Supply Chain Reacts To Health Care Cost Pressures With Innovative Partnerships

By Dave Bode, VP, Health Care Solutions – DSC Logistics

Innovation defines a wide range of initiatives that supply chain leaders in life science companies are pursuing to best help their organizations meet the fundamental changes occurring in the industry….heightened regulatory enforcement, outcomes-based reimbursement, consumer vs. provider centric care, increased access to care, and new taxes.  The magnitude of these changes was made perfectly clear at a Health Care conference hosted by Gartner in November 2012.  The keynote speaker, Don Cassey, CEO, Medical Segment, Cardinal Health, declared that the health care industry must reduce its cost by 30% in order to remain sustainable.  To put this in perspective, this means that the US health care system would need to shed $5Trillion in operating cost.  The need and value of step change innovation in the health care industry will never be higher.

The supply chain, like every other function, must bear its share of cost cutting and belt tightening to meet this challenge. But, the number of low hanging cost reduction opportunities is shrinking every year. Part of this is because the focus of these opportunities has traditionally been on a)immediate expense and asset reduction, and b) activities “inside the four walls” of a warehouse.  Cost reduction through belt tightening isn’t the answer to the industry challenge and life science supply chain leaders know this. The typical buyer/seller procurement dance that shippers and logistics providers do is still efficient, but yields diminishing returns, especially for the companies that already outsource their supply chains to 3PLs.  More importantly, the extreme pressure on price is causing shippers to seriously consider awarding large contracts to 3PLs who offer major price concessions, even though these 3PLs have little to no experience with their business.  This puts the supply chain at risk.

To be sure, the operational value of 3PLs to their life science customers is well established. For the life science companies that use them, 3PLs do the heavy supply chain lifting, from warehousing to transportation to freight forwarding to customs brokerage.  But the increasing complexity of life science businesses is changing what shippers value today in a 3PL relationship, leading them to ask their suppliers, What have you done for me lately? They are requesting their service providers/suppliers – even their preferred suppliers -  to bring more innovation to the relationship on both a daily and strategic basis.  They need them to be more proactive, creative and solution focused. They need them to read the health care landscape and make recommendations that support their evolving business strategies. They need their suppliers to become leaders in helping deliver solutions that are proportional to the challenges they face.

Today, the tools of innovation have expanded - from price, process improvement and assets - to include more knowledge-based and change management solutions that put a premium on information, agility, responsiveness, visibility, collaboration, transparency, trust and leadership.  These are the tools needed to align and optimize the supply chain to the unique business strategies put in place to position the company for the future.  Not surprisingly, when presented with the opportunity to become a more strategic partner, most service providers embrace the idea, and feel that they are poised to step into the role immediately.  Unfortunately, life science shippers don’t view it the same way. According to the 2013 Third Party Logistics Study, 89% of 3PLs believe they are ready to innovate, but only 52% of shippers agree. Further, the study also indicates that only 28% of shippers believe that 3PLs are a source of innovation. 

Innovation at Work

While innovation clearly means different things to different life science companies, the innovation required to enable business strategies and change management is rooted in a culture of operational excellence, accountability, collaboration and trust between shippers and their supply chain service providers, as well as between service providers.   Some real world examples of step change innovation initiated and led by Health Care Supply Chain leaders include:  

• Integrating the supply chain into product lifecycle management strategies in order to increase product portfolio profitability.
• Segmented supply chains that provide detailed visibility and insights into the cost to serve unique customer requirements, which is critical to uncovering low-profit and unprofitable customers and products
• Supply chain capabilities that enable up-selling, cross-selling and solution suite selling across multiple, non-integrated business units
• Standardization of the trading model used between all stakeholders in the pharmaceutical supply chain in order to improve product traceability and responsiveness to supply chain breaches
• Supply Chain network designs that integrate and optimize all trading partners to shorten end-to-end lead times and reduce total network cost.

A New Breed of Supply Chain Partner

There’s a new breed of supply chain partner that not only executes at the highest levels but also partners with customers as supply chain problem solvers, advisors and strategists.  They think and execute without being encumbered by traditional roles, business models, and existing infrastructure.   They bring a consultative, solutions-minded, health care-savvy and supply chain disciplined approach to making step change innovation happen with minimal risk to the business.  This is a company who will work side-by-side with a manufacturer’s supply chain, quality, operations, product management, customer service and sales leadership to understand their goals…business goals and supply chain goals… and customize a plan. 

The value of such partnerships to life science companies is compelling:

• Total transparency to supply chain expenses and decision making keeps companies in control of their customer relationships
• Agile supply chain operations enable rapid integration of new businesses which results in faster realization of acquisition benefits
• Integration of best industry practices with customer SOPs yields world class efficiency, productivity, quality and safety
• Greater visibility and insights into the customer behaviors that drive the Cost-to-Serve up and down
• Improved product portfolio profitability resulting from aligning the supply chain with the cost, service and quality goals of products in different stages of their lifecycle

Many talk-the-partnership talk really well. In fact, a recent study found that the websites of over 500 3PLs indicate expertise and/or capabilities in health care. Based on more than two decades in health care supply chain management, DSC Logistics found that specialized capabilities must be developed and perfected. Companies who want to deal with a NEW breed of strategic supply chain partner rather than  just another voice in the crowd recommends looking for the following things:

• Methodology for aligning the supply chain with customer business goals
• Tiered Relationship Governance
• Customer Collaboration Events
• Partnership process that fosters collaboration and proactive problem solving
• A commercial structure that achieves total transparency, shared risk and customer decision authority
• Advisory Boards provide health care guidance and leadership on industry direction and trends
• Access to supply chain intelligence and benchmarking data on performance metrics in health care…and willingness to share this with you
• Partnerships with leading supply chain universities - MIT, Michigan State, Northwestern, Penn State, Tennessee - on trends that shape the health care industry
• Participation on key industry Boards to influence regulations/legislation

These qualities are not developed overnight. A partner such as DSC Logistics, with more than 20 years in health care supply chain management, has invested in developing these capabilities based on understanding the changing needs of life science companies and the changing nature of the health care arena. As a new breed of supply chain partner, DSC aligns supply chain solutions with business goals and health care trends. We provide health care leadership, operations excellence, and strategic intellectual capital; and build strong collaborative relationships – all for the purpose of driving value and innovation in their customer’s supply chain.

Conclusion

As life science companies look for new ways to meet their goals and investor commitments, the advantages of outsourcing with the right supply chain partner become compelling.  A partnership where both parties hold the same high standards of service, agree to explore new ways of improving cost-efficiency and enabling growth, and strategically navigate dynamic market conditions will increasingly become a significant competitive advantage.

¹ Dr. David Simchi-Levi, Professor of Engineering Systems and OPS Rules Chairman, MIT, “Life Sciences Transforming Performance Using Operations Strategies,” Videocast SCTV Channel, October 2012

² Roddy Martin, SVP, Supply Chain, Competitive Capabilities International, “Women Leaders in Business-led Supply Chain Transformation,” SCOPE Conference – Dallas, September 2012.

DSC Logistics is one of the nation’s leading supply chain management companies with strength at both the operational and strategic levels.  The DSC nationwide network includes more than 45 Logistics Centers and a Transportation Management Center located at the corporate campus in Des Plaines, Illinois. DSC provides integrated supply chain solutions to help customers achieve their business goals, applying leadership, intellectual capital, and collaboration to meet changing needs. Among DSC’s customers are internationally known companies in a variety of industries, including the FDA-regulated industries of health care, food, and tobacco. DSC is one of the top five women-owned businesses in the Chicago area and among the 15 largest third-party logistics firms in the US.