Written by 9:43 pm Demand, Downstream data

How Do We Heal the Healthcare Value Network?

Last week, at Supply Chain Insights, as part of our monthly webinar series, I hosted a panel discussion on the current state of the healthcare value network. Hosting this webinar series is one of the favorite parts of my job as the Founder of Supply Chain Insights.

On this webinar, we shared data that we have collected on financial metrics for the healthcare value network (see figure 1) and we asked a panel of Karen Conway from GHX; Ken Thomas, previously of Eli Lilly, and now the founder of Taith Group; and Roddy Martin, previously a Vice President at AMR Research and now at Accenture, the question “How do we Heal the Healthcare Value Chain?” In this blog, I share the insights on the current state of the healthcare value chain and the recommendations of the panelists. (I would also like to encourage supply chain professionals in the healthcare value chain to share their opinions by filling out our survey on the current state of the healthcare value chain. This data will be combined with the financial ratio data and published in an Open Content Research report in April on the Supply Chain Insights Community. Here is a link to the healthcare research study  in the field.

Current State:

Costs are rising.  Power is shifting to the hospital. Pharmaceutical companies are struggling with falling margins and rising inventories. Over the last decade, neither the pharmaceutical nor medical device manufacturer has been able to drive the revenue/employee productivity gains of their comparative peer groups.  They each lag in their understanding of supply chain excellence, and are now struggling to build effective supply chain teams.

In our work with pharmaceutical companies, most executives wince when we mention inventories. However, most do not realize that the Days of Inventory for the industry has grown 33%.  The level of growth is a surprise. For most, it is a sore point. When the panelists were asked why the level of inventory for the average pharmaceutical companies is 3X higher than their process peers in food, consumer products or chemical companies, Ken Thomas spoke of the need for high service and the commitment for patient care, but he also agreed that the current levels of inventory are not affordable. On the webinar, when the participants were polled on the reason for rising inventories, over 50% of respondents indicated that it was the lack of an executive understanding of supply chain excellence. I think both factors are at play.

Figure 2 contrasts the state of cash-to-cash cycles between 2000-2003 and 2008-2011.  While hospital inventories are falling, the inventories of suppliers are rising.  Unlike other industries that have lengthened “days of payables” and squeezed suppliers on payment, this is not the case in this value network. Instead, the primary driver of the longer cash to cash cycles for suppliers is simple. It is rising inventory levels.

What Can We Do?

The winds of change are gathering. Legislation and compliance is increasing. Big Pharma is facing a patent cliff (more drugs are coming off of patent protection than are gaining patent protection.) It is a complex problem. Change will not come quickly. For most companies in the healthcare value chain, supply chain processes are still evolving.

It is time to step up and drive change. All segments of the healthcare value chain lag in their understanding of supply chain leadership.  In the past three decades of supply chain transformation, the greatest shifts happened through leaders. A.G. Lafley and Keith Harrison at Procter & Gamble. Angel Mendez at Cisco. Michael Dell at Dell. Sam Walton at Walmart.  I feel that it is time for leaders in the healthcare value chain to stand-up and redefine the supply chain processes to make a difference.

For those considering driving this difference, the panelists on the webinar offered three pieces of wisdom for the healthcare executive:

Redefine Relationships. Focus on Value-based Outcomes. The industry has shifted from suppliers selling directly to the physician to a more structured selling approach, i.e. selling directly to the healthcare organization or Global Purchasing Organization (GPO) for a group of hospitals. This major transition has happened over the past ten years.

Today, most of the ” relationships” in the healthcare value chain are transactional:  a buy/sell relationship between the head of procurement and the seller of materials. They are not based on value-based outcomes of the patient.  The evolution of outcomes based on value-based engineering programs is still in its infancy. Leaders in supplier organizations can begin the transformation of selling relationships by redefining sales incentives from volume-based incentives to a value-based outcome incentive.  They can also start measuring cost-to-serve and applying Lean principles to improving the extended supply chain.

Improve Visibility. One of the major obstacles to improving the healthcare value chain is the lack of downstream, or channel, visibility. This is an opportunity in the redefinition of selling relationships.  In the redefinition of buy/sell relationships, suppliers can work with hospitals to improve visibility in the channel and drive integration with hospital systems.  For example, on the webinar, Roddy Martin spoke on how Baxter had used RFID to improve visibility to the cabinets in the operating theatres to get a real-time read of the visibility of demand.  This enables the development of a “pull-based replenishment signal” and the use of real-time demand data.  Over history, the major shifts of value networks have been led by individual companies.  It is no coincidence that Walmart improved the consumer value network through the building of RetailLink, or P&G drove the adoption of the bar code through the formation of what is now GS1.

Focus Outside-in through Horizontal Processes. Today’s supply chain systems are inside-out, they are not outside-in.  The introduction of standards for medical device companies is a rallying cry for outside-in processes. The standards enable a “common language” and the mapping of the processes outside-in  (from the patient back) enables the maximization or use of the data.

At Supply Chain Insights, we are committed to the use of our research as a backdrop for supply chain professionals everywhere to have great discussions. It is for this reason, that we have adopted a format that takes a piece of recent research and asks supply chain professionals to have a spirited debate on a topic. It is a continuation of our free webinar series that we host monthly at Supply Chain Insights.

Here is an on-demand link to replay the healthcare webinar.

We would like to hear from you! If you give us ten minutes to take our study, we will share the results in a one hour call with your organization.

Here are links to the studies:

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