Friday, March 11, 2016
Trinity Health, one of the country’s largest Catholic health-care systems, is taking greater control of its supply chain by building its own distribution network.
The new setup, which starts with a distribution hub in Fort Wayne, Ind., would cut $20 million a year in costs, the health system said this week. The announcement comes as the health-care industry has seen a wave of consolidation in recent years as companies seek to gain scale because of pressures to constrain costs under the Affordable Care Act.
Consolidation in the last several years has enabled larger health systems like Trinity to streamline procurement and inventory management across dozens of facilities. Many health care companies have previously managed such processes separately within each facility and even within each department.
“As we’re bringing more organizations together, we naturally want to take advantage of economies of scale.” said Lou Fierens, senior vice president overseeing supply chain at Livonia, Mich.-based Trinity. “We had to rigorously reduce the amount of SKUs [individual products] that we use inside the hospital” and centralize procurement of the medical goods.
Trinity, a nonprofit that generated $15.8 billion in revenue in its last full fiscal year, has almost doubled in size to 90 hospitals across 21 states since 2010. The health system said efforts to standardize its inventory management across the growing number of facilities has saved $10 million so far and resulted in a 20% improvement in inventory turnover, meaning it is able to move supplies through the supply chain more quickly.
Mr. Fierens said building out its own centralized distribution network is the next step in those efforts. Trinity is hiring XPO Logistics Inc. to operate the Fort Wayne distribution hub, which will be equipped with “state-of-the-art” warehousing technology and be built within a year, and to manage distribution of goods from the site.
Three satellite warehouses, also to be run by XPO, are expected to be added by 2020, but the Fort Wayne facility will remain a central drop-off point for suppliers.
XPO will contract partners of its freight brokerage business, and use a mix of its own carrier divisions, to ship the goods between fulfillment sites and to restock Trinity’s hospitals. Previously, the health system ordered its medical supplies through distributor Cardinal Health, which managed the procurement and distribution of medical supplies to its hospitals.
“The new model gives Trinity Health more direct control over the part of the supply chain that is typically managed by an intermediary,” Trinity and XPO said in announcing their agreement.
The deal is good news for XPO, which has used acquisitions to expand dramatically in scale in recent years.
The company saw its share price fall by more than half in the last half of 2015 and recently reported a loss in the fourth quarter. XPO remains focused on its long-term plan to capture larger customers by offering better efficiencies than competitors through the combination of its newly acquired logistics and transportation services, however. Prices for XPO shares have grown 30% since reaching their low for this year so far on Jan. 20, and were up nearly 1% to $26 a share in trading on Thursday.
Mr. Fierens said the health system’s 10-year deal with XPO was structured to allow Trinity to look at alternative providers after an unspecified period. Trinity said it is in talks with XPO to use more of the logistics company’s services, such as its so-called “last-mile” business for the delivery and installation of medical equipment.
“We can see [XPO] being a part of our vision going forward,” he said.
Source : wsj.com
