In 2007, Mayo Clinic was faced with budgetary constraints; the organization was challenged to reduce operating costs significantly. Supply Chain Management saw the ability to manage transportation costs as a way to help add value to the bottom line. A DMAIC project was started to review and analyze cost saving opportunities. Through the Logistics DMAIC, the team felt savings could be achieved thus avoiding a staff reduction of 17-20 FTE. Such a staff reduction would have had negative impacts on service as well as forgoing other savings opportunities due to limited staff resources.
Studies indicate roughly 3%-5% of the total cost of supplies is directly correlated to transportation and there is surely no such thing as “free” shipping, but it may be “invisible”. Utilizing these statistics, it translates our organization had close to $50M in shipping expense which was not managed, optimized or transparent.
Mayo Clinic had the basic components already in place. While it was receiving some level of value through the utilization of a 3PL, we were paying a premium transport price with only 2% of suppliers converted to the current 3PL inbound collect program. With additional market share to be gained, FedEx, our primary transportation carrier, was willing to commit both human resources as well as expertise needed to help build the Logistics Program and make it a success.
As the organization learned more about the intricacies of how transportation carriers operate, what was discovered could best be classified as a “no brainer”. No service sacrifice, no significant technology investment, no hard choices for clinicians, yet savings projections of $1.7M annually.
This initiative was not just about automating an inefficient process, but rather the elimination of low value processes, empowering the buyer, and achieving complete transparency. These efforts yielded results and when properly educated, they found the end user and supplier community more than willing to change the way business was being conducted.
Mayo Clinic made three fundamental changes to its transportation management:
- We took negotiating freight costs into our own hands and entered into a direct agreement with FedEx.
- We entered into a relationship with a back end auditor to audit freight bills, pay shipping invoices, and provide analytics. In addition, we also started routing freight charges to the specific budgets of the department who ordered the supply.
- We created a change management campaign within the Mayo Clinic organization.
The result was astonishing. Suppliers started complying with freight terms and departments started asking how they could further reduce their freight costs in their budget. Compliant suppliers went from 200 to 3200 and freight costs dropped by 25%. Mayo Clinic wondered how many other organizations might benefit from this strategy. The Logistics Program is our effort to help educate and change market dynamics in Healthcare Supply Chain Management.