Healthcare Fulfillment Challenges- Why Can’t We Get the Stuff We Need When We Need It?

For the past few months, we have been working with a client  that is trying to sort out the performance of the supply chain of the present while planning the supply chain of the post-pandemic world.

The client- a respected multi-hospital system in the Northeast- was frustrated by the inability of it’s major distributors to fill orders at an acceptable rate. “They claim to be fulfilliing at a 95 to 98% rate,” said the system’s Director of Supply Chain Operations, “but when we measure, it’s often more like 70 to 80% on key items.”

For people like my boss, Tom Redding, who have worked with the leading companies outside of healthcare, where the concept of “The Perfect Order” (in which suppliers fulfill at a rate of 98 to 99%) is almost commonplace, it is stupifying to try to understand why there are so many problems in healthcare.

The interesting part of our conversation lies in the difference in perspective of Sean and me. Sean looks at healthcare as do most people unfamiliar with the exigencies of the industry. He knows what he has seen elsewhere, and asks why the same practices don’t bear fruit in healthcare. I, on the other hand, have spent my entire professional career working in healthcare.

I understand why.

It’s Outside-in versus Inside-out perspectives- both of which have their merit and both of which can frame the discussion in a manner that can lead to improvement.

Outside-in views the Supply Chain as part of a process that is measurable, predictable, controllable, repeatable and therefore- manageable. Their experiences are centered in manufacturing, where processes can be sharply-honed, where contracting and sourcing can be targeted and timely, where demand can be predicted  and where all aspects of the process can be accurately measured.

Let’s look at an example: The manufacture of an automobile- say a Ford Mustang.

Forecasting Demand: Before the first unit is built, Ford uses is extensive data bases to create a highly-accurate projection of what the expected demand for new Mustangs. Therefore, they know how much it will cost to produce them. Why? Because they know their manufacturing costs in infinite detail. Demand is where the supply chain starts and ends, and the ability to accurately forecast it before manufacturing begins creates a huge advantage in managing and planning the process.

Plan for Every Part:  The average automobile has 25,000 to 30,000 parts (counting each nut and bolt as one part). Every finished product uses exactly the same parts in exactly the same order of use at the exact same point in the process. This allows the automobile industry to utilize a strategy called “A Plan for Every Part” in which each component’s acquisition and use can be specifically-prepared for, with back-up suppliers identified and emergency interventions anticipated.

Contracting, Sourcing and Supplier Relations: The sheer size of a company like Ford gives it tremendous leverage with suppliers. A single contract with the company can guarantee the survival and success of a supplier. An exclusive contract will guarantee uninterrupted supply of needed goods. Suppliers will do whatever they need to do to obtain and maintain an agreement with a company like Ford. And the number of major manufacturers in the auto industry is also small- three domestic and around nine foreign major manufacturers. A contract with Ford means survival to the OEMs it deals with. Ford knows this and exercises its leverage accordingly.

Total Supply Chain Responsibility: A company like Ford takes responsibility for every aspect of its supply chain. It contracts for every part itself. It contracts for related logistics as well. It creates disaster or production interruption plans to deal with uncertainty proactively. It measures the performance-effectiveness of its operation. In short, it creates an environment in which the “Perfect Order” is not only possible, but a requirement to do business.

Given this perspective, it is not difficult to understand why folks like
Tom would be surprised and confused by inability of the healthcare supply chain to operate in a more effective and efficient manner than it does.

Let’s take a look at the healthcare supply chain from the Inside-out.

Forecasting Demand: Unlike Ford, who has multiple, proven tools to granularly predict demand, healthcare organizations do not. They often use historical data (often provided to them from suppliers or their medical/surgical distributor). Historical data is notoriously less accurate than the tools used by companies like Ford, and demand can be mitigated immediately by a local disaster or a pandemic, overloading suppliers’ ability to successfully complete orders.

Product Standardization. Also unlike Ford, who has a high degree of product standarization- using the same OEM nuts and bolts on every car produced, making it easy to source and contract for, hospitals often cannot agree on commodity items such as exam gloves and even 4×4 dressings and band-aids. For Physician Preference Iems (PPI) such as implants and cardiac catheters, variation becomes an issue difficult to deal with. Add to this the sheer number of products (65,000 to 85,000) used by the average hospital, and you can begin to understand the difficulty in developing a controllable process.

Contracting, Sourcing and Supplier Relations: The supply chain represents an extremely important area of focus for companies like Ford. Consequently, their Sourcing and Contracting operations are well-staffed by sourcing and contracting professionals. With the exception of the very largest of Integrated Delivery Networks (IDNs), healthcare sourcing and contracting efforts are generally quite under-resourced. Staffs are small, and generally devoted to the high-dollar PPI items, leaving much of the contracting for commodity items to be outsourced  to their Group Purchasing Organizations (GPOs). The GPOs provide pricing, terms and conditions for most commodity items. The IDN’s purchasing staff selects the GPO contract to use for pricing, and notifies either the supplier or the distributor. While this methodology helps organizations keep costs down, it also displaces responsibility from “Contracting and Sourcing” to “Order Placement.” The result of such an approach often lessens the impact of IDNs with their suppliers. Add to that the leverage that PPI suppliers have through physician influence and you have a process that can hardly be termed “controllable”.

Total Supply Chain Responsibility: The healthcare supply chain can best be characterized as one in which third parties have an untoward amount of influence on the process. These incluide:

  • GPOs are the de facto contracting agents for the preponderance of most Health Care Organizations’ (HCOs) commodity purchases. They forge contracts with supplliers and lock in terms and conditions and pricing. In effect, they provide free labor for the purchasing function, often saving as many as 3-5 Full Time Equivalents (FTEs). For this trade off, the HCOs are willing to surrender control for convenience and cost-cutting.
  • The Influence of Clinicians: As stated earlier, clinician’s choice plays a huge part in the healthcare supply chain’s inability to effect standardization. Doctors train on different companies’ products, and when they go into practice, they generally demand the products they prefer, which means that instead of having one carbeurator to be put into the car, the hospital may have to stock ten. Since new doctors come and go, this only tends to make the process less controllable.
  • The Major Distributors. Ford buys its equipment from OEM’s. Hospitals get theirs from NAPA Auto Parts.There are three major medical/surgical distribtuors. Among them, they serve virtually every hospital in the country to some extent. For many, they act as the big back-up warehouse- even those who have ther own distribution centers. Others go even further, shutting down their own store rooms and depending on the distributors to deliver supplies daily to their docks in the lowest unit of measure- leaving them virtually at the mercy of the ditributor. The strategy is chosen as a way to save money by (1) reducing on-hand inventories and eliminating distribution personnel. And when something like COVID-19 hits, these organizations are at the mercy of the distributors. When bad times come, the distributors ration scarce supplies via a process known as Allocation is nothing more than rationing. And when push comes to shove, who do you think gets affected most- Hibbing Memorial Hospital or the Mayo Clinic?

The Change That Must Come: Healthcare supply chain operations will probably never look like those of their non-healthcare counterparts. There are too many structural mitigating factors. Variation will always be present. Physicians will continue to exercise their leverage. Meager profit margins will impede supply chain leaders’ ability to add the resources they need. GPOs are not going away and neither are distributors. The challenge faced by every supply chain leader will be this: How can I create a resilient supply chain that leverage the best practices utilized by industry leaders?

Clearly, change must come. HCOs need to free themselves from their dependency on third parties. They must learn how to take control of their supply chain operations and implement practices that work in other industries.

Let us help

Through our design process, we perform an intensive level of due diligence to learn our clients’ needs. Site tours, detailed interviews and data drive the models and simulations we use to develop a thorough understanding of our client’s day-to-day activity from an efficiency perspective. This process validates our understanding of the client’s issues and provides the foundation for developing the relationships required to create innovative solutions.

St. Onge Company has grown steadily and developed a client list that includes many Fortune 500 companies and several world-renowned institutions. We have completed approximately 5,000 assignments for over 1,000 clients located through- out the United States, Canada, Mexico, the United Kingdom, Europe, the Middle East, the Far East, China and South America.

Our past projects cover a wide variety of Institutional, Commercial and Industrial applications for clients such as Johns Hopkins Hospital, Dana Farber Cancer Institute, MD Anderson Cancer Center, Rush University Medical Center, Duke University Medical Center, St. Jude Children’s Research Hospital and King Saud Abdul Aziz Hospital, as well as with their architecture firms. For these clients, we have developed a strong familiarity with the challenging logistics and related real-time issues associated with hospital operations, including campus supply chain strategies, materials management master plans, departmental optimization, facility designs and information systems to plan, direct and coordinate the movement of materials. Some of these solutions are highly automated; all are highly effective.

If you find yourself interested in developing a pandemic supply management strategy, please contact St. Onge. Our experts stand ready to take a look at your operation and find the opportunities you may have overlooked. You can reach me at fcrans@stonge.com or call me at 563-503-1847.

 

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