How supply chain management can help to control health-care costs

Faced with unrelenting pressure to rein in costs, medical-device manufacturers should look to their supply chains for savings. Health-care providers face extraordinary cost pressures today, due in large part to declining reimbursements for services. As a result, they are seeking opportunities to reduce costs without diminishing the quality of patient care. Medical devices are prime targets for these cost-cutting measures, and health-care providers are asking manufacturers for significant price reductions. What can manufacturers do to meet those demands?

They can start by eliminating significant waste and inefficiencies in the medical-device supply chain. To do this, medical-device manufacturers will have to make seven key improvements in their supply chains. The first three are operational improvements, and the last four are “cultural” shifts in how manufacturers and logistics service providers think about the medical-device supply chain.

On the operational side, the supply chain needs to be more streamlined, reducing the number of touch points so that there is less product handling. Next, there needs to be more transparency, so companies can better track products as they travel from the manufacturing plant to the patient; this will require a significant investment in technology in order to see a product’s entire path through the supply chain. Third, companies will need to provide more resources for compliance to meet growing regulatory requirements. Deep expertise in health-care logistics is key to staying ahead of increasingly complex and critical regulatory changes—changes that are happening very quickly. In just the last five years, for example, our third-party logistics (3PL) business has seen a 300 percent increase in regulatory inspections of medical warehouses.

The next four adjustments relate to changing the culture of the medical-device supply chain so it will be better aligned to meet the new and growing challenges in health care. To begin with, the supply chain must be more flexible in its network design, to create new solutions that accommodate the growing shift in care from the hospital to more cost-effective locations, including patients’ homes. Next, supply chain decisions must be more insightful, making better use of technology to establish clear demand signals that optimize inventory levels. Supply chain partners should be more collaborative, working together to create more effective shared warehousing and transportation strategies. Finally, all organizations in the medical-device supply chain need to be more nimble to manage the constant change in product complexity, regulatory compliance, transportation, warehousing, and points of care.

Implementing any one of these improvements will be difficult, and combining all seven into a cohesive strategy will be extremely challenging. But it is possible, and indeed will be essential to success in the new and fast-changing world of health-care delivery.

A three-part prescription

To implement the operational improvements mentioned earlier, creating new efficiencies and cost savings, medical-device manufacturers will need to take three actions.

1. Consolidate freight across manufacturers to improve efficiency. Based on our experience, approximately 65 percent of freight in health care today is transported via less-than-truckload (LTL) services. While the remaining 35 percent is transported as full truckloads (FTL), the trucks themselves are rarely full to capacity. In our experience, trucks typically operate about three-quarters full. Manufacturers that ship in truckloads do gain some time and cost savings compared to LTL, but significantly less than would be achieved if the trucks were running at full capacity. The most effective way to run at full capacity is to combine shipments from multiple manufacturers whose products are bound for the same destinations.

In addition to greater efficiency and cost savings, consolidation offers other important benefits. Because there are fewer product touches than in a traditional LTL approach, there’s less opportunity for potential damage and claims, resulting in fewer shortages and losses. Plus, driving full trucks reduces transportation’s impact on the environment. Fewer aggregate miles are driven, requiring less fuel and lowering greenhouse gas emissions.

2. Take advantage of multitenant warehouses to further improve efficiency. Traditionally, the warehousing of medical devices has been fraught with waste and inefficiency. In essence, each manufacturer creates its own supply chain infrastructure, building warehouses that typically have excess capacity from the start. These warehouses may only be 60-70 percent full at any given time, yet 100 percent of the infrastructure cost has to be maintained.

In fact, I have seen two manufacturers located side-by-side in the same industrial park, each with half-full warehouses. I’ve also seen a manufacturer with two full warehouses situated just a few miles apart. Neither scenario has ever made sense. In today’s environment of relentless cost pressures, it’s unsustainable.

As with transportation, the answer for warehousing is consolidation—in this case, combining inventory from multiple manufacturers in the same, shared facility. Doing so eliminates redundant expenses. This is especially important when it comes to the highest-cost services in health-care logistics, such as regulatory expertise. Medical-device regulations change constantly; rather than maintain their own experts, manufacturers that store products in the same facilities can share the regulatory costs with others. The same holds true for information technology (IT), which is another critical and high-cost function that manufacturers can share when they utilize a common warehousing infrastructure.

3. Eliminate excess inventory. Inefficient transportation and warehousing both lead to a common problem in health care: too much inventory sitting on the shelves instead of taking care of patients. Stories abound of nurses who hoard supplies on the hospital floors to make sure they never run out. Now magnify that to the warehouse level, and it becomes clear just how big the excess inventory challenge really is.

No wonder low inventory turns are a chronic problem in health care. For comparison, consider inventory turn rates in industries where supply chains operate far more efficiently. In consumer electronics, for example, the average inventory turn is 44. In the automotive industry, it’s 10, and in consumer packaged goods, six. But in medical devices, the average inventory turn is just over two.

It’s no surprise that maintaining excess inventory is rampant in health care. After all, patients’ lives depend on these products, so health-care providers require high fill rates.

But there’s a better way to achieve the necessary level of inventory availability than carrying the needless costs of hoarding products. It starts by creating full visibility and tracking of products, from one end of the supply chain to the other. In order to be able to take meaningful action based on your field inventory data, it is critical to get visibility at point of use. Finally, it’s essential to build a warehousing and transportation infrastructure that can quickly act on this data, always maintaining the most efficient levels of inventory and then being ready to deliver products quickly, efficiently, safely, and cost-effectively to the point of care.

Driving success by the numbers

Building efficient supply chains can help medical-device makers save a significant amount of money in the changing world of health care. For example, by implementing best practices such as those outlined in this article, our company helped one medical-device manufacturer save more than US $2 million in transportation costs and $250,000 in regulatory costs in just 24 months. Another manufacturer achieved a total cost reduction of $550,000 over a 16-month period—with near-zero freight claims, a 5 percent decrease in transit times, and a reduction of variability within its supply chain.

For medical-device makers, achieving such dramatic cost improvements will not be easy. They will have to undertake the operational changes—becoming more streamlined, gaining more transparency, and focusing more resources on compliance—discussed earlier, as well as make the cultural improvements—becoming more flexible, more insightful, more collaborative, and more nimble—required to support those operational changes.

In the long term, it will be well worth the effort. As medical-device manufacturers come under increasing pressure from health-care providers to reduce costs, the supply chain can become a greater, more reliable source of new efficiencies and savings. Just as important: Improving health-care logistics can be a key not only to lowering costs, but also to improving the care of patients. Dollars saved today in the health-care supply chain can be redirected to research and development to improve or develop new medical devices tomorrow.