Hospital chain Trinity Health, XPO partner to take supply chain in house

In a move that may have profound implications for how large U.S. hospitals manage their supply chains, Trinity Health, with 90 hospitals nationwide and nearly $16 billion in annual revenue, said today it will develop its own transport and distribution center network and use third-party logistics provider (3PL) XPO Logistics Inc. to manage end-to-end order flows, shipping, warehousing, and fulfillment.

The announcement is believed to mark the first time an American hospital has partnered with a 3PL to provide total supply chain management services. Some hospitals manage the entire process in house. However, the vast majority of hospitals outsource the function to such massive health care distributors as Dublin, Ohio-based Cardinal Health Inc. and San Francisco-based McKesson Corp. For example, Cardinal serves more than 100,000 locations, according to information found online.

The alliance with XPO will enable Livonia, Mich.-based Trinity to migrate more fully to a just-in-time (JIT) inventory management model, a strategy that attempts to minimize inventory-carrying costs while ensuring products are available when needed. Trinity has been converting to the JIT model in anticipation of the partnership, and that method today applies to about 60 percent of its inventory management, the company said.

The JIT model has been used for decades in many industries, but has been largely avoided by hospitals because they don't want to risk running low on supplies needed to treat patients.

In what could be the most significant long-term development, Trinity will end its distribution relationship with Cardinal, though it will continue to purchase products from the company, which has a manufacturing arm. Under the current arrangement, Cardinal accepts orders from Trinity and delivers products directly to one of its hospitals or 126 continuing-care locations.

The decision to take control of a key part of the supply chain and rely on a global 3PL could impact almost every facet of Trinity's caregiving function, Lou Fierens, Trinity's senior vice president, supply chain and fixed asset management, said in an interview today. "The changes will reach from the factory to the bedside," he said.

Trinity has chosen Fort Wayne, Ind., as the site of its first DC, a 450,000-square-foot facility. The project will start by the end of the month with initial site preparation and is expected to be finished within a year. XPO will manage the $26 million facility as Trinity's contract logistics partner.

Fort Wayne will be Trinity's national hub, and will serve as the central restock and fulfillment location for three satellite facilities to be built over the next five years, the company said. It declined to disclose the locations of the satellite facilities.

In the project's initial phase, Greenwich, Conn.-based XPO will manage transportation and warehousing services for Trinity, Fierens said. Most of the shipments in the initial phase will be comprised of "medical/surgical" products, fast-cycle goods that could be considered a hospital's bread and butter.

Trinity hopes to save $20 million in the early part of the relationship through reductions in inventory carrying costs and associated improvements in logistics efficiencies that will lead to lower procurement, production, and transportation costs, Fierens said. Cost savings could increase as the partnership deepens with time and more opportunities for efficiency are identified, Fierens said.

The alliance with XPO would not be suitable for a system with a local or regional footprint, because a certain amount of scale is needed to make it work, Fierens said.

Health care has long been seen as low-hanging fruit for supply chain management efficiencies. Within that broad universe, hospital operations are considered fruit that can be picked without climbing a ladder. Until recently, hospital executives have not focused on inventory optimization, in part because they are leery of not having enough product on hand for the facility to fulfill its essential mission of treating patients and saving lives. However, as private insurers and the federal government have tightened the reimbursement purse strings in recent years, hospitals have begun to re-examine their operations and processes in an effort to cut costs and grow revenues without compromising patient care.

In a recent Cardinal Health survey of 150 top hospital supply chain and C-suite executives, 75 percent of supply chain executives said that better supply chain management would increase revenue, while 60 percent of C-suite leaders felt that way. Two-thirds of supply chain executives and 60 percent of C-suite executives said better supply chain management results in a better quality of care, according to the survey. Cardinal executives did not return a request for comment on the Trinity-XPO partnership.

Fierens, who joined Trinity from the automotive industry, where the just-in-time inventory model is almost a religion, said he understands that hospitals need to be managed differently from any other vertical. Besides the unique nature of a hospital's work, inventory flow is inherently unpredictable. By contrast, auto production schedules are, for the most part, fixed and easy to map, he said.

Trinity has spent three years on the project. Part of the effort has involved implementing the practice of "change management," where the many internal stakeholders needed to be slowly brought along to accept an unfamiliar way of doing things, Fierens said.

In 2014, the 5,627 hospitals registered with the American Hospital Association (AHA) reported expenses of more than $892 billion, according to AHA data.