Much has been made of the fact that Walmart’s distribution expertise is vital to their success, and the typical shopper needs no help comprehending that they rely on a lean supply chain to efficiently feed the network. The hospital patient, on the other hand, is a different story. Most do not know that hospitals spend about 25 percent of the budget on supplies, and that medical products incur another 40 percent of internal expense before they are used, discarded or written off.
For this reason and others health systems continue to explore new strategies to reduce product acquisition cost. Though pricing is an obvious focus, standardization is the supply chain’s single greatest and most elusive goal, and it is for this reason that they have been experimenting with self-distribution of low-cost, low risk products for quite some time.
"Implant manufacturers should consider moving to a new model that would deliver dramatic levels of inventory consolidation."
That said, a still greater challenge for health systems today is managing, ornot managing a major category of high dollar products called physician preference products (PPI). Commodity devices are acquired in a relatively straightforward manner–from their Tier 1 distributor. This is quite different from high value implants which (a) ship direct, (b) are often consigned, and (c) are chosen by surgeons who historically have no role in the pricing discussion.
Unlike Tier 1 commodity distributors who insert one touch point in the channel, the irony here is that direct distribution PPI products can actually have two layers in between the OEM and the hospital. By this we mean the sales rep and a local branch that replenishes him and remedies real-time defects in his personal inventory. For the large orthopedics OEM this channel equates to a need to support hundreds, and even thousands of remote stocking locations with all of the classic pitfalls having to do with visibility, shrink and loss.
This model drives the highest industry SG&A expense on record, and stakeholders have argued for decades about who is to be blamed: the physician who chooses without asking about price, the manufacturer who engineers physician dependency on his rep, or the hospital who resists every opportunity to take title to these products. All of this is water under the bridge and the only conversation worth having is how to solve for a better model.
With the availability of new app-centric software platforms and other innovative distribution methods, implant manufacturers are moving to a new model which can deliver dramatic levels of inventory consolidation. This is especially important in ortho, where every dollar of inventory drives another dollar on instruments used to install (e.g. implant) the actual item. Our $15B orthopedics industry is suffocating under the weight of $8B worth of working capital in the field.
Our studies show that about three-fourths of the industry’s 40 percent SG&A cost is a sales logistics expense bucket, 3 to 4 times greater than the actual cost of the rep. Knee replacement surgery has much more in common with repair logistics than fulfillment, as every surgery requires the delivery of components and instruments, most of which will not be touched. Before any kit can service the next surgery, instruments must be inspected and device history records updated.
Regardless of whether you are a fan or not, the 2009 Affordable Care Act has been driving new levels of cost consciousness and a great sense of urgency. We see this in the shift to Bundled Payments, in which Payers fund one fee split by the hospital, the surgeon and the rehab facility for “the knee,” with no consideration for who makes the knee or how many how many surgeries were needed in this episode of care. More to the point, everyone is starting to think about cost-to-serve, including surgeons.
The net effect is that stakeholders on all sides of healthcare are poised to drive new business models forward. Health systems are starting to put PPI initiatives front and center in future self-distribution strategies, and we are having more and more conversations with health system managers who are channeling business to suppliers who are most willing to embrace change. The primary issue is cost-to-serve, not margin, and those who resist supply chain re-design are losing share.
What’s missing in this story isn’t technology or process engineering expertise, as the tools we need in healthcare were developed 10 and 20 years ago in retail and automotive with vendor managed inventory (VMI) and just in time (JIT) fulfillment models. What’s missing today is a new type of supply chain partner who can forge end-to-end collaboration among stakeholders.
The right partner is comfortable inside the in-hospital supply chain, with the reach needed to take a role in the efforts of multiple departments to standardize and reduce costs. This partner will work both ends of the supply chain, materially benefitting both hospital and manufacturer with each party’s current cost burden. A good example here is the ortho sales rep, who currently spend 30 percent to 50 percent of his week managing inventory and logistics, or time not spent with clinicians and clinical issues. Healthcare cannot afford to pay talented sales reps for time lost to lower value tasks better handled by logistics professionals at a more reasonable cost.
The right partner is the Partner who can earn and keep the trust of manufacturers and health systems because he has no manufacturing mission that (a) competes with the former, or (b) produces unwelcome product substitutions for the latter. This service provider shares the ideology of a mature 3PL who comes to work every morning, thinking about KPIs and continuous improvement, rather than dollars shipped. And finally, this partner needs to understand how a formulary works and what it means to enable (but not steer) every health system’s pursuit of standardization, in all product categories. In fact, long term this partner should install the formulary management tools that enable hospitals to design and drive compliance to new standards for product, and process.
The message here is that the tools, the business partners, and the reasons for change all exist today. Regardless of whether we’re talking about implants or gauze, healthcare needs supply chain services partners who can build closed-loop solutions around the point of care, with a service suite that honors manufacturer profit obligations to shareholders, while producing health system savings in categories where everyone has had less success than they will need going forward. Challenging the status quo is never easy. Implant manufacturers have done a commendable job of ensuring that their products are available for use by providers – but at an unsustainable cost. The time has come for solving this very expensive problem. Tools exist to design and build a zero-defect supply chain. Not only are we talking about improving cost and efficiency, we are committed to patient safety as well. We’d do well to get started.