunity we have in healthcare is to not drive the cost of shipping back into the price of the product.  A contract negotiator – whether at the hospital or a GPO – may find it easy to succumb to the vendors request to remove any ‘third-party freight’ language. However, we all need to understand that shipping is not ‘free,’ even if that is what the vendor is saying. Our industry needs full visibility of these freight costs so that they can be managed. – Eric McGlade, vice president of professional services, HLS MedFreight, Westerville, OH

Red flags on freight/shipping processes What issues in the freight/shipping process should alert supply chain professionals to search for savings? For TRIOSE Inc., it’s all about compliance, education and expertise. "From our perspective the fundamental essence is vendor implementation and compliance – instructing and monitoring the vendor to use the program. As a hospital or health system you can take advantage of rate savings only if the vendors agree to implement the routing requests and then actually comply. Vendors have to agree to the terms in the routing guide. When vendors agree to the terms then the key piece is that someone has to manage the process and monitor compliance – make sure vendors follow through consistently. We’re contracted by the hospital to manage and monitor this so the hospital gets the maximum savings and benefits. In a case when a hospital uses its own people resources to manage the logistics, then they have to be accountable for managing and monitoring the process. The reality is that most hospitals don’t have the resources to do it on their own so that’s why they look to us. "We become the traffic department of the hospital as custodians of the process and data for freight and shipping. Service level optimization is the next level of driving cost savings. We constantly ask, ‘Can we do it better?’ When making these recommendations, you have to educate people on changing the behavior and past shipping patterns. As an example, you can effectively ship something locally via ground rather than expedited based on the delivery geography, thereby providing more than just rate savings. To do so, you need data to validate that it can be done without degradation of service and then use that to educate the stakeholders. The decisions are all data driven. Once you get data you can present a compelling case to individual department users and management, showing them how they can save by shipping something a certain way. You have to validate and then educate. "We make these decisions on how to route something based on the lowest cost alternatives. We’re always acting on our customers behalf. They are buying that expertise from us. It’s the easy way out to do things the same way as before. The same-old process may never get changed because it’s easy and vendors generate revenue through shipping. But we’re not hired to do the easy stuff. Our mandate is to get something there at the lowest cost without sacrificing service." – Ira Tauber, executive vice president and COO, TRIOSE Inc., Reading, PA For UPS, it’s all about controlling available options and managing the management companies. "From an outbound perspective, hospitals should take stock of their ‘overnighting’ habits and take a close look at each shipment to determine the most cost-efficient mode of transportation for their needs. For example, could a shipment actually travel via ground freight instead? In order to make the right decision, hospitals will need to familiarize themselves with ground time-in-transit to weigh the options. Many would be surprised at the significant savings they could achieve by examining their shipping habits. "There are certainly large savings opportunities with inbound transportation by implementing an inbound freight collect solution. Material managers and hospital CFOs should be cautious about inbound freight management companies that offer to implement a program for no additional cost. The vast majority of these companies do not pass along the full carrier discount to hospitals and often will not disclose how much margin they are keeping. These are missed savings that could be realized if hospitals use the right inbound freight management service – and the savings can be significant." – John Menna, director of marketing, Healthcare Logistics, UPS, Atlanta For Cardinal Health’s OptiFreight unit, it’s focusing on total costs involving all aspects of the process. "It is important for a healthcare facility to evaluate all areas that receive or ship product and the type of freight associated with the product. This includes inbound/outbound small package and bulk/capital goods that are sent on larger trucks. Typically inbound shipments comprise 80-85 percent of a customer’s total freight cost, with outbound shipments equaling 10-15 percent and larger packages shipped via trailer (LTL) amounting to 0-5 percent. "In terms of savings, healthcare facilities should look beyond discounted rates to achieve cost reductions. An important part of the freight management discipline is focusing on reducing the total cost associated with shipping a package." – Doug Schwieger, director of marketing and product management for OptiFreight, Cardinal Health Inc., Dublin, OH For MedSpeed LLC, it’s understanding the guts of pricing and where savings can be wrung. "For inbound deliveries of product/equipment/pharmaceuticals, etc., transparency is the key to understanding how pricing from suppliers is actually derived. When freight/shipping is broken out as a component of the final cost, it becomes a negotiable line item in the supplier’s contract and provides supply chain with an additional means of driving down expenses. Beyond inbound and outbound freight/shipping, there is a third opportunity for savings: The same day intra-system movement of patient and business critical materials across the IDN. Delivering care requires a multitude of items to move daily around a system and the larger the system, the greater this need – and the costs – become. Laboratory specimens, pharmaceuticals, medical records, X-rays, supplies and internal communications, such as mail and reports, travel continuously from location to location. Health systems need to make sure this area of freight/shipping is not being overlooked as the opportunity to reduce costs directly and improve operational quality and service waits. Moreover, when done right, a centrally managed, interconnected operation can be leveraged to drive future strategic initiatives and cost save opportunities not possible before." – Jake Crampton, CEO, MedSpeed LLC, Elmhurst, IL For HLS MedFreight, it’s about harnessing the data. "First and foremost, in order to reduce costs, hospitals need to track their baseline well by standardizing their code freight in their [general ledger]. Data/information is the key to effectively managing costs. If hospitals don’t have a good baseline of their current costs, they may want to work with a freight management company to not only save on their shipping costs, but to provide great data to analyze for savings initiatives. One example of that would be savings related to mode optimization. However, without the data, hospitals are not able to analyze where there is potential savings to ship products via a less costly mode, without sacrificing delivery time. Hospitals don’t necessarily need to ship ‘priority overnight’ if a less costly mode will get there in the same amount of time, but at less costs." – Eric McGlade, vice president of professional services, HLS MedFreight, Westerville, OH