The global healthcare landscape is changing rapidly. Key drivers include cost pressures, changing customer behaviour, economic developments, new product introductions, short lead times and ongoing mergers and acquisitions.
Unlike other industries such as the electronics, automotive and fast-moving consumer goods (FMCG) sectors, the medical technology (medtech) industry supply chain is lagging behind. Medtech supply chains are usually seen as purely facilitating rather than driving a company’s success. There are a number of improvement areas to be identified to demonstrate that supply chains can contribute to the success of medtech companies.
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A recent survey was held among top supply chain executives of medical technology companies in Europe (Buck Consultants International (BCI)/Arvato, 2008), complemented with extensive experience in healthcare supply chain redesign initiatives implemented by the authors. The focus is on medical technology rather than on pharmaceuticals, as that segment brings its own unique dynamics and characteristics.
It is important to look at the key issues and improvement potential in today’s set-up of medtech supply chains, as well as depicting the future roadmap.
Room for improvement
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Based on the BCI/Arvato survey in 2008 and the experience of the authors in working for the medtech industry, four key issues in today’s medtech supply chains can be identified:
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By GlobalData1. Supply chain is not regarded as a key driver for success
2. Lack of transparency in the supply chain
3. High involvement of commercial third parties in the chain
4. Lack of a holistic approach towards improvement.
1. Supply chain is not regarded as a key driver for success
In terms of the value disciplines of Treacy and Wiersema, the primary focus in healthcare companies always was on product leadership, secondary focus on customer intimacy and only then on operational excellence. In the BCI/Arvato survey (2008) this was confirmed: 75% of the companies mentioned product leadership as the key strategic objective but do not link the supply chain’s objective towards achieving product leadership.
Operational excellence is only regarded in relation to cost reduction. Many Lean initiatives in production plants and warehouses, planning and control, transportation tenders,and cost rationalisation programmes have been carried out under the Lean umbrella all with the aim of reducing operational costs within the individual nodes of the total supply chain.
2. Lack of transparency in the supply chain
All actors active in the healthcare supply chain state that real optimisation cannot be realised because of a lack of visibility of what is happening in other parts of the chain. Take, for example, the mechanism called consignment inventory that is widely spread in the healthcare industry to ensure product availability (right size, right quantity and right moment).
Many suppliers of products such as implants, operating devices, medicines and so on have built up significant piles of inventory at the point of consumption to have their product visible and available to the specialist at any given moment, given the lack of information of real customer demand and product supply.
In several cases there have been examples where a company had over 70% of the inventory at consignment level with no visibility on consumption or (incentified) future demand and less than 30% in a central warehouse, in which the replenishment cycle for consignment stock was treated in the same way as emergency orders.
3. High involvement of commercial third parties in the chain
Commercial third parties such as wholesalers and distributors still have a strong position in medtech supply chains. This is especially the case in emerging markets in Eastern Europe, Russia and other parts of the world. Although these parties usually have a positive contribution to business growth in the markets they serve, more and more companies are looking for ways to bypass or at least change the role of these third parties.
For the manufacturer this has advantages on the commercial side: closer contact with the end customers, less margin swallowed up by third parties and so on. On the operations side it brings large challenges and questions with it: are there any logistics service providers that can take over the physical distribution function? Is the distributor willing to shift to a fee for a service model? Are investments in own logistics infrastructure required? How should the supply chain until the end customer be controlled in terms of traceability? Is the point of use information supplied? and so on.
4. Lack of a holistic approach towards improvement across the value chain
Comparing the medtech industry with other industries has shown that there are limited examples of holistic end-to-end supply chain initiatives within the medtech supply chain. Typically, improvements are conducted on a node-by-node basis and not across the value chain.
For example, hospitals are working hard to optimise the goods and patient flows within their control, manufacturers conduct Lean and Six-Sigma projects within the parts of the chain that they ‘own’, logistics service providers try to offer economies of scale and a broader service offering but have a limited penetration rate in the medtech industry.
Whereas in sectors such as the retail industry the retailer or manufacturers are strongly enforcing initiatives to improve the value chain, this has not happened so far in the medtech industry as no single party has created the scale or power to do so, with the exception of the National Health Service and DHL set up in the UK.
Supply chain roadmap
Given the issues at hand and the improvement potential, we believe that a roadmap for a medtech company to move towards a growth on top of cost model needs to contain:
- supply chain transparency
- supply chain differentiation
- supply chain collaboration.
Supply chain transparency
Transparency is a major prerequisite for any optimisation in healthcare chains. Other industries have already significantly invested in this. The large food and non-food retailers all have systems in place using point of sales information to trigger supply upstream in the supply chain. Also these companies, just like many high-tech and FMCG companies, have developed sales and operations planning (S&OP) processes to align sales and marketing with operations.
In the recent survey carried out by BCI and Arvato among leading medtech manufacturers including Medtronic, Hologic, Beckman Coulter, Cardinal Health, EV3 and St Jude Medical, the gap in creating transparency has not been closed despite investments in IT and systems. Actions that can be taken to improve transparency in the chain are to:
- align commerce and operations within the company itself by implementing clear S&OP processes and systems
- start discussions with counterparts in the chain: upstream (suppliers) and downstream (hospitals, distributors, patients) and define actions to improve chain visibility
- analyse current supply chain structures and inventory management practice: allowing a fact-based discussion rather than a discussion based on emotions and perceptions.
Logistics is about the flows of goods and information. If the supply chain function in medtech companies realises the importance of control over the information flow throughout the chain, they will be in the position to start becoming a growth facilitator rather than merely a cost factor.
Supply chain differentiation
Although logistic requirements can differ by customer and product group, many companies are still organised as a ‘one size fits all’. This means that companies are either over serving customers (providing a service that a customer is not willing to pay for) or under serving the customer.
A well-known car tyre supplier, for instance, has classified its customers as value buyers, quality buyers and commodity buyers, each getting a different service in terms of supply chain proposition. Differentiation elements include order frequency, product offering, minimum order size, the speed of delivery and so on.
In medtech companies there are similar opportunities to better match the supply chain proposition to the market requirements of specific product market combinations. For instance, distributors, buying disposable products in relatively high volume, can be served from a central facility in large shipments at fixed moments (such as one delivery per week). Hospitals demanding specific implants for trauma surgery might need to have a limited consignment stock at hand in the hospital itself to allow for rapid delivery to the operating theatre. Medtech companies can realise differentiation by means of:
- aligning commerce and operations within the company itself: identifying customer segments, requirements and service propositions per segment
- developing clear propositions or menus for the customers by product line
- aligning the physical supply chain set-up with the service propositions.
Supply chain collaboration
The third element of the improvement roadmap is supply chain collaboration. Collaboration can be horizontal and vertical. An example of horizontal collaboration is the manufacturing consolidation centre of Kimberly Clark and Lever Faberge in the Netherlands where flows from both FMCG companies are consolidated and shipped towards retail customers.
An example of vertical collaboration is the efficient consumer response concept (ECR) as applied in many retail chains, where manufacturers, logistics service providers and retailers work closely together to have maximum product availability at the point of sales, combined with minimal inventory levels throughout the chain.
In Europe the Healthcare Logistics Forum (HLF) exists, in which 20 manufacturers discuss and carry out collaborative projects such as benchmarking, freight consolidation and cold chain development. From this group a consolidation initiative has arisen in which manufacturers located in the same area consolidate their line haul to a carrier platform. Other horizontal collaboration projects are driven by the hospitals that have started to set up combined hospital distribution centres where suppliers need to deliver to and from which different hospitals in one city/geographical area are efficiently supplied.
In the survey and roundtable session mentioned earlier, the participating manufacturers agreed with the statement that although collaboration has slowly become a discussion subject in the industry, the way towards real full chain collaboration is still long and much can be learned from other industries. Supply chain transparency again is a key prequisite here. Medtech companies can make progress in collaboration by means of:
- talking to peers in the industry, defining common issues and potential collaborative solutions
- discussing with logistics service providers who have an overview of what is happening in different companies
- defining small-scale pilot projects with low exposure to ‘test’ collaborative concepts, turning them into best practice and ramping up.
The way forward
There is room for improvement in medtech supply chains. Logistics is not the highest priority on the agenda and within logistics the focus is often purely on operational excellence rather than on the contribution supply chains can have on business growth.
Examples from other industries show that it is possible to make steps forward, resulting in supply chain cost reduction and overall business growth. The way towards transparency, differentiation and collaboration in the supply chain is a real journey which will take time, but which will lead to significant results.
