It has been said that if you’ve seen one IDN, you’ve seen one IDN. Following a panel discussion with three IDN supply chain executives at the recent HIDA Executive Conference in Jacksonville, Fla., so too could it safely be said that if you’ve seen one IDN/distributor relationship, you’ve seen one IDN/distributor relationship.

The three supply chain executives described relationships with distributors that featured innovations in pricing and logistics. One executive even described her IDN as “self-distributing,” yet the IDN’s relationship with its med/surg distributor is tighter than many.

The three executives were Joe Bane, purchasing and contracts manager, Tufts Medical Center, Boston, whose prime vendor is Claflin Co., Warwick, R.I.; Rosalind Parkinson, administrative director, materiel systems, Ohio State University Medical Center, Columbus, Ohio, whose prime vendor is Owens & Minor; and Sandra Erickson, executive director, Iowa Health System Consolidated Services, Urbandale, Iowa, which has outsourced logistics to Owens & Minor.

Necessity is the mother of invention

In at least two cases – Tufts and Ohio State University – the fact that the hospitals were running out of space drew them into close relationships with their distributors.

“We never thought the basement storeroom would be a space really being looked at,” said Bane. “But it’s being taken for other medical uses. So we have been forced to move more products offsite.” That fact has made Claflin the IDN’s de facto supply room. Not only has the transition freed up space, but it has also freed up cash for Tufts, he said. “We have an opportunity to pay [for products] as we use them, as opposed to having them just sit on the shelf.”

Added Parkinson, “Space considerations are huge.” At Ohio State University, materials management space on the hospital ground floor was turned over to other hospital support functions.

Outsourcing expertise

Outsourcing logistics functions to Owens & Minor made sense from a lot of perspectives, explained Parkinson, who has been at Ohio State for 14 years. During that time, she and the materiel systems team have evaluated the IDN’s supply chain and made many decisions to improve it. For example, they centralized purchasing, so that departments no longer did it independently. What’s more, over the years, the materiel systems department has invested heavily in information systems to stay on top of product cost and flow.

“But when it came time to look at new resources to be put into the supply chain, we made a decision to get rid of something we weren’t doing all that well,” said Parkinson. Despite the effort – and space – being expended, the IDN’s fill rate to its own departments was only 89 percent. “You can imagine a day in the life of materials management in that environment – unpleasant. And we were spending a lot of resources to achieve that fill rate.”

Parkinson engineered a shift of almost all of the medical center’s contracting to its group purchasing organization. “But our distributor was the answer to the other part of the equation. We wanted to outsource distribution entirely.”

In the IDN’s early discussions with Owens & Minor, “we could barely have a conversation with them, because our vocabularies were so different,” Parkinson said. In other words, the distributor knew distribution. “For hospitals, it’s always all about the clinicians. But distributors have a skill set – managing a worldwide supply chain.”

Self-distributing IDN

Six years ago, Iowa Health System’s decision to become a self-distributing IDN brought it – ironically – closer than ever to distribution. “We wanted to self-distribute, but we wanted the experts at the table,” said Erickson.

Iowa Health encompasses 12 hospitals and more than 100 clinics in Iowa, Nebraska and Illinois. In 2004, at the IDN’s request, Owens & Minor opened a warehouse specifically for Iowa Health in Urbandale, Iowa. “I didn’t know anything about distribution,” recalled Erickson. But she quickly learned. “It’s an eye-opener, going from the hospital side to the distributor’s side.”

Today, “fewer trucks back up to our door,” said Erickson. “No hospital in the Iowa Health System was designed for that.” To achieve further efficiencies, the IDN employs a cross-docking technique for pharmaceuticals. In other words, Iowa Health orders pharmaceutical products from Cardinal Health, which are delivered to the Owens & Minor warehouse in Urbandale. The orders are then married up with the products being shipped to Iowa Health System from the distribution center, and all are delivered in one shipment.

While Iowa Health System’s Des Moines facility receives products on a modified low-unit-of-measure basis, its affiliates receive them on a more traditional basis, according to Erickson. “Due to the distance of most of our affiliates as well as the uncertain Midwest weather, we have made the decision not to deliver in low-unit-of-measure,” she added.

Innovative approaches to pricing

Based on remarks by the three panel members, it seems that today’s IDN/distributor relationships are likely to be marked by innovative approaches to pricing. “We have an open book relationship for the revenue and expense generated out of the distribution center specific to Iowa Health System,” noted Erickson. Instead of paying on a cost-plus basis, the IDN pays Owens & Minor using what it calls an “allocation” method.

“In a cost-plus model, you pay the same markup on a thousand-dollar item as you do on a ten-dollar item, even though it will most likely cost the same to order, receive, store and pick it,” noted Erickson. On high-cost items, the traditional cost-plus approach can actually deter an IDN from acquiring a product through its distributor.

“In our model, all products are invoiced at the Iowa Health System’s contract cost,” she said. “At the end of each month, we receive a financial report on what it costs to run the distribution center. That actual expense is then allocated to each Iowa Health System affiliate. [This approach] is removing the barrier to more throughput through our distribution center, resulting in a lower overall expense for our hospitals.”

Departure from cost-plus

Like Iowa Health, Ohio State University Medical Center has departed from the cost-plus approach. “We see our relationship with our distributor as a logistics service, an information service,” said Parkinson. “With cost-plus, nobody knew what was really going on,” she said. For that reason, the IDN differentiates between the price it pays for the product itself and the price it pays to Owens & Minor for logistics services.

Owens & Minor services the IDN on a low-unit-of-measure basis. What’s more, the distributor provides Internet-based templates to Ohio State’s owned and affiliated physician practices. The practices order on the Internet, and products are delivered direct to the practice locations.

Tufts and Claflin have also moved away from a traditional cost-plus pricing method. “We are just starting to realize the potential of activity-based costing,” said Bane, whose IDN receives products on a low-unit-of-measure basis. “It accurately reflects the distributor’s cost of handling the specific order.”

Bane cites the following hypothetical example: Under the cost-plus model with a markup of 5 percent, an expensive item, like a stent, might have a manufacturer’s sales price of approximately $2,000 and a total distributed cost of $2,100. But in an activity-based model, the distributor’s actual cost to provide that item may only be $25, which would cover the distributor’s labor and delivery costs, the cost of money, billing, etc. So, instead of costing the hospital $2,100, that stent would only cost $2,025.

Next steps

Strong IDN/distributor relationships are characterized by growth, according to the panel members. “We switched purchasing our janitorial paper products to Claflin from a janitorial supply company, and that produced significant savings,” said Bane. “We are continuing to look for other non-med/surg products where it would make sense to take them through Claflin.”

But sometimes market forces can work against such growth. “We are constantly talking to manufacturers about going through distribution instead of direct, but it has been very difficult at times,” continued Bane. “On each item, you need to balance the added direct cost of procuring the product against the indirect cost savings, to see if it makes sense. On these items, some type of activity based pricing will be required because of the cost of these items is usually quite high.

“Up to this point, the manufacturers don’t want to help subsidize the increase in cost to the hospital, although it will save them money with this process. I think this will be a slow and long process, but will eventually happen.”

Sometimes direct-selling manufacturers resist IDNs’ attempts to push products through distribution because they fear getting disconnected from clinicians. (In many cases, clinicians fear the same thing.)

“I think manufacturers are concerned about maintaining their connectivity to the doctors,” said Erickson. Nevertheless, “we have had success in working with traditionally non-distributor-friendly manufacturers. They appreciate our model in that they feel their products can be controlled and their pricing structure can be kept confidential. We are also able to provide them with a tool we were provided by Owens & Minor that details the advantages of using a distribution vs. direct model.”

Don’t remain static

A good IDN/distributor relationship “doesn’t remain static,” said Parkinson. “We’re continuing to streamline our process and identify new opportunities. We have developed new solutions to manage peaks and valleys in demand.”

Growth demands that IDNs get their own supply chain system in order, according to panel members. It is Sandra Erickson’s goal, for example, to reduce the four disparate materials management information systems currently in use at Iowa Health to just one. Such a move would eliminate inefficiencies due to multiple item masters, a lack of standard work methods and compromised data integrity, she said.

And at Ohio State University Medical Center, “our distributor taught us in a nice way that we need to discipline the troops on our side,” said Parkinson. “Even in low-level commodity areas, to get standardization and regularity in ordering took two to three years. But we saw immediate benefit from our fill rate going from 89 to 99 percent. That convinced us that this was the best choice for us – to have our distributor manage the distribution process and the logistics that go with it.”

Distributors, she said, “have a lot of value to bring to hospitals.”