Zeroing in on the rising importance of improving the health care supply chain

The health care supply chain could cut billions of dollars in cost by adopting practices well established in other industries.

Take the case of a typical Asian laptop manufacturer, for example. As a result of a top-notch supply chain, a European customer can place an order and receive a pallet of freshly assembled computers in just over a week. Ask a pharmaceutical manufacturer for a delivery, on the other hand, and the lead time stretches to 75 days.

The case is further illustrated by the difference in operational metrics between the health care supply chain and the supply chain for fast-moving consumer goods (FMCG). Whether you look at days in inventory, obsolescence, or manufacturing lead time, the FMCG is invariably so efficient that the health care supply chain looks sluggish in comparison.

But such a significant performance gap also means even minor efficiency gains could have a big impact, according to a McKinsey report. An industry that spends in the excess of $340 billion annually on pharmaceuticals and medical devices would benefit from examining every part of its supply chain to not only speed up lead time and boost ROI, but also provide safer and more affordable products to end customers around the world, the consulting firm argues.

The shortcomings so far stem from an inability to tackle challenges that today add substantial cost to the health care supply chain. Big-ticket challenges include:

• Increased regulatory scrutiny
• Expanding product portfolios
• Drug recalls
• Drug shortages
• Counterfeiting
• Supply-chain security breaches
• Medication errors in the developed world

Although transforming a supply chain is an incredibly complex undertaking, McKinsey notes:

“…if the sector adopted straightforward advances well established in other industries, we estimate that total costs (from the supply chain and external areas, such as patient care) could fall by $130 billion.”

Industry research does indeed show every member of the value chain – from pharmaceuticals and medical suppliers to pharmacies and hospitals – that embraces opportunities to optimize the health care supply chain reaps the rewards in increased profitability. In most cases, the impact on profits ranged from 10 to 20 percent.

So which area of the supply chain offers the greatest opportunity for improvement?

Senior supply chain executives in the pharmaceutical and medical device industries overwhelmingly place improved collaboration at the top of the list. To overcome cultural barriers and make transactional relationships more productive, McKinsey suggests the following approach:

“…six essential steps can make the difference between a productive collaboration and a frustrating one: companies must collaborate in areas where they have a solid footing; agree on sophisticated benefit-sharing models; select partners for the potential value of the collaboration, as well as their capabilities and willingness to act as a team; dedicate resources to the collaboration and involve senior leadership in it; jointly manage performance and measure impact; and start out with a long-term perspective.”

Collaboration is still only a small piece in the supply chain puzzle that also includes better market, product, and customer segmentation; greater agility; improved benchmarking and measurements; and the establishment of global standards for data exchange. To put it all together, it is imperative for the health care supply chain to follow the lead of high performing industries.

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