The great freight debate

Should freight-shipping strategies be aligned with distribution, inventory strategies?

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For Supply Chain, overseeing freight and shipping costs seems a bit like the crazy uncle assigned to bring the ice-filled beverage and meat coolers to the family summer picnic every year.

The family tolerates and relies on him but typically takes him for granted until he fails to show up one year when the temperature hits the triple digits.

In healthcare organizations, freight and shipping remains a necessary tactic. How else would Supply Chain get the stuff clinicians need — or demand — quickly? Where it gets costly, however, is when the high price for convenience or lack of planning somehow morphs into acceptable operating procedure, and everyone looks the other way when the charges surface at budget time.

Some Supply Chain experts argue that freight and shipping practices should be treated similarly to distribution. Both involve the movement of products between two or more locations. But higher freight and shipping costs may indicate a deeper problem.

John Freund

“Shipping methods can be an indicator of inventory issues,” said John Freund, founder and CEO, Jump Technologies. “If items are being routinely shipped using some sort of express freight option, it can point to an inventory problem. A high number of overnight or express shipments can be an indication that a hospital isn’t managing its inventory effectively. For example, many hospitals will look at inventory today for procedures scheduled tomorrow.  If they are short on a item and they don’t get from a distributor, they will often have it shipped via next day early delivery. If there is a large number of overnight packages coming daily and the orders are for the same items, it points to an inventory issue. Understanding your inventory velocity and forecasting demand within procedural areas (most procedures are scheduled weeks in advance), a hospital can avoid having to rush items in for a procedure scheduled for tomorrow.”

Jump’s JumpStock product enables end users to track the retail costs of their UPS and FedEx shipments, according to Freund, recording the data in reports that helps them adjust their order levels and frequency as necessary.

Bill Denbigh

As healthcare organizations have centralized their contracting, purchasing and distribution operations, so should they centralize their shipping and transportation management, according to Bill Denbigh, Director, Business Development and Marketing, TECSYS.

“For a health system [the] outbound shipping of supply chain goods is a very small percentage of the total transportation budget, often less than 20 percent,” Denbigh acknowledged. “In many leading health systems such as Mercy Health or Intermountain the supply chain transportation team have taken on responsibility for the entire transportation network including all the clinical service goods — often referred to as courier — along with the in hospital transportation.”

Such a “total transportation” approach for outbound freight and shipping can improve customer service and reduce costs, he added.

“Transportation as a total is up in the 20 percent to 25 percent of the total cost of supply chain these days,” Denbigh continued. “A health system can reduce their outbound shipping costs by a significant percentage and also provide better quality of service to their customers and patients by taking transportation out of the hands of the departments and centralizing it. Other than the lack of transportation experience in the health system and ‘protectionism’ within the departments not wanting to lose control I’d say it’s more a question of why would you not?”

Gerry Romanelli

More acute scrutiny of freight and shipping expenses via a centralized and total program can shed light on issues otherwise hidden or misunderstood, according to Gerry Romanelli, Chief Commercial Officer, TRIOSE Inc.

Romanelli points to vendor compliance and “free freight” as two examples where price becomes a factor.

“Hospital Supply Chain leaders and freight management companies will often focus on the rate they are paying with the carrier for inbound and outbound shipping,” he said. “A lower rate may increase savings on an individual shipment but a strong inbound vendor management program will deliver much more saving as a percent of total spend. For example, a 50 percent savings on one $10 package is $5. A 45 percent savings on $10,000 in freight [spending] is $4,500.

“Free Freight is also a frequently misunderstood term,” Romanelli continued. “While it sounds appealing it often has stipulations in the fine print that make it difficult to realize. It depends on the vendor but some provide on certain day and time frames; others require a particular mix of product or spend.”

Three-legged stool

Freight and shipping issues extend beyond receiving goods (inbound) and sending goods (outbound). In fact, the third area can be toxic to budgets, particularly in an integrated delivery network or multi-hospital system. It’s moving goods between facilities that can add to total costs.

Don Carroll

“VPL has found that health systems are becoming more proficient in tracking the total landed cost of products on the first leg of the delivery into their network,” said Don Carroll, Vice President, Business Development, Vantage Point Logistics, Inc. “Once it enters their network, they tend to lose visibility to the movement of the product, and therefore have no idea what the true final landed cost might be. With ever-expanding points of care, such as ambulatory sites, physicians’ clinics, home health, etc., made even more complex with the accelerating [merger-and-acquisition] activity across the industry, health systems are having to move an increasing amount of product to various locations within their own networks. In fact, the latest estimates indicate that up to two-thirds of all health system freight costs occur within their systems’ networks. These freight costs include local and regional carriers, local couriers, small parcel carriers, etc.”

As a result, VPL is developing a product that will allow its customers to follow and track a product from the original shipper into their network and then track it until it arrives at the final point of patient care, according to Carroll. This technology will provide its customers with the ability to calculate the true landed cost of any product, regardless of the number of times it moves from location to location, he added.

Jake Crampton

Jake Crampton, Founder and CEO, MedSpeed LLC, concurs that Supply Chain may skip scrutinizing of the entire journey of a shipment, which affects calculations of the total cost of ownership.

“Beyond the [expense] of freight moving into the healthcare system, the costs of moving items between health system facilities — known as intra-company logistics — can be overlooked,” he indicated. “Intra-company logistics costs are often buried in line items in many departments throughout the organization, managed by a number of resources and fragmented/overlapping. Waste within intra-company logistics translates into a higher overall logistics total cost of ownership.”

Crampton points out that the freight expense of supplies delivered directly to non-acute facilities can be overlooked.

“Often, the freight expense for these items is bundled into the cost of goods, instead of separated as independent line items,” he noted. “Compounding the confusion, items are typically shipped directly to the facilities via a third-party freight company that provides little visibility into the shipping mode, making tracking freight costs and creating strategies to reduce them a challenging task.”

Melissa Laber

Supply Chain should pay closer attention to courier-direct, local and same-day shipments, too, emphasized Melissa Laber, Senior Vice President and General Manager, OptiFreight Logistics, Cardinal Health.

“When there’s a lot of focus and energy placed on inbound and outbound freight management, Supply Chain often overlooks same-day/local courier transportation,” Laber said. “This segment of transportation touches distribution, but it is also mission critical for many other departments and clinical areas across the health system. Ownership and management of same-day shipments are usually shared or spread across many parts of an organization, and there are typically multiple third-party couriers performing the work, adding to the complexity. What’s important to note is that same-day spend is estimated to be about half of a health system’s total freight spend and is an important component to manage.”

Consequently, Laber calls for a unified view of everything being shipped, including small parcel, large freight and same-day transportation expenses. “A holistic view of a health system’s transportation spend supports the ability to get closer to a ‘one truck’ concept,” she noted. “Layering all movement within a network can have a compounding impact when managing costs. Working with a singular partner to align, audit, and drive change management through all these elements will reduce cost and streamline operations.”

She further encourages managing freight and inventory together for products shipped direct. “If you know how much inventory you have, where you have it, and when it expires (as appropriate), would it better inform you about the decisions you make about shipping? Absolutely,” she added.

Daniel Gagnon

Supply Chain simply needs transparency in its freight and shipping/transportation operations, according to Daniel Gagnon, Vice President, Global Healthcare Logistics Strategy, UPS.

“Visibility tools track shipments, notify recipients of transit details and often easily integrate into existing purchasing systems,” Gagnon said. “Status alerts let users know when supplies are in transit. That advance knowledge can help with inventory planning, and may help logistics staff troubleshoot delivery issues before they have an impact.”

But Gagnon urges Supply Chain to pursue a more holistic approach, too, that includes the types of product shipped and the condition in which they need to be shipped in order to remain safe to use.

“Regulatory support is critical as requirements are growing in complexity,” he said. “Regulations, like the Drug Supply Chain Security Act (DSCSA), are requiring a single system of federal electronic, unit-level traceability of drugs and will require investments across the supply chain. While the FDA has delayed preliminary requirements for serialization, they plan to begin enforcement in November 2018. Additional FDA process requirements may ramp up from there.

“Temperature control in relation to product-specific packaging and time-in-transit must be carefully considered to minimize supply chain costs,” Gagnon continued. “Innovative packaging solutions are increasingly important. With the aid of packaging experts, industry leaders look to standardize product kits and quantities. This can help reduce waste and improve the patient experience.”

Sidebars:

  • Defining ‘priority’ a flexible point of view
  • Freight-shipping indicators to track and trace
  • Freight-shipping audit frequency tips
  • Winning in the freight escape

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