The modern healthcare supply chain is filled with density, complexity, and layers of cross-regional trade. During the coronavirus pandemic, the need for a resilient and strategic healthcare supply chain came to light, while the pitfalls and weaknesses that were present in the healthcare supply chain were seen more clearly, as global healthcare systems were profoundly impacted.
Even prior to the pandemic, healthcare had come under intensive governmental scrutiny for foreign reliance on medical devices, pharmaceuticals, and personal protective equipment (PPE). This so-called “repatriation” of the medical supply chain is still front-page news, has summoned leaders at G20 summits, has drawn criticism, and is the talk-of-the-town for healthcare research companies.
Yet, there’s a minor problem. Large-scale changes — which are certainly drenched in risk and operational challenges — seem out-of-reach of most healthcare providers, especially in an environment where many healthcare providers fail to adequately manage their existing supply-chain supply.
According to McKinsey, the fragmented and inefficient nature of the healthcare supply chain is costing healthcare providers billions, weakening them against challenges, and putting their patients at risk. The supply chain alone accounts for 25% of pharmaceutical costs and 40% of medical device costs. So, how do we drive tangible value into the supply chain without completely retooling how we approach supply, demand forecasting, and cross-border flow?
What are the areas of opportunity for supply chain managers in today’s environment that exclude massive overhauls? And how can your healthcare organization revitalize its inventory and control to facilitate widespread value and reduce those annoying operational costs?
The answer lies in an already-written playbook. Sales & Operations Planning (S&OP) can help healthcare providers take control of their supply and demand today — positioning them to retool their supply chain in whatever way they see fit in the future.
The global COVID-19 pandemic didn’t just create a health crisis: it shined a spotlight on the healthcare supply chain and illuminated both its strengths and weaknesses. In a survey of 80 different healthcare systems, 90% of hospitals said they faced challenges getting medical supplies during the pandemic. And it makes sense why: over the past 20 years or so, supply chains turned to a “lean” method, in order to meet customers’ needs while streamlining distribution and minimizing waste.
While this “lean” approach was previously beneficial for healthcare supply chains, it created rampant issues during the pandemic, demonstrating its weaknesses and vulnerabilities. For example, healthcare experts found that one of those impacts was a rise in certain hospital-acquired infections.
The pandemic aside, the need for improved healthcare supply chains is great. The average pharmaceutical sits in inventory for 258 days, causing 3.5% of all pharmaceuticals in the healthcare space to become obsolete, recalled, or out-of-date before reaching patients. To help put that into perspective, consumer goods operate on an average of 72 days in inventory and 0.5% total waste. That’s a massive difference. You could easily point the finger at regulatory needs, complexity, or demand-side frictions. But the truth is: healthcare providers lack the strategies and tools to maximize the value of their incoming (and existing) inventory.
Based on medical equipment, pharmaceuticals, and protective equipment alone, McKinsey estimates that more efficient supply chain management strategies could save healthcare a whopping $130 billion a year. In fact, retailers could see a 6 percent total improvement in efficiencies and costs by adopting better supply chain strategies. That’s huge. When we look at healthcare, that percentage is an overwhelming 20 percent.
But let’s turn the page. We know that there are cost-savings and efficiency packed into adopting supply chain technology and strategies. What about patient care? In the United States, around 10 percent of all hospital admissions are related to medication errors. In addition, as many as 440,000 people die each year of these same medication errors, adding billions in costs to healthcare providers.
To top it all off, the overall pharmaceutical supply chain complexity (as measured by SKUs) increases by a whopping 50% per year. So, we have this convergence of factors calling for better healthcare supply chain management. On the one hand, it helps position hospitals to oversee the increased complexity, scrutiny, and regulatory headaches of modern distribution measures. On the other hand, it reduces costs and improves patient care practices while saving lives.
So, how do you maximize your supply chain without a multi-billion-dollar retooling or tear-down?
While improving a healthcare supply chain might seem like a big (or even impossible) lift, it doesn’t have to be. And the benefits for supply chain managers who make improvements to their operations can be monumental. Recent data from McKinsey shows that the supply chain function “oversees most of a health system’s external spend,” accounting for up to 40% of all costs. McKinsey also found that an optimized healthcare supply chain will have numerous positive trickle-down effects, such as better care, more satisfied physicians, health systems which are better positioned for growth, and most notably, reduced supply spend by up to 10%.
There are a few actionable ways that healthcare organizations can improve their supply chain performance. That same data from McKinsey found that some of the biggest challenges to the healthcare supply chain today include:
Further data found that on the heels of the pandemic, most companies planned “significant changes” in the way they manage their inventory, and that overall, resilient supply chain planning can be built on three pillars. These three pillars are visibility (which includes digital dashboards and other technological tools), scenario planning, and “master-quality data,” or data of the highest quality. Supply chain leaders who executed these three pillars were up to two times more likely to report no challenges from supply chain disruptions in 2021 and 2022.
But there is another key factor which can overarchingly improve healthcare supply chain operations, minimize impacts from disruptions, and create more resilient supply chains: sales and operations planning.
Sales and operations planning in healthcare (S&OP) refers to the collation of predictive and demand forecasting, sales, marketing, manufacturing, and supply chain management. So, instead of having each of these units operating in a data-enclosed bubble (or silo), S&OP rallies them all around one common mission — supply chain visibility, security, and viability. The goal is to understand what you have, what you need, and how you move the stock at your disposal. As an example, sales and operations planning in healthcare can help you understand what pharmaceuticals you have in stock, which ones you need, and how any black swan events (like recalls) impact your overall supply chain architecture.
This is typically accomplished in monthly meetings. The S&OP leaders will analyze supply, demand, and financials to make critical decisions regarding stock, inventory, manufacturing, and purchases. A common misconception is that S&OP is primarily strategic. It’s not. In fact, S&OP is technology-centric, and the value of your S&OP strategy is only as good as the data and forecasting capabilities you possess.
The benefits of sales and operations planning in healthcare include:
It’s important to understand that S&OP isn’t universal. There’s no standardized framework for deploying S&OP in your healthcare facility. Your strategies and functionality hinge on your technology vendor. Remember, sales and operations planning are primarily tech-fueled, and technology will be the lever that unlocks collaboration. It’s helpful to create a sales and operations planning committee — who are responsible for reviewing forecasts and making key decisions in the S&OP process. However, strategies are underpinned by your forecasting capabilities, and efficient tech use can preempt many strategic needs.
Effective S&OP planning requires forecasting and data. You need to understand the scope of your supply chain, inventory needs, and overall inventory health. We can help. At StockIQ, we provide world-class supply chain management technology that can help you create hierarchical forecasts and drill-down deep into group and category-level inventory supplies. Contact us to learn how StockIQ can transform your medical supply chain.