Exclusive! Department of Health will not give DHL a 5-year NHS Supply Chain contract extension

When we say "exclusive" we mean this does not appear to have been reported anywhere else. The National Health Service BSA (Business Services Authority) announced a couple of weeks ago (very quietly) that they were not taking up the 5-year contract extension allowed by the original ten-year 2006 contract with DHL for operating the NHS Supply Chain operation, which provides medical goods and equipment to most hospitals in the UK.

See the letter here NHS BSA DHL announcement.

However, matters are not totally clear cut. The BSA says that "we might extend the contract" for a shorter term, so you might even see this as part of the negotiation strategy with DHL. Who knows, after some tough negotiations, we might find that the contract does get extended, if not by 5 years, then still by a significant amount. Or it may just be that the Department of Health has no real clue what to do next - that has been suggested to me by some observers, even more cynical than me.

NHS suply chain bookletsHow has DHL really performed over the contract period? In our experience, if we talk to ten CPOs in the health system, users or potential users of the Supply Chain service, we will probably find:

  • Two or three who hate the whole operation with a vengeance and have probably moved away from it wholly or largely.
  • Five or six who think it is "OK", has its faults but overall has done a pretty good job most of the time.
  • Two or three who think DHL do a great job, and have made significant improvements over the last few years.

So most would prefer to look for some improvements around the current model,I suspect; a significant minority world start again with a totally different model. Certainly, there is a recognition that the current model is flawed in some ways. Providing a catalogue with tens of thousands of items does not maximise buying power, or the benefits of standardisation outside pure price (which may well be greater in many areas than simple price benefits).

There is an interesting question around the contract though - we're assuming that it does give the Department the right to choose an extension period to suit their needs? Sometimes contracts will give the option of just a specific  extension period - but it’s more likely that this one does allow any length of extension up to and including 5 years. Anyone able to confirm that?

A couple of years back, there were unconfirmed rumours that DHL had done something that really annoyed DH and might have led to contractual action. But even if that is true, the firm seems to have largely redeemed itself, and has worked with DH in some positive areas, such as the Capital Equipment Fund for committed buying we wrote about here.

The other factor working in DHL's favour is that it would be an enormous undertaking for any other firm even to bid, let alone win and take over the operation. This is one of the largest government contracts in operational scale as well as monetary value, and it is never going to be suitable for SMEs!  On the other hand, how do our politicians feel about all this spend going to a German company (Deutsche Post, DHL's parent)?

Voices (5)

  1. Peter Jones:

    Very interesting, what I find more interest and something that never gets report is that DHL is adding a 7% mark up minimum to all products in supply chain as well as charging manufacturers at least 3%. Essentially using supply chain is costing the NHS at least 10% more than buying direct. Why oh why when the NHS claims to have no money are our taxes going into the pockets of DHL. I think the answer is lazy procurement within the NHS?

    1. Mark Lainchbury:

      Here’s Why oh Why

      DHL are contracting with & getting far better prices (than those available to individual Trusts who buy directly) due to the huge volumes in question (Examination gloves, Syringes, Copier Paper, Toilet Roll etc). So warehouse gate prices are at the very least cost neutral.

      Also ordering & invoice processing costs are virtually non-existent at Trust level when e-requisitioning from DHL.

      This holds true with orders for items priced up to around < £85 to when the markup starts to outweigh process cost savings.
      Which is why Trusts tend to buy items like Endoscopes, Stents & Hip Implants direct.

      DHL also decant most SKUs into "eaches" and then re-consolidate the hundreds of different ordered items back into a weekly (or daily) delivery direct to individual Hospital wards and clinics for minimum impact on hospital staff time. Classic Hub n Spoke

      There is plenty wrong with the DHL-NHS SupplyChain contract but lazy procurement isn't one of the answers.

      1. Bill Athetill:

        Well said.

        Though it must also be said that, for many years, trusts haven’t collaborated around this contract and committed their demand to market.

        Some recent responses from the market have generated savings of over 20% for some trusts for very basic commodities such as gloves (yes, gloves).

        Other responses have apparently generated saving of 60%+.

        On the latter, it’s not clear whether this is a saving against the equivalent price at factory gate, or against total delivered cost (ie: the cost from NHS Supply Chain).

  2. Stephen Heard:

    Hello Peter,

    Perhaps this would make a good topic for your key note speech at the HCSA conference where you will probably find more of the “I hate DHL” group then any of the others. I was still at OGCbs when this contract was let and seem to recollect that the contract extension was not an automatic extension fir five years but was an option to be discussed. Indeed during my time on the HCSA committee I seem to recollect that Jim Easton indicated that it was possible to extend this contract by 12 month increments.

    I would be interested to know if you are going to pick up on the FYFV document and your observations that there was no mention of commissioning or procurement in the paper.

    1. Peter Smith:

      Stephen
      Yes I think NHS Supply Chain / DHL will come up in my session and elsewhere at HCSA. i’ll be inetrested to see what the delegates see as the laternatives if a mega-contract isn’t the way forward. We did cover the FYFV here http://spendmatters.com/uk/nhs-five-year-forward-view-is-light-silent-on-competition-commissioning-and-procurement-issues/ but more on that to come too. In fact, loads on Health next month!

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