Healthcare Logistics: A Network Design Case Study
By: Leeanna Thomas – Manager Business Development
$23 million dollars in total healthcare logistics cost savings; how would that make you feel?
The healthcare industry is embracing lean concepts to increase efficiency and decrease costs. Nurses are utilizing lean concepts and methodology on things like surgery prep stations and crash carts. Meanwhile, executives from hospitals to major healthcare distributors are evaluating the entire supply chain to identify areas for improvement and waste elimination. Executives are utilizing supply chain consulting to diagnose areas for improvement and develop a plan to end supply chain pain within the healthcare industry.
Constructing a total cost model and performing a Greenfield analysis to identify optimal distribution center locations and transportation network allowed the LeanCor engineers to identify $23M total healthcare logistics cost savings for a healthcare product distributor. The organization distributes a range of medical, surgical, and laboratory products to hospitals, surgery centers, laboratories, physician offices, and other healthcare providers.
Current State Challenges
The company utilized LeanCor Supply Chain Consulting services to evaluate their current state challenges, including:
- Stock outs and long lead times were causing service level issues for the customer.
- Increased cost to the customers who were also indirectly incurring the cost of transportation, which was often exaggerated to account for complex and inefficient transportation strategies.
- Suppliers were faced with difficulties resulting from the large number of distribution centers to which they were required to ship material.
- Excessive purchase orders and unconsolidated freight created complexity and cost.
- Lack of ownership and visibility to much of the freight planning and spend on inbound material.
The large number of distribution centers caused difficulty in providing good SKU coverage without creating inventory bloat. The ability for the client to take ownership of freight planning and spend hinged upon providing value to the supplier. The client’s inbound transportation consisted of a significant portion of LTL and parcel shipments due to the fact that supplier freight was deconsolidated to service a large number of distribution centers. Significant inter-facility transfers due to poor SKU coverage created excess costs.
Future State Analysis and Planning
LeanCor Supply Chain Consulting team created a future state model which implemented hub distribution centers focused on rapid replenishment to the forward distribution centers. This required understanding the optimal locations and distribution flow strategies and the total logistics cost associated with different options. LeanCor used total cost models, Greenfield analysis, and inventory frequency analysis. The customer’s future state goals for this supply chain consulting – healthcare logistics network design, included:
- Cost neutral implementation of hub-and-spoke distribution network.
- Clear value proposition for the suppliers to collaborate on inbound freight cost reduction initiatives.
- Improved service levels with overall inventory reduction.
LeanCor constructed a total cost model to understand the biggest opportunities for improvement and performed a Greenfield analysis to identify optimal locations for the hub distribution centers. LeanCor analyzed facility sizing to determine space needs in the hub distribution centers. LeanCor designed an optimal future state transportation network around the new hub locations and created a cost model for each future state scenario. The future state model not only yielded a network with higher inventory turns and lower cost per cube in transportation, but also a favorable shipment schedule for the supply base. A bonus element that was uncovered through the supply chain consulting project was the opportunity to reduce transportation costs by using a lower cost port of entry for ocean freight.
Through the utilization of LeanCor’s supply chain consulting services, two optimal hub distribution center locations and the associated size requirements were identified. LeanCor also developed the material flow and inventory strategies from sourcing to the forward distribution centers.
Through the analysis, LeanCor uncovered total healthcare logistics cost savings of 5% ($23.1 million) annually, overall network inventory reduction of 27% ($93.5 million), and 167% increase in delivery frequency to the forward distribution centers. Supplier shipments improved from 61% to 97% truckloads through implementing milk runs as opposed to direct shipments.
“We developed a cost neutral or better future state model which provides clear value to the suppliers and to the forward distribution centers from a complexity, lead time, and utilization
perspective.” –Kelcy Monday, Project Manager and Lean Deployment Team Leader
Call to Action
How would you utilize supply chain consulting to ease the pain in your supply chain?
LeanCor Consulting Provides:
- End-to-end supply chain and value stream perspective
- Focus on Total Cost of Fulfillment and optimizing material and information flow
- Deliverable of current and future state roadmaps with measured financial results
- Tools and processes to equip your team for tactical execution
- Building of the lean culture to drive sustained continuous improvement
Link to the website: http://leancor.com/index.php?page=lean-consultingShare