Driving the future: The mandate to build a better medical device supply chain

In the fall of 1973, one of America's most treasured industries was brought to its knees by the toughest competition of them all. This competitor wasn't another company. It was far more dangerous than that. This competitor was a better supply chain—which caught this industry so flat-footed that it never has quite recovered, even though the problem began more than 40 years ago.

Let me set the scene. The Organization of Arab Petroleum Countries1 had just declared an oil embargo2 on the United States. Suddenly, America was paralyzed by an energy crisis. As gas prices began to skyrocket, American automaker sales plummeted. Consumers were trading in their gas-guzzling muscle cars for more efficient Japanese models.

The Japanese were masters at building them, and the secret was their supply chain.3 Long before The Toyota Way4 became a benchmark for modern-day lean manufacturing, the Japanese were delivering world-class products with precision, just-in-time (JIT) inventory controls. And they were expert at using disciplined quality control and management practices. So when they saw an opportunity to get a bigger foot in the door in America, they stepped right through.5

To respond, American carmakers had to quickly create a leaner supply chain that delivered far better products much faster. But they had a long way to go. See if any of the following problems sound familiar to you, as you think about the healthcare supply chain:

• Too much waste everywhere you look
• Too many hands pulling the supply chain in different directions
• Shortsighted product development
• A failure to modernize
• No consistency with product identification

What can we do, working together, to avoid the mistakes that the auto industry made? How can we improve the health of the healthcare supply chain?

Unlocking billions of dollars
According to McKinsey,6 the supply chain accounts for more than $16 billion of medical device costs. The implication is staggering: even minor efficiency gains could free up billions of dollars for more research and product development to help improve the lives of patients.

So how do we make that happen? It won't be easy, because there are hard constraints standing in our way. For example, where and how patients access care is evolving rapidly. The pressure to improve quality is relentless—and growing. The role of the sales rep is changing, from assisting in the OR to creating more value elsewhere. And most critically, costs and cost structures are changing as rapidly as healthcare itself.

Cutting waste to lower costs
Manufacturers know all too well: healthcare providers are looking for significant price reductions, because their own margins are being cut dramatically in a world of declining reimbursements. Manufacturers can no longer afford to pay for half-empty warehouses and trucks that deliver less than a full load.

The answer is as simple as it is powerful: stop maintaining your own warehouses. And avoid paying the high price of shipping LTL (less-than-truckload) with traditional trucking companies. Instead, collaborate with other manufacturers, gain new efficiencies and save substantially with every shipment.

Driving the future
We need to rethink how the healthcare supply chain works to lower costs, improve efficiency and help manufacturers move their products from factory to point of care via a network built just for them. Here's how we see the future of the manufacturers' supply chain:

1. More streamlined: cutting the number of touch points in the supply chain down to size.

2. More transparent: so we can better track products as they travel from plant to the patient. This requires a significant investment in technology to see a product's entire path through the supply chain.

3. More compliant: to meet growing regulatory requirements. For example, at Cardinal Health in the last five years alone, we've seen a 300% increase in regulatory inspections of medical products. That's why deep expertise in healthcare logistics is key to staying ahead of such complex and critical change.

4. More flexible: to accommodate the growing shift in care from the hospital to more cost-effective locations—including patient homes.

5. More intuitive: using technology to establish clear demand signals that optimize inventory levels.

6. More collaborative: to create more effective shared warehousing and transportation strategies.

7. More nimble: to manage the constant change in product complexity, regulatory compliance, transportation and warehousing.

So what steps need to be taken to bring this future to life?
When it comes to medical consumables, it means:
• Consolidating freight across manufacturers.
• Taking advantage of multi-tenant warehouses.
• Improving transportation efficiency.
• Eliminating excess inventory.

For high-dollar physician preference items, it means:
• Providing full product visibility and tracking, from one end of the supply chain to the other.
• Monitoring usage at the point of care, identifying clear demand signals that help set more efficient inventory levels.

The future isn't coming. It's right here, right now. As an industry, we are either going to lead—or be left behind. It's time for all of us in healthcare to work together. Our challenges are no less daunting than what automakers faced in the 1970s. If they can change, so can we. So can you.

1 http://www.investopedia.com/terms/o/oapec.asp
2 http://history.state.gov/milestones/1969-1976/oil-embargo
3 http://www-personal.umich.edu/~afuah/cases/case3.html
4 http://www.toyotaway.com/
5 http://www-personal.umich.edu/~afuah/cases/case3.html

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