Supply Chain Conflicts
The following six generalized operational problems have been identified with Healthcare's existing supply chain. Many of them are caused by the visible and invisible conflicting goals.
1) Service levels. Because Healthcare supplies can be a somewhat seasonal business, there was a constant battle between too much and then not enough inventory. When there was too much inventory, there was often the need to force products out to the hospitals regardless of their rate of sale. Stock outages occurred throughout the year with both core and non-core products. The cost-driven, inventory-reduction actions of the various suppliers and distributors contributed to the increase of Healthcare managerial costs, as well as the reduction in operational efficiency. Correcting these types of problems benefits everyone in the supply chain.
2) Expanding assortment. The product assortment carried by Healthcare providers has grown significantly because of an expansion of new products and suppliers and to accommodate the ever changing healthcare landscape The constant flow of new proprietary products and seasonal products is in conflict with distributors that operate most efficiently with a predictable product flow and stocking of only a few proprietary items for their customers.
3) Shelf-life. Additionally, healthcare providers constantly had to contend with shelf-life issues: Products often were delivered with little remaining shelf-life and, in some cases, they were expired. Ordering too much at one time is the major cause of this problem. Whether the distributors had bad forecasting information or were attempting to minimize their purchasing costs, this action was clearly not in sync with the needs of the healthcare industry. The costs that Healthcare providers incurred to dispose of short shelf-life products were invisible to others in the supply chain, yet they unfavorably impacted the total costs associated with the supply chain.
4) Delivery capacity. The delivery system was not adequate to ship the amount of products needed during seasonality of use. There were not enough trucks, trailers, drivers or warehouse capacity to service the needs of Healthcare providers during these times.
5) Information gap. Much of the true cost information was not available to all parties due to the visible conflicting goals between supply chain members. Examples of this include inbound and outbound freight, storage costs, volume purchasing discounts and rebates. What the Healthcare industry lost is what the supplier or distributor gained. Supply chain partners were protecting their own interests by keeping information secret and making their actions invisible to outsiders.
6) Lack of collaboration. As various supply chain problems occurred in the system, the supply chain was slow to react. The ability to identify the root of the problem, develop options, choose the best option and then implement that option were all hampered because the supply chain did not collaborate to solve the problem. The difficulty was largely due to the fact that supply chain members had conflicting operational goals.
Mitigating Inefficiencies in Healthcare Supply Chains
Clearly, these inefficiencies were caused by many of the conflicting goals among suppliers, distributors and the Healthcare Industry. In order to influence the behavior of other supply chain partners in ways that are best for everyone, Healthcare providers need to developed a different approach. The following strategic solutions could mitigated the inefficiencies that occur within the Healthcare supply chain. The ultimate goal was to increase the overall size of the supply chain "cake" by increasing revenues. And only then could everyone improve their profitability.
1) Strategic thinking. As the leader of the supply chain, Healthcare providers need to learned to strategically "think earlier" and tactically "plan earlier." Strategic decisions such as selecting a supplier or distributor have a long-lasting effect on Healthcare's operational performance. They must be made based on a careful, systematic analysis that considers factors such as potential conflicting goals. For example, one of the major initiatives of many Healthcare suppliers is to negotiate a consolidated contract with a major freight carrier for dry goods. This contract enabled the suppliers, distributors and Healthcare providers to save costs on both inbound and outbound shipments.
2) Benchmarking. Benchmarking is an effective way to learn from others. In the logistics area, difference in managerial style and culture does not affect the performance substantially. In many cases, learning from industry leaders serves as a more relevant way to make improvements. For example, benchmarking could help the Healthcare Industry improve turnover by converting some items to limited-time offers, which was a successful technique of other industries.
3) Performance measures. Healthcare providers and suppliers better (timely and accurate) information about its supply chain performance. A new "supply chain system" could allow suppliers and Healthcare providers to collect and analyze the required data such as costs and on-hand and on-order inventory as well as delivery information in a timely manner. The Healthcare Industry could develop a fully integrated costing tool that calculates at the item level the distribution costs for its various methods of distribution in each of the markets that it operates. A "what if" spreadsheet could be developed to precisely calculate the cost of one distribution option over another.
4) Information sharing. When one company cannot observe another company's actions, it will find it hard to design, implement and justify changes necessary to improve the relationship. The Healthcare Industry need to work with its supply chain partners to identify the information needed to make better long-term decisions that benefit everyone. For example, the distributors could develop detailed analyses of their costs for each activity, and by working with the industry, they would be able to fine-tune assortments and delivery schedules to take costs out of the system for everyone.
5) Inter-company collaboration. During the different stages in the supply chain, distributors and suppliers frequently have conflicting goals. For example, in order to save ordering cost, distributors tend to place a large order, which can create shelf-life issues. Performance measurement, information sharing and close collaboration between Healthcare providers, suppliers and its distributors could all been effective in mitigating these problems.
6) Contract-based monetary incentives. Supply chain contracts detail the requirements for the procurement of goods, transportation of products and distribution of the products to the customer. Based on the visible costs and other operational information, some incentives can be offered to supply chain members for synchronizing their decisions. Financial incentives must be properly structured and aligned in order to drive and sustain the behaviors during all supply chain stages. After all, a win-win situation materializes only if everyone finds their share of revenue increasing.
As the supply-chain world evolves, companies are finding that the practices of yesteryear do not guarantee them success in the marketplace. Technology has allowed us to understand our business actions in real time, and it has become incumbent on all of us to share that information to reduce cost inefficiencies in the supply chain and deliver better service to our customers. If we don't, someone else will.
1) Service levels. Because Healthcare supplies can be a somewhat seasonal business, there was a constant battle between too much and then not enough inventory. When there was too much inventory, there was often the need to force products out to the hospitals regardless of their rate of sale. Stock outages occurred throughout the year with both core and non-core products. The cost-driven, inventory-reduction actions of the various suppliers and distributors contributed to the increase of Healthcare managerial costs, as well as the reduction in operational efficiency. Correcting these types of problems benefits everyone in the supply chain.
2) Expanding assortment. The product assortment carried by Healthcare providers has grown significantly because of an expansion of new products and suppliers and to accommodate the ever changing healthcare landscape The constant flow of new proprietary products and seasonal products is in conflict with distributors that operate most efficiently with a predictable product flow and stocking of only a few proprietary items for their customers.
3) Shelf-life. Additionally, healthcare providers constantly had to contend with shelf-life issues: Products often were delivered with little remaining shelf-life and, in some cases, they were expired. Ordering too much at one time is the major cause of this problem. Whether the distributors had bad forecasting information or were attempting to minimize their purchasing costs, this action was clearly not in sync with the needs of the healthcare industry. The costs that Healthcare providers incurred to dispose of short shelf-life products were invisible to others in the supply chain, yet they unfavorably impacted the total costs associated with the supply chain.
4) Delivery capacity. The delivery system was not adequate to ship the amount of products needed during seasonality of use. There were not enough trucks, trailers, drivers or warehouse capacity to service the needs of Healthcare providers during these times.
5) Information gap. Much of the true cost information was not available to all parties due to the visible conflicting goals between supply chain members. Examples of this include inbound and outbound freight, storage costs, volume purchasing discounts and rebates. What the Healthcare industry lost is what the supplier or distributor gained. Supply chain partners were protecting their own interests by keeping information secret and making their actions invisible to outsiders.
6) Lack of collaboration. As various supply chain problems occurred in the system, the supply chain was slow to react. The ability to identify the root of the problem, develop options, choose the best option and then implement that option were all hampered because the supply chain did not collaborate to solve the problem. The difficulty was largely due to the fact that supply chain members had conflicting operational goals.
Mitigating Inefficiencies in Healthcare Supply Chains
Clearly, these inefficiencies were caused by many of the conflicting goals among suppliers, distributors and the Healthcare Industry. In order to influence the behavior of other supply chain partners in ways that are best for everyone, Healthcare providers need to developed a different approach. The following strategic solutions could mitigated the inefficiencies that occur within the Healthcare supply chain. The ultimate goal was to increase the overall size of the supply chain "cake" by increasing revenues. And only then could everyone improve their profitability.
1) Strategic thinking. As the leader of the supply chain, Healthcare providers need to learned to strategically "think earlier" and tactically "plan earlier." Strategic decisions such as selecting a supplier or distributor have a long-lasting effect on Healthcare's operational performance. They must be made based on a careful, systematic analysis that considers factors such as potential conflicting goals. For example, one of the major initiatives of many Healthcare suppliers is to negotiate a consolidated contract with a major freight carrier for dry goods. This contract enabled the suppliers, distributors and Healthcare providers to save costs on both inbound and outbound shipments.
2) Benchmarking. Benchmarking is an effective way to learn from others. In the logistics area, difference in managerial style and culture does not affect the performance substantially. In many cases, learning from industry leaders serves as a more relevant way to make improvements. For example, benchmarking could help the Healthcare Industry improve turnover by converting some items to limited-time offers, which was a successful technique of other industries.
3) Performance measures. Healthcare providers and suppliers better (timely and accurate) information about its supply chain performance. A new "supply chain system" could allow suppliers and Healthcare providers to collect and analyze the required data such as costs and on-hand and on-order inventory as well as delivery information in a timely manner. The Healthcare Industry could develop a fully integrated costing tool that calculates at the item level the distribution costs for its various methods of distribution in each of the markets that it operates. A "what if" spreadsheet could be developed to precisely calculate the cost of one distribution option over another.
4) Information sharing. When one company cannot observe another company's actions, it will find it hard to design, implement and justify changes necessary to improve the relationship. The Healthcare Industry need to work with its supply chain partners to identify the information needed to make better long-term decisions that benefit everyone. For example, the distributors could develop detailed analyses of their costs for each activity, and by working with the industry, they would be able to fine-tune assortments and delivery schedules to take costs out of the system for everyone.
5) Inter-company collaboration. During the different stages in the supply chain, distributors and suppliers frequently have conflicting goals. For example, in order to save ordering cost, distributors tend to place a large order, which can create shelf-life issues. Performance measurement, information sharing and close collaboration between Healthcare providers, suppliers and its distributors could all been effective in mitigating these problems.
6) Contract-based monetary incentives. Supply chain contracts detail the requirements for the procurement of goods, transportation of products and distribution of the products to the customer. Based on the visible costs and other operational information, some incentives can be offered to supply chain members for synchronizing their decisions. Financial incentives must be properly structured and aligned in order to drive and sustain the behaviors during all supply chain stages. After all, a win-win situation materializes only if everyone finds their share of revenue increasing.
As the supply-chain world evolves, companies are finding that the practices of yesteryear do not guarantee them success in the marketplace. Technology has allowed us to understand our business actions in real time, and it has become incumbent on all of us to share that information to reduce cost inefficiencies in the supply chain and deliver better service to our customers. If we don't, someone else will.
posted by Jay Deragon at 4:49 PM
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