Our Take

How Covid-19 will impact the supply chain

15 Minute Read

Covid-19 has revealed critical shortcomings in the health care supply chain. Shortages of personal protective equipment (PPE), ventilators, and other vital supplies have hindered the U.S. health care system‘s response to this crisis, and additional waves of shortages are likely in coming months.

This crisis has exposed an acute need for leaders across the health care supply chain – from manufacturers to distributors to provider organizations (purchasers) – to re-evaluate legacy strategies that have prioritized efficiency over resiliency. For a more sustainable, reliable supply chain to emerge, all parties must seek opportunities to increase transparency, enhance flexibility, and facilitate greater collaboration.

 

The pre-Covid reality

The global health care supply chain is designed to maximize efficiency. At every step of the supply chain, from sourcing raw materials and manufacturing of final products to purchasing, distribution, and ultimate use of those products at medical facilities nationwide, stakeholders aim to eliminate redundancies. In practice, this takes the form of common strategies such as geographic concentration of production, sole-sourced contracts, and “just-in-time” inventory management, all of which aim to cut costs.

To date, these efforts to build efficiency and eliminate costs have been quite successful, but this financial success comes at the expense of supply chain resilience. In pursuit of maximum efficiency, the health care industry created a fragile, inflexible system that was uniquely susceptible to market shocks, be they natural disasters or global pandemics.

The irony here is, of course, that the products with the most volatile demand in a medical crisis are precisely those products health care leaders normally think of as commodities, such as PPE, painkillers, sedatives, and diagnostic testing supplies. For years, stakeholders across the value chain have found more and better ways to squeeze upstream costs in order to produce high quantities of low priced goods for global clinical consumption. In a typical year, provider executives pay little attention to those items, instead focusing on high priced clinical innovations that drive up medical supply budgets, such as specialty pharmaceuticals and implantable devices. Covid-19 exposed the flaw in those priorities: the supply chain for commodity supplies most critical to everyday care lacked the flexibility necessary to adapt to the emerging surge in demand.

However, if manufacturers, distributors, GPOs, and providers had greater supply chain visibility -- with more transparency upstream, downstream, and within their own organizations – disaster may have been avoided. Such visibility could enable stakeholders to identify overreliance on individual sources of raw materials or component parts, design high-impact contingency plans, anticipate potential shortages, and proactively shift operations in order to prevent widespread scarcity of critical supplies.

Factors that limit flexibility across the health care supply chain
Factors that limit flexibility across the health care supply chain
 

Our take

The legacy strategies and business operations that enabled such systemic fragility run through the entire health care supply chain. As a result, all stakeholders must critically assess their contingency plans, their upstream and downstream visibility, and their partner requirements in order to prioritize the changes that enable a resilient supply chain – one truly able to respond in times of crisis.

Contingency planning

Provider organizations must mitigate their supply chain risk by revamping purchasing, contracting, inventory management, and appropriate use guidelines. State and federal governments may mandate some of these changes by requiring minimum inventory levels or local sourcing for essential medical products. Such mandates would inevitably increase costs. But even without government mandates, health systems must adapt their supply chain processes and priorities within the broader context of immense margin pressures, thus requiring a delicate balancing act between efficiency and resiliency.

Manufacturers and distributors should anticipate heightened customer demand for evidence of redundancy and flexibility in all aspects of operations. Many will try to pass these added costs onto their customers – especially if the government requires them to regularly report on supply risks and contingency plans. Regardless of who ultimately absorbs these costs, competition will require manufacturers and distributors to bolster resiliency as cost-effectively as possible and to articulate precisely how their investments will lower customers’ risk of shoddy products or shortages. Risk mitigation will quickly become a customer service differentiator.

Supply chain visibility

Supply chain stakeholders will struggle to build and act on contingency plans without adequate upstream and downstream visibility. Manufacturers, distributors, and providers will need to identify data gaps and inconsistencies that hinder their ability to anticipate and respond to shortages. Existing third party platforms, innovative analytic tools, and new-in-kind collaborations will emerge to fill these gaps, streamline information exchange, and enable the transparency required to optimize both efficiency and resiliency.

Potential responses from stakeholders to build a resilient supply chain

Manufacturers, suppliers, distributors

  • Build greater redundancy and contingency plans into manufacturing capabilities
  • Consider local sourcing and manufacturing options
  • Invest in data infrastructure that enhances supply chain visibility

Governments

  • Stockpile critical supplies
  • Mandate manufacturer contingency plan reporting
  • Remove regulatory barriers to innovation and flexibility in times of crisis
  • Enable centralized views into product need and availability

Provider organizations

  • Assess supply chain risk during purchasing process
  • Include contingency guarantees in contracts
  • Stockpile critical supplies
  • Invest in infrastructure that provides greater supply chain visibility
 

Three requirements for a more resilient, transparent health care supply chain

Health system leaders cannot solve their supply chain problems alone. They must ask more of their suppliers, distributors, and GPOs – and they must be share more with those partners in return. Below, we outline three requirements for providers and their trading partners seeking a more modern, resilient health care supply chain.

  • Requirement

    Suppliers must develop and communicate contingency plans to remain competitive

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  • Requirement

    Providers must balance their need for greater supply chain resiliency with pressure to sustainably reduce costs

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  • Requirement

    Suppliers, distributors, and providers will look to analytics platforms and innovative partnerships to facilitate data visibility and aggregation

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Parting thoughts

Health care provider organizations will almost certainly adapt their supply chain strategies, priorities, processes, and partnerships in the short-term. But true resiliency requires longer-term solutions. The supply chain shortcomings illuminated by Covid-19 will likely catalyze a data revolution, enabling providers and their trading partners to more thoroughly assess risk and more regularly track both supply and demand. Only through such increased visibility can all of the essential stakeholders build a more resilient health care supply chain.

Shared cost, inventory, and forecast data unlocks new opportunities
Shared cost, inventory, and forecast data unlocks new opportunities

Questions providers should be asking:

  1. Which of our supply chain strategies are non-negotiable and must remain in place post-crisis? Which strategies can we adjust to build resilience?
  2. Where might we consider moving further “upstream” to have greater control of our own supply chain (e.g., storage, distribution, production, assembly)?
  3. How can we elevate the role of supply chain leaders to enhance oversight and manage long-term purchasing strategy?

Questions suppliers should be asking:

  1. How much are we willing to invest in our contingency plans? How will supply chain resilience impact the perceived value of our products and partnerships?
  2. Which parts of our own supply chain are most vulnerable to shocks in weather, labor, transportation, regulation, or production?
  3. To what extent is it feasible to source and manufacture products locally? How much of our production should we do domestically?

Questions everyone should be asking:

  1. What strategies can we employ to offset the increased costs of supply chain resiliency?
  2. What data infrastructure do we need to gain greater visibility into the supply chain, both upstream and downstream?
  3. What platforms or software vendors may help us “see” our own performance – and our partners’ performance – more clearly?
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