Healthcare Logistics: Under Pressure

Healthcare Logistics: Under Pressure

Healthcare leaders diagnose their biggest supply chain pains and write a prescription for the Obama administration.


It’s A Patient, Not A Package

The healthcare industry is feeling besieged on all sides, with companies slammed by the economy and worried about cost control as they attempt to drive innovation and ensure safety and security.

That’s just for starters. Healthcare decision-makers also are grappling with increasing regulations and recognize they’ve had limited success so far in actually managing supply chain costs.

Those are the findings of UPS’ second annual Pain in the Healthcare (Supply) Chain survey of supply chain decision-makers at small to mid-sized companies (SMBs) in the pharmaceutical, biotech, and medical device industries, as well as supply chain decision-makers at large healthcare companies with more than $1 billion in revenue.

According to the survey, top decision-makers at all-sized companies rank "managing costs" as their biggest supply chain concern.

Specifically, 55 percent of small company respondents are "highly concerned" with managing costs and fewer than half of those (46 percent) report success in addressing this area. Among the leaders at large companies, 81 percent are "highly concerned" about managing supply chain costs and only 41 percent report success in doing so.

Product damage, loss and spoilage, and meeting customers’ changing demands for service rank second among supply chain concerns, with 42 percent of SMBs reporting they are "highly concerned" with these issues.

Despite the economic slowdown, many companies still plan to increase supply chain spend, although to a lesser degree than before. Forty-five percent of small company respondents will increase supply chain spending by an average of 18 percent over the next 18 months. Forty-three percent of SMBs will hold steady on spending during the next 18 months, and only nine percent will cut spending.

For those planning to increase spending, 51 percent cite a greater demand for their products and services as the reason. Among large companies surveyed, 44 percent expect supply chain spending to increase, while approximately one-third expect to reduce spending over the next 18 months.


When it comes to business concerns among companies of all sizes, regulatory issues grab the spotlight. Numerous industry factors are driving this growing focus on regulations, including heightened concerns over security and patient safety, increased cross-border controls, and an increase in temperature-sensitive products entering the marketplace.

More than half (56 percent) of companies with $1-billion-plus revenues rank "increasing regulations" as their top business concern. At the same time, nearly one-third (30 percent) of SMB respondents rank increasing regulations as their top business concern.

Fifty-two percent of large companies report that keeping up with regulatory compliance laws is a challenge in serving global and emerging markets. The majority of large companies (74 percent) cite temperature-sensitive concerns as the top regulatory challenge from a supply chain standpoint.

For SMBs, the top three regulatory challenges from a supply chain perspective are: changing regulations in the United States and abroad; cost of compliance; and training employees on regulatory requirements.


The survey also reveals decision-makers’ views on the top healthcare priorities for the Obama administration.

Small to mid-sized healthcare companies believe that ensuring product safety and security (ranked first by 33 percent) and simplifying regulatory requirements (ranked first by 31 percent) should be the top two spending priorities for the administration.

Fifty-two percent of large healthcare companies rank simplifying regulatory requirements as the top spending priority for the new administration, followed by ensuring product safety and security (33 percent).

Looking toward the future, shifts in supply chain strategies to meet evolving customer needs are apparent. Large healthcare companies plan significant changes in their go-to-market strategies in 2009, while smaller companies plan far fewer changes.

Among companies with revenues of $1 billion-plus, 56 percent plan to alter their distribution models to go direct to hospitals, pharmacies or retailers; 52 percent plan to go direct to consumers (patients or physicians); 30 percent will go direct to wholesalers; and 48 percent plan to work with a third-party logistics provider in the near future.

Approximately one in four (27 percent) SMB respondents plan to change their distribution models to go direct to hospitals, pharmacies, or retailers in the near future, while 21 percent plan to go direct to wholesalers in the near future.

The healthcare industry is increasingly embracing outsourcing, especially large companies that are outsourcing as a way to drive efficiencies across the supply chain while focusing on their core business.

The largest difference between the small and large healthcare companies surveyed are in their outsourcing plans. Forty-three percent of large companies expect to increase the amount they outsource in the next two to three years. Of the two-thirds of small and mid-sized companies that do not currently outsource any supply chain functions, no more than three percent expect to outsource in the next one to two years.


It’s A Patient, Not A Package

As one of the world’s largest providers of ostomy products that patients rely on for the rest of their lives, $1.6-billion ConvaTec can attest that customer service is critical. “We don’t sell boxes to a distributor,” says Michael Steadman, president, ConvaTec USA. “We handle products that have an impact on patients’ lives.”

Skillman, N.J.-based ConvaTec serves consumers and healthcare professionals on six continents through four business divisions. In addition to the patients who use ConvaTec products, the company’s direct customers include more than 129 distribution partners that move products to market. These companies look to ConvaTec not only for its high-quality products, but also to help them with their own inventory management and cost containment planning. This requires a flexible supply chain.

The desire to increase supply chain flexibility and achieve a higher level of customer service spurred ConvaTec to re-examine its supply chain strategy.

One major supply chain challenge for ConvaTec was improving order turnaround times, which were averaging two to four days, while also reducing inventory days on hand. Because ConvaTec manufacturing sites are located in the Dominican Republic and the United Kingdom, with one U.S. location in Greensboro, N.C., many products travel long distances to reach end customers. In addition, ostomy products are considered medical devices with a Class 1 qualification in the United States; they are regulated by the Food and Drug Administration and must adhere to strict guidelines.

Faster order turnaround times were essential for enabling the company to continue providing top-quality customer care. At the same time, issues on the back end of the supply chain were costing ConvaTec valuable time and money. One area needing improvement was the collections process. ConvaTec’s Days Sales Outstanding were slightly above the industry norm, an average that certainly left room for improvement.

After examining its current distribution processes and needs, ConvaTec determined a diagnosis: it needed to outsource its supply chain to a third-party logistics provider.

ConvaTec turned over all its supply chain functions—order entry and processing, warehousing, distribution, global transportation, call center service, accounts receivable, and chargebacks—to UPS so it could focus on product development, marketing, production, and sales.

To meet ConvaTec’s goal of speeding products to market, UPS first assembled global air and ocean freight services to and from the company’s manufacturing facilities to the UPS campus in Louisville, Ky. The solution also included fulfillment, outbound small package, and UPS Freight distribution to ConvaTec’s wholesalers and retailer distribution centers. Customs brokerage services and supply chain visibility solutions ensured that products moved on time.

ConvaTec also tapped into UPS’s Order to Cash services, which enable healthcare companies to outsource front- and back-end supply chain functions such as order processing, customer service, invoicing, accounts receivables collection, and chargebacks. UPS acts as the company’s customer service center, taking telephone orders directly from ConvaTec’s distributor customers, then ensuring those orders are fulfilled. The 3PL also processes customer invoices and coordinates all retailer discount chargebacks for ConvaTec.

As part of the outsourcing relationship, UPS employees received rigorous training and education about ConvaTec’s ostomy products at the UPS Healthcare Logistics Center in Louisville. During the initial training, UPS employees were so inspired by ConvaTec’s patient care that they created a motto for UPS healthcare operations: “It’s a Patient, Not a Package.”

With the new distribution solution, ConvaTec was able to cut order turnaround time from the initial two to four days to one to one-and-a-half days. Today, the company can react immediately to order requests received before 2 p.m. EST, with UPS processing orders and shipping products that day. Orders received after 2 p.m. can still be guaranteed for next-day delivery.

The solution also allows ConvaTec to take emergency orders up to 10 p.m. for delivery anywhere in the United States the next day. ConvaTec is currently receiving about six to 10 of these emergency orders per week—requests it can now easily fulfill, according to Bill Binder, associate director of customer service and operations for ConvaTec.

ConvaTec is now able to offer a higher degree of service to its distributor customers. Now that these customers know exactly how long it will take products to be delivered from Louisville, they can plan ahead to keep their own inventory costs down, a major advantage for distributors.

As for the back end of the supply chain, since functions such as customer service, order entry, and accounts receivable were outsourced, ConvaTec’s Days Sales Outstanding has decreased by 30 percent—a significant improvement.

Another major benefit that ConvaTec has gained since outsourcing its supply chain is the ability to take advantage of UPS’s Louisville Healthcare Logistics Center, an FDA-regulated, state-of-the-art dedicated healthcare facility.

But the biggest advantage of outsourcing logistics is the amount of flexibility ConvaTec has gained. “We have a very flexible supply chain now,” reports Steadman. This new level of flexibility has allowed ConvaTec to reduce inventory days on hand, speed new product launches, increase customer responsiveness, and accelerate cash flow.

Now, that’s a healthy supply chain.

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