How to add agility and customer focus to the healthcare supply chain

Martin Christopher, Emeritus Professor of Marketing and Logistics, Cranfield University, UK.

Introduction The global pharmaceutical and healthcare industry has experienced a number of severe shocks to the system in recent decades. What was once a sector where profits flowed from ‘blockbuster’ drugs and a customer base willing to pay premium prices has transformed into a quite different world as a consequence of competition from generics along with reduced budgets available to healthcare providers. Compounding these problems are increasing regulatory constraints and more challenging logistics requirements as bio-pharmaceuticals and related products increase the need for stricter control of temperature and shelf-life as they move through the supply chain.

As a result there is now a significantly greater focus across the sector on supply chain management. Previously, when margins were higher and logistics costs were a relatively small proportion of total costs, supply chain issues tended to take a back seat. Now things have changed. Recent research by UPS® has highlighted that many companies are finding it difficult to develop supply chain capabilities that can simultaneously take out costs whilst ensuring regulatory compliance, track and trace, product security and stricter temperature and shelf-life control.

Because of these pressures, a new approach to the design and management of supply/demand networks in the industry becomes imperative. In today’s marketplace, there is a need for supply chains that are cost-effective, efficient and agile.

Companies operating in every industrial sector and in every market around the world have been confronted in recent years with significant challenges. These challenges have come from numerous sources – economic recession, demographic changes, geo-political upheavals to name but a few. The healthcare and pharmaceutical industry has been no exception and has been impacted by major changes in the competitive and market environment.

Amongst these business transformations some of the most critical have been:

Shift from a sellers’ market to a buyers’ market

Commoditisation of markets and the growth of generics

Increasing supply chain complexity

In common with many other industries, pharma has been impacted by the growing power of its customer base. For example, the increasing consolidation amongst retail pharmacies has led to greater demands for high levels of service and responsiveness. Likewise, hospitals and government agencies have used their buying power to demand lower prices and have used regulation to specify which drugs may or may not be made available through public health services.

With the expiration of patents on what were once ‘blockbuster’ drugs sold at higher prices, the rise of lower cost generic manufacturers has been dramatic. In 2015 it was estimated that drugs worth about US $4 billion in revenue were subject to generic competition – representing about 40% of the pharma market globally, up from 27% in 20101. The effect of this new source of competition on established players in the industry has been significant, leading to large parts of the market becoming ‘commoditised’ and subject to increasing pressure on price.

Complexity in the pharma supply chain has many sources. The manufacturing process by its very nature often involves long lead times and uncertain yields. The growing range of products and the number of variants within a product family mean that total stock-keeping units (SKUs) continue to rise in many companies. In addition, the need to service multiple geographic markets and to provide local customised solutions for specific customers as well as meeting local regulatory requirements add to supply chain complexity. These pressures have significantly impacted the cost profile of pharma supply chains.

1 IMS Institute for Healthcare Informatics report. Counted in ‘Five steps towards a revitalized pharmaceutical supply chain’ strategy + business Issue 66, Spring 2013

Turbulence, Volatility and Uncertainty

Most supply chains today were designed some years ago when the world was a different place. There is evidence2 to suggest that up until about the year 2000 most businesses had experienced several decades of relative stability in the competitive environment. The assumption was that the future would be much like the past and hence decisions could be taken on the design of supply chains with a degree of confidence that they would still be fit for purpose for many years to come.

Previously, when designing supply/demand networks, the focus was on cost optimisation, i.e. the objective being to design a supply chain solution that would minimise operating costs whilst meeting pre-specified levels of service. The emphasis was primarily on efficiency and working to plans which had horizons stretching some way into the future. Because of the relatively stable conditions that prevailed across the supply chain this ‘forecast-driven’ business model was entirely appropriate.

2 Christopher, M. and Holweg, M. (2011), “Supply Chain 2.0: Managing supply chains in an era of turbulence” International Journal of Physical Distribution and Logistics Management Vol. 40, No. 1, pp 63-82

Many companies in healthcare and pharma are currently struggling with how to devise a supply chain strategy that can deliver more value whilst still containing costs. The answer lies in a fundamental re-think of the architecture of the supply chain itself.

Hence, rather than the vertical integration of the past, the company is part of a network of specialist – but independent – suppliers utilising multiple channels to go to market. These networks are connected by shared information which itself is captured in as close to real-time as possible. This information comprises demand signals from the marketplace as well as the current status of supply conditions across the network. The aim now is to achieve the ‘economies of scope’, i.e. to be able to meet the precise needs of different customers but with the same resources – a strategy made possible often by postponement of the final manufacture or packaging of the product.

Customer-driven supply chainsWhen there is so much emphasis on cost reduction across the supply chain it is easy to forget that success in the market place is largely determined by the value that a product delivers. Customer value comes in many forms and the supply chain might be thought of as a value delivery system. The specific ways in which the supply chain delivers value is through availability, responsiveness and the provision of tailored solutions.

As we have already observed, most traditional supply chains were

designed to optimise the internal operations of the supplying company. Thus a manufacturer might be motivated to establish supply and distribution arrangements that would enable production efficiencies to be maximised. Typically this would entail manufacturing in large batches, shipping in large quantities and buffering the factory – both upstream and downstream – with inventory.

Whilst this approach was fine from the perspective of the manufacturing organisation, it clearly did not come anywhere close to being ‘customer centric’, instead of designing supply chains from the ‘factory outwards’ the challenge is to design them from the ‘customer backwards’.

To meet this challenge healthcare businesses need to focus their efforts upon achieving greater agility so that they can respond more rapidly both in terms of volume change and variety change. In other words, they need to be able to adjust output quickly to match market demand and to switch rapidly from one variant to another. To a truly agile business, volatility of demand is not a problem; its processes and organisational structure as well as its supply chain relationships enable it to cope with whatever demands are placed upon it.

Demand driven

Yesterday’s modelVertical integration

Inventory basedEconomies of scale

Tomorrow’s modelVirtual networks

Information basedEconomies of scope

Forecast driven

Mass production

Mass customisation

However, as we entered the 21st century conditions began to change. Volatility and turbulence are now the backdrop against which business decisions have to be made. One of the main impacts of these changes has been the increase in uncertainty making it more difficult to plan ahead using conventional forecasts. If, as some have suggested, these conditions of constant and unpredictable change are to become the ‘new normal’ then supply chain management will have to change accordingly.

Rather than the forecast-driven model that has typified supply chain management for so long, a new model that is ‘demand-driven’ and responsive to change will have to be developed.

Figure 1 below highlights the challenge facing companies as they move from a world where mass-production and forward planning were the fundamental principles to a world where market responsiveness and flexibility become the drivers.

Thus the traditional supply chain model – the lower left hand quadrant in figure 1 – was based

around vertical integration - upstream and/or downstream - with a high degree of control. It was based on building inventory ahead of demand and a production ‘push’ philosophy. Ultimately, the main objective of the supply chain strategy under this model was to achieve economies of scale.

Now as we enter the era of change and uncertainty, a much more flexible and responsive capability is required. This is the world depicted in the top right hand quadrant of Figure 1.

Figure 1: Supply chain transformation

The foundations of agility 3 It will be apparent that agility is not a single company concept but rather it extends from one end of the supply chain to the other. The concept of agility has significant implications for how healthcare organizations and their suppliers relate to each other and how they can best work together on the basis of shared information.

To bring these ideas together, a number of basic principles can be identified as the starting point for the creation of the agile supply chain.

Synchronize activities through shared information

Synchronisation implies that all parties in the supply chain are ‘marching to the same drumbeat’. In other words, through shared information and process alignment there is in effect one set of numbers and a single schedule for the entire supply chain. This somewhat utopian vision is increasingly becoming reality as web-based technology and cloud computing enables different entities in a network to share information on real demand, inventory and capacity in a collaborative context.

Global logistics providers, such as UPS, maintain sophisticated inventory management systems for their contract logistics operations that can be fully integrated with their customers’ Enterprise Resource Planning (ERS) software to ensure that the title holder has full visibility on stock levels, and logistics provider full visibility on incoming deliveries.

By improving the visibility of downstream demand, healthcare companies can move towards the goal of continuous replenishment whereby as products are consumed they are automatically replaced thus dramatically reducing the need for safety stocks. This principle of ‘substituting information for inventory’ holds good for any industry but has a particular resonance for the healthcare sector where the cost of holding inventory can be high.

Work smarter not harder

Many processes in the supply chain are lengthy because the constituent activities are performed in ‘series’, i.e. in a linear, ‘one after the other’ way. It is often possible to reduce lead times by conducting a supply chain mapping exercise and re-engineer processes where activities are performed ‘in parallel’, i.e. simultaneously.

For pharmaceutical companies, it is essential to map the current supply

chain from end-to-end, not simply the transportation of goods, but the flow of materials and data within the organisation, both upstream from its suppliers and downstream to its customers, all the way to care providers and their patients. Almost without exception, this exercise uncovers logistics processes that are based on the organisation’s history rather than its current reality or its strategic vision.

1

2Many opportunities exist in the healthcare sector to establish procedures for information sharing so that a greater level of synchronisation across the supply chain can be achieved.

3 This section draws on material from the author’s book Logistics and Supply Chain Management (5th Edition) Pearson, 2016

Seek to reduce complexity

Complexity comes in many guises in supply chains. Complexity may be generated by multiple variants of the same product, e.g. different pack sizes, or by each product in a family having greatly different Bills of Material, or by frequent product changes, and so on. Complexity can also be generated through cumbersome processes that involve many different stages and hand-offs. Simplification is an obvious remedy for complexity but one which may not always be available. However, there will often be opportunities to reduce complexity by questioning the reasons why things are the way they are.

For example, is the level of product variety greater than the customer actually requires? Often product proliferation is driven by sales or marketing departments and may not actually achieve additional sales but spread the same total demand over a

Postpone the final configuration/assembly/distribution of products

The philosophy of postponement ideally would begin on the drawing board so that products are designed with late configuration in mind. The longer that products can remain as generic ‘work in progress’, the more flexibility there will be to ensure the ‘right product in the right place at the right time’.

Postponement may not always be feasible in terms of late configuration but there may be scope for spatial postponement through holding inventory in just a few locations with the ability to ship the product rapidly to the location required when an order is received. In the pharmaceutical industry many companies have started to explore the opportunities for delaying the final packaging of the product until it is known which country the product will be shipped to. The idea here is that products are produced with a standardised primary packaging at global packaging sites and shipped to regional distribution centres exploiting economies of scale. And only after receiving a specific customer order, will the product be customised with a designated secondary packaging containing relevant country information.

45

Partner with suppliers to reduce in-bound lead times

Conventionally, firms have maintained an arm’s-length relationship with suppliers. Suppliers have often been chosen on the basis of price rather than their responsiveness. A major opportunity exists for reducing in-bound lead times through working closely with key suppliers. Because in the past there was often a view that suppliers should be held at ‘arms length’, many opportunities for improving responsiveness have been missed. Since supplier agility is one of the main requirements in the creation of a more responsive supply chain, it is perhaps surprising that some businesses even now have few collaborative programmes with suppliers in place.

Often suppliers may well be able to transfer knowledge and best practice from their operations to their customers – and vice versa. In either case, the opportunities to reduce in-bound lead times by closer partnership across the supply chain are considerable.

3greater number of stock keeping units (SKUs). The greater the fragmentation of demand, the harder it becomes to manage availability in that the variability of demand at the individual item level will tend to be higher.

Simplification can sometimes be achieved through seeking greater commonality of raw materials, components or sub-assembly across a family of products. For example, in automobile design these days it is increasingly the case that several different models of car are built on the same platform and ‘under the skin’ share common components and sub-assemblies. Similar opportunities should be available in the medical device industry but may require product design changes to make it possible.

The point about complexity is that it provides a barrier to agility as well as generating cost.

Manage processes not just functions

For centuries organisations have followed an organisational logic based upon the ‘division of labour’ whereby activities take place within functions or departments. Whilst this functionally-based organisational concept may ensure the efficient use of resources it is actually inwardly focused and tends to lead to a ‘silo’ type mentality. It also seems to be the case that these functionally-based organizations are slow to respond to changes in the market or business environment. Because there are often multiple ‘hand-offs’ as things get passed from one function to another, there is an inevitable lengthening in the time to respond. Companies that are able to respond rapidly to changing customer requirements tend to focus more upon managing ‘processes’. Processes are the horizontal, market-facing sequences of activities that create value for customers. They are cross-functional by definition and are usually best managed through the means of inter-disciplinary teams. The critical business processes that cut across the organisation would include innovation, customer relationship management and supplier relationship management.

Healthcare companies, often because of long development lead-times and burdensome regulatory regimes, are accustomed to lengthy end-to-end supply chains and may not have considered how they could increase the ‘clockspeed’ of their processes. Even with the constraints specific to the sector, significant improvements to critical supply chain processes, such as procure-to-pay and order-to-cash, could be achieved by borrowing ideas on time compression from other industries such as automotive and consumer electronics.

Utilize appropriate performance metrics

It is a truism that performance measurement shapes behaviour. This is particularly the case in business organisations where formal measurement systems drive the business. In functionally-based organisations these measurements often are based upon departmental budgets and are underpinned by objectives such as cost minimisation, asset utilisation and efficiency and productivity improvement. Whilst on the face of it these objectives may appear to be desirable, they will not necessarily encourage agile practices within the organisation. If, for example, a manufacturing facility is measured on, say, unit cost of production, then the incentive will be to go for big batch sizes to take advantage of economies of scale. However, such actions will probably lead to a loss of flexibility and the creation of additional inventory. If, on the other hand, time-based metrics were to be employed, then the focus could be on cycle-time reduction, set-up time reduction and other measures that encourage agile practices.

A fundamental tenet of agility is customer responsiveness, hence the need to ensure that the primary measures of business performance reflect this imperative. ‘Time to market’ and ‘time to volume’ are powerful metrics employed by companies where short life cycles dictate a focus on rapid response to fast-changing markets and volatile customer demand. This is particularly true for the healthcare industry where the pressures from the marketplace are making ‘time-based competition’ a critical differentiator. Unfortunately, many companies, whilst they may recognise the need for higher levels of agility, still retain the traditional, inwardly-focused and efficiency-based metrics. Any business that is serious about becoming a demand-driven organisation needs to ensure that the performance measures it employs are encouraging the right behaviour.

6 7

A routemap to responsivenessAs we observed earlier, conventional supply chains are typically designed from the factory outwards. In other words, they tend to be structured to enable the company’s internal efficiencies to be optimised. So, for example, in a manufacturing environment the objective has often been to achieve low-cost production with high levels of capacity utilisation with the consequent need to warehouse products which are manufactured in economic batch sizes.

By contrast, a customer-driven supply chain recognises the primacy of the needs of the customer. Rather than the ‘one size fits all’ philosophy of the conventional supply chain, the implication of adopting a customer-driven approach is that there will be a high level of tailoring and customisation of the service offer to respond quickly to market changes and meet customer demands.

The responsive business will have agile suppliers and will work very closely with them to align processes

across the extended enterprise. It will also be very close to its customers, capturing information on real demand and sharing that information with its partners across the network. Internally the business will also be focused on agility through the way it organises – breaking through functional silos to create process teams. In terms of its manufacturing and sourcing strategy, the responsive business will seek to marry the lean and agile paradigm through de-coupling its upstream and downstream processes, utilising the principles of postponement wherever possible. Figure 2 summarizes the key elements.

Those companies that can follow this routemap will be more likely to be the leaders in their field. More often than not, when we look at the successful companies in any market, they tend to be the ones that have demonstrated their ability to respond more rapidly to the changing needs of their customers.

Whatever the supply chain solution that is adopted, ultimately its ‘architecture’ must be market driven.

GenericInventory

Capacitymanagement

Set-up timereduction

Visibility of real

demandQuick

response

Demand driven

The responsive

business

Design for late

con�gurationVendor

managedinventory

Sychronizedproduction

Processmanagement

Cross-functional

teams

Postponementstrategies Agile

suppliers

OrganisationalagilityFlexible

response

Figure 2. Routemap to the responsive business

ConclusionAs is the case for many industries, the ‘centre of gravity’ of the pharmaceutical and healthcare supply chain is shifting. With the growth of emerging markets new challenges emerge as existing supply chain solutions will probably no longer be adequate. The likelihood is that more ‘local-for-local’ manufacturing and logistics strategies will be applied rather than seeking to serve these markets through existing western-centric supply chains.

If this is the case, companies in the sector may struggle with issues such as the protection of intellectual property, product security, counterfeiting and compliance with different regulatory environments as they seek to develop their presence in these markets.

Partnerships with logistics service providers who have developed specific knowledge and capabilities in the sector and with the experience of operating in different geographies may provide a way forward. Again, the need for sophisticated tracking tools to monitor products as they move through complex supply networks also makes the idea of partnerships with specialist logistics service providers an attractive proposition.

One thing is clear and that is that yesterday’s solutions will not work in tomorrow’s world. The turbulent economic conditions and the heightened uncertainty that have characterized the recent past are likely to prevail for some time. As a consequence healthcare companies must be prepared to re-engineer their supply chains to build in greater levels of flexibility and adaptability. Typically, many current supply chain arrangements are not able to be reconfigured rapidly if conditions change. Rather than seeking to optimise supply/demand networks in terms of cost – as has usually been the case in the past – smart companies are optimising their networks with flexibility and responsiveness in mind. Over one hundred and fifty years ago Charles Darwin provided us with an insight which should be the guiding principle underpinning the development of future supply chain strategy:

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change”

Supply chain transformation: How UPS can help…

Historically, the design of pharmaceutical supply chains was determined primarily

by the achievement of high delivery reliability as well as high delivery readiness.

Companies have achieved these objectives by keeping a large inventory of

finished goods close to the customer in addition to executing reliable

production and logistic processes.

However, looking at the healthcare industry’s growth trajectory, companies are

advised to constantly re-evaluate their supply structures and put in place the

right resources, technologies and processes to meet supply chain demands.

A number of leading global healthcare corporations have found that the most

effective, timely and efficient means of success is to work with a global logistics

integrator that can provide turnkey, scalable solutions for end-to-end supply chain

management, from upstream supplier to ultimate customer.

UPS provides solutions for many of the elements outlined in Professor

Christopher’s ‘Routemap to a responsive business’ - from postponement services,

to demand visibility and process improvement. We work collaboratively with

our customers to understand their business and help them redesign and optimise

their supply chain using a tried and tested approach. We consider key criteria that

includes sourcing, manufacturing, distribution, delivery, fulfilment and returns—

analysing the entire network. We look at service levels, distances, operating

costs, inventory levels etc. to develop a “what if” planning exercise on which

logistics decisions can be based. We manage thousands of sensitive healthcare

shipments every day and have helped numerous clients across the life science

industry perform better and realize greater efficiencies.

If you are facing a logistics problem or want to rebuild your supply chain to be

agile and more responsive to customers’ needs, I invite you to contact UPS.

We are here to help.

Jan DeneckerDirector Healthcare Marketing and StrategyUPS Europe Visit solvers.ups.com/gb/healthcare

About the authorMartin Christopher has been at the forefront of the development of new thinking in logistics and supply chain management for over thirty years. His contribution to the theory and practice of logistics and supply chain management is reflected in the many international awards that he has received. His published work is widely cited by other scholars and he has been invited to participate in academic and industry events around the world. www.martin-christopher.info

UPS Europe SPRL/BVBASiège social/Statutaire zetel: Avenue Arianelaan 5, B- 1200 Bruxelles/Brussel, Belgique/België - RPM/RPR (Bruxelles) 0458.890.865 -T.V.A./B.T.W. BE 0458-890-865 - Commerzbank DE59300400000753991900 – BIC: COBADEFF300

© 2016 United Parcel Service of America, Inc. UPS, the UPS brandmark and the color/colour brown are trademarks of United Parcel Service of America, Inc. All rights reserved.

Learn more about our healthcare capabilities by visitingwww.ups.com/healthcarelogistics

HCSS01 02/16