Controlling Costs in the Healthcare Supply Chain

Tags: 3PL, Inventory Management, Supply Chain Management, Health Care Logistics

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Increasing regulation, supply chain inefficiency, and product security concerns plague healthcare companies already crippled by rising costs. Treating the ailments with high-tech tools and optimized logistics provides relief.

Healthcare costs are rising at an alarming rate. Projections show healthcare spending in the United States will reach $4.8 trillion by 2021, according to the Centers for Medicare and Medicaid Services. For healthcare businesses, improving logistics management plays a growing role in controlling costs.

"Seven or eight years ago, controlling supply chain costs in healthcare was not critical," says Clive Lester, European business development specialist for healthcare at Tokyo-based third-party logistics (3PL) provider Yusen Logistics.

"But over the past few years—during which research and development costs, for example, have quadrupled—healthcare businesses have started seeking areas where they can save money," he continues. "One such area is the supply chain."

Healthcare companies have traditionally had healthy margins, but the industry's changing landscape puts margins at risk. "As a result, healthcare businesses have to better manage their operations," says Kyra Sweda, director of business development for Ryder Integrated Logistics, a division of Miami-based 3PL Ryder System Inc. "The industry traditionally operates in silos, but it is imperative that healthcare companies improve visibility to make smart decisions that integrate the whole supply chain."

Increasing regulation, supply chain inefficiency, and product security concerns also plague the industry. Here's a look at how healthcare companies and their supply chain partners are working together to treat the problem.

An Uncertain Regulatory Environment

Regulatory compliance ranks as the top supply chain concern among healthcare companies, according to the 2013 Pain in the (Supply) Chain survey conducted by Atlanta-based logistics provider UPS. Sixty-three percent of global healthcare executives—leaders in the pharma, biotech, and medical device industries—surveyed cite regulatory compliance as their top challenge.

"We know regulations and compliance will continue to change," says Sweda. "What we don't know is how healthcare companies will deal with the change—and how it will ultimately affect their supply chains."

Numerous industry factors—including heightened concerns over security and patient safety, enhanced cross-border controls, and an increase in temperature-sensitive products entering the marketplace—are driving a growing focus on regulations.

"For many companies in the healthcare sector, the primary challenge is to comply with a myriad of trade, security, safety, and environmental regulations," says Angie Alleva, director of trade compliance services for Philadelphia-based global logistics provider BDP International Inc. "They are struggling to obtain in-house expertise to help them comply with an ever-changing regulatory environment."

Some companies are choosing instead to outsource compliance. Freight management companies, for example, can act as compliance partners in helping importers better understand and follow regulations.

One factor that may help ease regulatory compliance pressures is an increasing push by both U.S. Customs and Border Protection (CBP) and the U.S. Food and Drug Administration (FDA) to computerize and streamline operations. For example, in August 2013, the FDA conducted a Centralized Entry Review pilot in an effort to improve efficiency and review of entries. As part of the test, the FDA required all import entry documents to be submitted electronically.

Similarly, over the past few years, CBP has undertaken several trade transformation efforts designed to update customs procedures to align with modern business practices and improve efficiencies for the trade community.

"CBP is working on a more consistent approach to help improve compliance and security at the same time," says Alleva. "These programs will help expedite supplies through the supply chain.

"The FDA has also improved its technology significantly," she continues. "This is critical for the healthcare industry because it is all about the data. Early and comprehensive information is powerful, and keeps the supply chain flowing to meet increasingly stringent regulations."

Treating Inefficient Supply Chains

Another contributor to increasing healthcare industry costs is inefficient delivery systems and processes.

"A significant cost driver is the universal complexity of the healthcare supply chain," notes The State of Healthcare Logistics Cost and Quality Improvement Opportunities, a survey of more than 1,000 healthcare supply chain professionals, conducted by the Center for Innovation in Healthcare Logistics at the University of Arkansas in Fayetteville.

"Healthcare logistics is an area in which costs can be reduced and efficiencies gained in order to provide healthcare delivery at a reasonable cost," the report states.

Healthcare providers, distributors, and manufacturers struggle with a large error rate related to medical devices procurement processes. While other industries have implemented product scanning, electronic ordering, order accuracy controls, and other key processes to improve supply chain efficiencies, the healthcare industry lags behind.

While other industries have implemented product scanning, electronic ordering, order accuracy controls, and other key processes to improve supply chain efficiencies, the healthcare industry lags behind.

The sector is still burdened by manual processes and a significant amount of re-work. Such inefficiencies can result in ordering errors, lack of product on hand to treat patients, clinicians receiving incorrect product, and expired inventory.

"Healthcare supply chains can be unsophisticated," says Volker Shultz, senior vice president of healthcare logistics at GENCO, a Pittsburgh-based 3PL. "Often, if practitioners run out of a certain product, their only recourse is to call the supplier directly and place a rush order. If lack of that product caused a disruption in service, then they often start stockpiling to ensure they don't run out again."

Another challenge revolves around disparate proprietary data for medical devices and location information. Continuously translating data and performing manual processes can cause errors, and prevent companies from achieving efficiency.

Lack of data standardization was the most common obstacle to achieving supply chain excellence, according to The State of Healthcare Logistics Cost and Quality Improvement Opportunities. "Regardless of their organization, healthcare providers are using almost one-third of their annual operating funds to support the supply chain," the report notes. "Within group purchasing, distribution, and provider organizations, healthcare supply costs are incurred primarily to support inventory and order management."

A Global Data Standard

Recently, Becton, Dickinson and Company—a Franklin Lakes, N.J.-based medical technology company—and healthcare supply chain company Resource Optimization & Innovation (ROi) collaborated on the first known instance in the United States of GS1 standards, including bar codes, being integrated across the medical device supply chain.

GS1—an international organization that develops and maintains standards for supply and demand chains across multiple sectors—introduced Global Location Numbers (GLN) and Global Trade Item Numbers (GTIN) for the healthcare industry in 2010. The goal of the initiative is to accelerate industry-wide adoption and implementation of one common global data standard to improve patient safety and supply chain efficiency.

GTIN is used to unambiguously identify products, and communicate product data throughout the supply chain, into the clinical setting, and beyond, while GLN is a consistent standard to identify delivery locations and replace custom account numbers. GS1 data standards also enable healthcare providers to track products when treating patients, which can help reduce medical errors while improving patient care.

End-to-End Improvements

ROi and Becton Dickinson viewed GS1 Standards as a tool that could be leveraged to improve the existing state of the healthcare supply chain, from order placement to delivery and payment, without human intervention. In this instance, the standards were implemented in the clinical care setting, from manufacturing plant to patient bedside.

"This collaboration provides a snapshot of how data standards can serve as a common platform for organizations throughout the healthcare supply chain to raise efficiency, drive unnecessary expenses out of the system, and play an important technology role in patient care initiatives," explains Curtis Dudley, vice president of integrated business solutions for ROi.

As a result of the collaboration, Becton Dickinson/ROi achieved a 30-percent reduction in days payable outstanding, a 73-percent reduction in purchase order discrepancies, improved product sourcing and replenishment, and fewer stockouts.

"Using the system, healthcare providers are now making four or five handoffs without losing track of the data," says Shultz. "It's allowing the hospital to better manage inventory, and Becton Dickinson to streamline its supply relationship with the hospital."

Home-Based Healthcare

Another trend in the healthcare industry is delivering medical services via technology. New tools make it possible to care for more patients in their homes. Rather than making regular visits to a doctor's office to manage a chronic disease, for example, patients can use portable, technology-based devices to check their vital signs at home. Doctors can remotely and continuously monitor blood pressure, glucose levels, and brain waves.

Over the next few years, these tools are expected to dramatically reduce both the number of hospital visits and their duration. This may mean significant growth for companies such as Lake Forest, Calif.-based Apria Healthcare, a home healthcare products provider that already serves 2.4 million patients annually.

Recently, Apria was struggling with challenges related to decreased Medicare reimbursements and increasing competition. "Apria was gaining market share, but winning by smaller margins," says Sweda. "It needed to do something to ensure its survival. It also needed to prepare for the home health industry's growth potential."

In October 2012, Apria contracted with Ryder Supply Chain Solutions to redesign its supply chain. Ryder's national engineering team began its redesign efforts by analyzing Apria's inbound supplier-to-DC channel to identify cost-savings opportunities. Apria's U.S. distribution network for respiratory therapy and home medical equipment products includes seven distribution centers, a Bio-Med center, and more than 420 branch operations locations within a 50- to 60-mile customer delivery radius.

Too Much of a Good Thing

Suppliers made hundreds of annual direct shipments to Apria DCs. But they were shipping too often to every DC, and less than five percent of shipments were moving on truckload pricing. They were also using expedited freight unnecessarily, and a large week-to-week variance existed in order/delivery volumes. Dedicated routes were running 50 percent empty in backhaul lanes—and many ran near Apria suppliers.

Using its transportation modeling software, Ryder's engineering group and Apria collaborated to reengineer the network. They identified inbound routing and delivery optimization opportunities, and chances to provide supplier backhauls.

Better By the Truckload

As the program with Ryder, Apria, and its suppliers gained momentum, the team identified significant cost savings and implemented operational improvements. Seventy-five percent of inbound supplier shipments are now consolidated on full truckloads. Supplier shipment frequency has been reduced to one to two times per week to each Apria DC.

The use of expedited freight has been greatly reduced, and the standard shipment method is regular truckload and less-than-truckload. The team further optimized the network by filling Ryder's dedicated operation's backhaul lanes with inbound shipments from suppliers to Apria DCs.

The effort "allows us to collaborate with key suppliers to develop a freight network solution that is a game-changer for the home healthcare industry," says Jim Chung, vice president of supply chain at Apria.

Through its supply chain redesign efforts, Apria is expected to realize significant dedicated transportation cost savings via engineering optimization, improved backhaul utilization, and fuel savings.

Security presents another significant challenge for healthcare logistics leaders, particularly those operating on a global scale. Product security surpassed cost management as the second supply chain concern in 2013, according to UPS' survey, with 53 percent of executives citing it as a top issue. The leading security concern was increasing counterfeit sophistication (48 percent), followed by poor supply chain visibility (40 percent).

An additional challenge is the increasing number of healthcare products developed and consumed in emerging markets, which can be difficult to navigate. Companies such as Transwide, a Brussels-based logistics technology provider, are helping healthcare companies navigate these new frontiers.

Other industries have been feeling cost pressure for years. With healthcare projected to grow from 18 to 26 percent of GDP in the next 20 years, the industry is now in the spotlight.

For example, Paul Hartmann Group, a supplier of disposable medical devices, is working with Transwide to optimize its inbound factory, supplier, and dealer deliveries in Europe and around the world.

Transwide's Software-as-a-Service transportation management system (TMS) ensures supply chain security, monitors supplier reliability, and tracks inter-company deliveries. It has also enabled Paul Hartmann Group to dispose of non-value-add administrative tasks, and provides the company a comprehensive overview of its daily traffic.

"With an annual transport budget of around $31.3 million, we are always looking for options to improve supply chain productivity," says Fabrice Mast, Paul Hartmann France's logistics project manager. "We are currently focusing on inbound distribution, then we'll turn to improving delivery operations."

In another emerging market, Yusen Logistics and Imperial Health Sciences are launching the first temperature-controlled sea freight consolidation service from Antwerp to southern Africa dedicated to the pharmaceutical industry.

"As we move to a more global market, temperature control and quality are crucial," says Lester. "Moving products great distances while maintaining temperature control and quality is critical."

Most pharmaceutical supplies transported to Africa move via air freight. The new service will maximize the cost-effectiveness of ocean versus air freight, providing a transparent and comprehensive solution for stock replenishment.

Diagnosis: Modal Shift

"Switching from air to sea can generate cost savings of 70 to 80 percent, and provide improved temperature control," says Lester. "Moving supplies by sea provides container visibility from door to door. Lead times may seem longer, but because air freight requires certain procedures and releases, some of that time balances out."

Globally, Yusen also utilizes centralized Control Towers dedicated to the healthcare sector. The towers manage all shipping orders, operations, and administration, for any global origin or destination location. Rather than individual plants organizing their own freight movement to in-market DCs, the Control Tower manages weekly shipments. The result is a pull, rather than push, approach to inventory.

The healthcare industry still has work to do to enhance logistics and supply chain processes. Fortunately, the sector is finally beginning to look for new opportunities to reduce costs and improve operations.

In the Spotlight

"The healthcare industry is not as mature in terms of supply chain and logistics as other industries, such as automotive, that have been feeling cost pressure for years," says Shultz. "But with healthcare projected to grow from 18 percent of GDP to 26 percent in the next 20 years, the spotlight is on."

These pressures are likely to cause healthcare companies to shift supply chain strategy to meet evolving customer needs. That, in turn, could mean they rely more on third-party logistics partners.

"Healthcare organizations are looking to the future and trying to identify what their needs will be five to 10 years from now," says Norman Brouillette, group director for Ryder System Inc. "More groups are working together, and looking for 3PLs that can bring to bear lessons learned in other industries where markets have always been tight and cost-conscious.

"Healthcare companies are looking at long-term solutions, and lowering costs because they know costs will continue to rise, and they want to get ahead of that trend," he adds.

For many healthcare companies, the focus is on making the supply chain leaner, while improving visibility.

"Better visibility upstream and downstream in healthcare supply chains is imperative," explains Alleva. "Enabling that visibility allows healthcare companies to gather quality information about their shipping processes. They can monitor in-house performance, as well as keep tabs on their partners, and every supply chain node."

While healthcare companies work to ensure medical professionals have the right tools so they can spend more time with patients—and less time trying to locate the equipment and supplies they need—they are also looking for every possible way to cut costs.

Smarter procurement and logistics processes and practices will go a long way toward easing those pains.