New arrangements for the supply and delivery of healthcare related products to the NHS will save £1bn which can be reinvested in frontline patient services, Health Minister Andy Burnham announced today.

Over 1,000 new jobs will be created in NHS Supply Chain, the name of the new service, with the outsourcing of parts of supply chain services of the NHS to leading logistics expert DHL. The outsourcing covers NHS Logistics and parts of the NHS Purchasing and Supply Agency (NHS PASA).

Under the agreement, DHL will be responsible for procuring a range of products - from catering supplies to medical equipment - and delivering them to NHS hospitals and GP surgeries.

By offering a wider range of goods to NHS trusts at lower prices, it is expected that trusts will make more use of the new service. This in turn will mean more products are distributed through the system - a bigger operation than today - creating the new jobs and safeguarding the vast majority of existing jobs.

Mr Burnham said that although NHS Logistics had been a successful organisation in many ways, it handled less than one third of the NHS spend on such products and the outsourcing was necessary to deliver greater value for money for the NHS.

The contract with DHL will:

• over the 10 year contract, release an estimated £1bn currently spent by NHS trusts on healthcare products for frontline NHS care instead and provide an improved service to hospitals, delivering more products more cheaply;
• create up to 1,000 new jobs across the existing NHS Logistics regional distribution centres and mean a new depot is built in the Midlands within two years and another over the course of the 10 year contract;
• guarantee current staff Agenda for Change pay rates - the modernised NHS pay deal - throughout the life of the 10 year contract;
• guarantee that all new staff receive broadly comparable terms and conditions to the current staff in line with the Two Tier Workforce Code agreed between the Government and unions;
• guarantee current staff pensions that are at least comparable to their current NHS and civil service pension schemes; and,
• invest millions of pounds in staff training and IT.

The outsourcing covers the supply and delivery of 10 categories of products such as catering supplies, clothing, stationery, bed linen and medical supplies. The NHS uses around 500,000 different products over the 10 categories.

The NHS spends £3.7bn a year in total on such products. However, only around 51,000 of these products - around 10 per cent of the total - are in the catalogue provided by NHS Logistics. Between them, NHS Logistics and NHS PASA account for only £1.1bn of the total £3.7bn spent over the categories of products.

That means the remaining products are delivered through locally negotiated contracts where trusts don't necessarily get the best value for money because suppliers can charge higher prices as they can exploit the fragmentation of the market. For example, the NHS buys 21,000 different spares for wheelchairs but none appear in the current catalogue.

The potential is for DHL to capture all the £3.7bn spend across the 10 categories of goods. Using DHL will mean that trusts can benefit from the economies of scale that a larger operation can negotiate.

Under the contract, DHL has to reduce prices to hospitals. It will do this by increasing the range of products. DHL will also work closely with clinicians in order to determine the best products for the NHS and ensure innovation isn't stifled. DHL will also be bound by procurement rules which allow a range of companies to provide products to the NHS.

Andy Burnham said:

"This is a good deal for staff, patients and the taxpayer.

"NHS Logistics staff will enjoy, at the very minimum, the same terms and conditions as they have at present. We have guaranteed that Agenda for Change pay rates will apply to all current staff and that new staff are not subjected to the two tier pay system that used to exist under this type of contract - exactly what the unions were asking.

"The arrangement means substantial scope for bringing down the prices of the goods that NHS trusts buy. We estimate that around £1bn which trusts currently spend on such goods could be released over the course of the contract - money which then can be reinvested in patient care."

"I acknowledge the good work that has been done by NHS PASA and NHS Logistics and the commitment of their staff to the NHS. But the NHS is not an expert in distribution or warehousing. There is a compelling case to bring in a company which is.

"DHL will expand the business, invest in infrastructure, IT and customer services and through its sub-contractor Novation improve procurement. Consolidation of more NHS spend through this channel will allow the NHS to exercise its buying power and benefit from a wider range of products at more competitive prices."

The business operations, including 1,650 staff, will transfer to DHL on 1 October 2006.

The outsourcing means that DHL will be the agent on behalf of the NHS. The new service will be known as NHS Supply Chain and remain part of the NHS 'family', being managed on behalf of the NHS by the NHS Business Services Authority. The blue and white NHS emblem will appear on uniforms, at distribution centres and on all vehicles.

Notes to editors:

NHS Logistics orders, stores and delivers to NHS organisations products ranging from food to surgical equipment. NHS PASA is the purchasing and supply arm of the NHS, negotiating contracts with suppliers of healthcare related products.

The parts of PASA that are covered under the outsourcing are:

• medical supplies
• food and kitchen
• print and stationery
• laundry and cleaning
• bedding and linen
• dressings
• uniforms and clothing
• patient appliances
• lab equipment
• furniture and office equipment

The procurement has been subject to EU procurement regulations.

A feasibility study was conducted in 2003 and an outline business case was presented to Ministers in 2004.

In August 2004 the OJEU was published seeking interest from the market.

Six organisations pre-qualified were sent Invitations To Submit Outline Proposals (ISOP) in November 2004.

In July 2005, three organisations were sent Invitations To Negotiate. Based on evaluation of the responses, two organisations were selected in January 2006.

In February 2006, DHL was selected as the preferred bidder and in March the SofS agreed that there was a compelling case for the outsourcing to go-ahead, subject to final negotiations.

Currently DHL run Bridgewater, one of the six distribution centres in the logistics network. This centre was outsourced to DHL in 2001. TNT currently run all transport services. This amounts to 279 drivers. These drivers are not part of the outsourcing. The management of TNT's contract will transfer to DHL.