3PLs Moving Into Healthcare Supply Chain –Low Hanging Fruit for All

Third-party logistics firms (3PLs) are essentially travel agents for freight. They generally do not own transportation equipment, but instead buy capacity from the carriers who do –the truckers, railroads, steamship lines, or cargo airlines, and then mark it up and resell it to the shippers. The cost of purchased transportation is highly variable for 3PLs because they primarily buy capacity in the spot market. As a result, in periods of macroeconomic weakness when capacity loosens and carrier pricing falls, 3PLs can pass those declines to shippers on a lag, thereby expanding their gross margins.

Despite how robust the 3PL business model has always been, increasing cost pressures on shippers and continuing economic uncertainty has combined over the last few years to lower margins for 3PLs worldwide, thus raising the specter of further industry consolidation.

So what are they doing about it? Many have entered new industry verticals and yes, you guessed it, healthcare is at the top of most everyone’s list. Healthcare is ripe for 3PLs (and visa versa) because it’s an industry full of businesses trying to gain better control over their costs.  In fact, a recent survey of leading 3PL CEOs didn’t just reflect their confidence in the growth of the healthcare transportation services markets, but their enthusiasm was characterized as “wildly optimistic.”  And while medical devices have never had the volumes –in terms of dollars– that pharmaceuticals have enjoyed, more than 50% of the CEOs surveyed expressed their thought that the medical device industry is going to take-off over the next three years –both in physical volume (an important metric to the 3PLs) and dollars.

“Our aging population and ongoing technological innovations have led to a proliferation of medical devices and equipment for large and mid-sized distributors,” stated Joe Gallick, SVP, sales for Penske Logistics (Reading, PA), in a news release. “As these companies grow, the increasing complexity and higher costs of managing logistics internally make a compelling case for collaborating with a third-party logistics provider, who can help them design and implement more efficient transportation and distribution solutions.”

Here’s what the 3PL CEOs said they believed are the critical concerns of healthcare products clients:

  • Growing importance of compliance and regulatory assurance;
  • Developing countries increasing consumption—major logistics needs;
  • Hospitals looking to outsource procurement and delivery;
  • More stringent government regulation of imported medical products;
  • Aging population and building of hospitals/clinics, coupled with growing global urbanization, expected to drive growth in the medical device industry.

Of course, all of this makes sense on the supply side, but what about the provider side? What about the major integrated health systems that continue to spend millions on developing their own warehousing and distribution solutions? Are the 3PLs and 4PLs being systematically overlooked in this space?

One thing is certain. SCM tool providers who focus on supporting competitive sourcing and procurement for providers and GPOs alike will all tell you that the freight-side of the cost equation is the biggest basket of low hanging fruit out there.

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