Randy Hayas  l  Corporate Director, Materials Management  l  Orlando Health -

Freight management, long an area of non-focus for IDN’s and their Supply Chain teams has become a significant cost management opportunity for hospitals as they turn over more rocks to reduce costs.  In the past, freight costs were hidden in the purchasing and accounts payable systems.  Often the costs were spread across several departments and the full impact was not visible.  When freight costs were consolidated the IDN’s realized the costs were huge – and something that could be managed.

The initial challenge has been to separate true freight costs from “shipping and handling” and other charges that are often not related to the cost of transporting a product to a hospital.  Shipping and handling charges are a separate topic and require a different approach.  However, often suppliers confuse the terminology and attempt to pass along charges that do not relate to the actual transportation costs and all too frequently are greater than the cost of the product. Unfortunately, there are suppliers that use “shipping and handling” charges to hide the real price charged.  The reality is that freight is a cost of doing business and will need to be included in the product price or billed separately. 

Prior to managing the cost, the challenge begins with freight terms and FOB Shipping Point versus FOB Destination.  Most IDN’s have taken the position that products shipped to their facilities must be shipped FOB Destination. The intent is to begin managing goods only when title to those goods is passed and for a hospital to not take title, or assume the risk of transport, until the goods have reached their dock.  The argument is that the freight carrier is chosen by the supplier and therefore the supplier should retain title and risk and resolve any shipping damage with the freight carrier.

Freight, shipping and handling and other similar terms and charges have prompted hospitals to look at ways to manage these costs to fairly pay for freight.  Many hospitals and IDN’s have attempted to control freight costs through a third party that established discounted freight rates with ground and air carriers including UPS and FedEx.  These programs claim to deliver 25% - 40% savings over freight costs passed along by the suppliers.  In brief the supplier uses a hospital supplied account number for shipments and the hospital is billed directly for the shipments through the third party at the discounted rates.  The third parties typically charge a fee for the service or collect a portion of the savings.  For those IDN’s that may have in-bound freight costs exceeding $1 million the up-side is very attractive.

The programs are not simple drop-in savings programs and do require a coordinated effort to achieve the savings.  This includes the front-end where the buyer often must remind the supplier to use the designated account.  In addition the vendor must be a willing participant in the program and ship all products, where freight costs are absorbed by the hospital, using the buyer’s freight account.  Not all suppliers want to participate in these programs and often each transaction with a supplier does require manual intervention.  In some cases this may cause the supplier to change the way they process orders.  In other words, create the dreaded “one-off” relationship.  Willing is a key word as some of the suppliers may portray this as a burden and “freight” and “shipping and handling” may in fact be a profit center for that supplier and as stated earlier may not be as expected by the hospital to be a reflection of freight cost. 

Hospitals should also not understate the impact this may have on the accounts payable process.  The use of a third party solution does require some reconciliation of costs and fees. Also, the purchasing/accounts payable systems also need to capture additional costs that might replace the freight charges.  Regardless, with focus and coordinated effort this becomes one of the tools that hospitals can use to manage in-bound freight costs.

Another action taken by IDN’s includes creating a consolidated receiving depot.  This depot or receiving hub operates to consolidate shipments to a central location to be dispatched later to the individual hospitals.  The economies are derived from reduced trucks attempting to access crowded hospital docks and a delivery system that is already in place or can be used to reasonably deliver products to each hospital. Hospitals with limited dock space or limited access, especially urban land-locked facilities, may find that a consolidated receiving depot can effectively help manage the amount of disruption caused by many trucks with little space.

For those who have leaped into a consolidated service center model the challenge also includes out-bound freight management as well as in-bound freight management.  That model creates an opportunity to even better manage in-bound freight for many repetitive supplies while creating the burden associated with managing a freight service.

In summary, freight charges are often hidden in the organization. However, if they are consolidated the overall costs may be surprising.  There are various ways to manage these costs in order to reduce costs from ferreting-out the real freight costs to selecting the freight carriers.