So you want to own and operate
a CSC…

There’s more to it than location

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Last month, we explored some of the primary motivations for Supply Chain developing a consolidated service center (CSC) for its healthcare organization. This month, we continue the discussion with our group of veteran Supply Chain industry experts: Jay Mitzel, former Supply Chain Executive from TriHealth and Summa Health; Jim Francis, Chair, Supply Chain Management and Chief Supply Chain Officer, Mayo Clinic; John Gaida, who recently retired from Texas Health Resources as Senior Vice President of Supply Chain Management; Bill Mosser, Vice President of Materials Management, FMOL Health System and LogisticsOne; Bob Simpson, President and CEO of LeeSar; and Charlie Miceli, Vice President and Network Chief Supply Chain Officer,the University of Vermont Health Network.

What is your geography?

Logistics plays an important role. This is where the experts are needed. For every possible type of centralized activity, distribution of the output is required, and for each of these there is an accompanying optimal radius. Several years ago I was working at an IDN that wanted to build a central laundry completely across the state from where the organization was located. I costed the activity out and deduced that to do so would virtually double my linen processing costs while compromising service and quality. The idea was the brainstorm of an inept Vice President of Supply Chain who has long since been booted out of healthcare. The laundry was built, and my projections were proven to be true. Today, the distribution costs for many of the facilities served exceed the total delivered cost prior to the building of the laundry.

What are your current and expected (10-year horizon) costs for the services you hope to centralize?

Conduct a detailed audit with your finance people. Many people conduct cursory analyses, as was done with the laundry mentioned above. You must conduct exhaustive analyses of your current costs to develop the baseline “N” against which everything else will be measured. Include everyone you can in the analysis. Charlie Miceli of University of Vermont Health suggests you consider four issues:

  1. The scale of the spend and the opportunity
  2. Labor and real estate costs (what is overhead
  3. Regulatory and governmental issues and/or incentives
  4. The current total cost of the supply chain process. Be painstaking and thorough. Per NBA star LeBron James, Cavalier decisions are only appropriate for Cleveland.

What do you expect the costs of your proposed solution to be over those same 10 years?

Engage an expert to walk you through the proposed options and their costs. This is where you should seek out the experience of folks who have done this before you as well as certified industry/discipline experts in the areas you are looking to centralize. Pay someone to help you. It is much better to spend a little money to discover that doing something is a bad idea than discovering it was a bad idea after you have committed to it. Ask to “see the homework” of others who have done what you intend to do.

Do you have the expertise and business acumen to do what you want to do?

This is a tough one. It requires self-reflection and honesty. According to Bob Simpson, if you decide to “self-anything” you must be prepared to achieve unparalleled service levels. In his words, “Service levels have to be perfect.” Simpson also says to “surround yourself with a senior staff that knows what it is doing.” It is very unlikely that you can simply “repurpose” existing personnel to the new roles required for a centralized operation. Few acute care Supply Chain folks have ever had experience in such a setting. You need expertise, and expertise costs money.

What are the alternative uses of the money?

In tight times, where could the money be spent more effectively? Any centralized function will likely have significant start-up costs. You, and your organization’s senior leadership must not only analyze the costs and benefits associated with what you want to do, but also the costs and benefits for alternative uses of that same money. Suppose you wanted to build a centralized Sterile Processing plant that would add $1 million to equip and staff (it would actually cost much more) and return $1 million savings every year. You are looking at a one year payoff. Suppose with half that money you could add two Purchased Services experts, buy a contract management system and a purchased services data base tool and save $5 million a year for the next five years. What would be the best use of your money? While this is a simplistic comparison, and not necessarily accurate, it makes a strong point. There is always stiff competition for scarce resources and cash if often the scarcest resource of all. John Gaida, most recently of Texas Health Resources weighed in about a Consolidated Distribution Center:“There are way more important initiatives that Supply Chain leaders can spend their time growing/creating that have a much higher return — reducing implant cost, growing/creating a non-acute business (physician’s offices, ambulatory surgery centers, imaging centers, long-term care facilities, etc. And if you really just have to do this, then joint venture with someone who knows how to do it and run it for you!”

On the consolidated service center, there is a little more rationale there, but:

  • The system needs to be geographically close enough to make sense of it.
  • There needs to be a very good transportation system created
  • The businesses located there need to really drive standards and cost reduction — mail, copy centers, possibly central processing, possibly clinical engineering dispatch, etc.
  • Essentially there needs to be quite a bit of volume to make these logical and cost effective — my guess is that most health systems can’t make the math work.”

Do you have support from your key stakeholders (senior leadership, members and suppliers)?

Once again, Simpson says: “If you are going to centralize anything, you need commitment—from the C-suite, from the suppliers from the customers and from your staff. And you had better make certain to keep your staff’s morale up by supporting them because this isn’t easy work.” Jay Mitzel agrees, saying, “It was only because of the support we had from senior leadership that we were able to succeed. Key customers feared loss of service levels and even though we brought the operation up a month early without telling anyone, the customers were still skeptical.”

Bonus Question: Who’s going to measure the results?

One of the oldest saws is, “Figures don’t lie, but liars figure.” Whether you decide to go forward or wait, it is imperative that you measure results against both actual activity as well as against your projections. There will come a time in the future when your decision will be revisited, and you don’t want to start over every time.

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