Over the course of the last week, I have been working on healthcare research. We finished our report on the maturation of hospital supply chains, and I have put the finishing touches on the Healthcare Supply Chain Index for this Thursday’s webinar. I also had the opportunity to speak at the GHX conference and facilitate a leadership workshop on the required changes for implantable devices.  As I worked with healthcare leaders, and shared the research available on slideshare, I better understood the individuals’ pain.

Here are some of the quotes from the workshop I led yesterday that helped me to better understand the industry:

• “A process born out of chaos is chaos. The problem is us. We have to change the mental model of our organizations to move forward.” Medical Device Manufacturer
• “Does everyone realize how bad the problem is? We cannot process map ourselves out of this problem, it requires new thinking.” New Supply Chain Leader of a Regional Children’s Hospital
• “We have used Lean process systems and swim-laned ourselves to death. Today, we are efficiently swimming in the lanes without alignment on value-based outcomes.” Supply Chain Leader of a Large Hospital
• “We are a large part of the problem. We cannot drive change without taking a hard look at ourselves. It starts with redefining our processes and what we reward.” Supply Chain Leader of a Large Hospital

Healthcare is at a pivotal transition point. I firmly believe that supply chain leadership can make a difference. Over the last decade, power shifted in the healthcare value chain. Originally healthcare suppliers sold to physicians. At the dawn of the decade, the supplier had the power.  In the last five years, while the physician is still important, the buying decisions transitioned from the supplier to the care provider. It is now shifting again. With the introduction of managed care, the transition of power is to the payer. It needs to shift to the patient.

No one questions the statement that managed care will dramatically affect the healthcare value chain. The change will not be incremental: It will be a step change. Hospital receivables will lengthen and supply chain roles within the hospital will become more important. The traditional focus on efficient sickness will shift to health and wellness. It requires a redesign, from inside-out to outside-in, based on value-based outcomes. The change in accountable healthcare will give more voice to the patient. Data driven discussions on patient satisfaction, readmittance rates and hospital-induced infections will be transformative.

The question in front of us is “How do we get started?” Hospitals are fragmented. They are small regional players. While processes have matured, it is hard for individual healthcare providers to get traction.

Suppliers now have a dance partner. But, the tune has changed, and they are unsure how to dance together. Hospital supply chains have matured. Seventy-five percent of hospitals have a supply chain organization. The average tenure of the supply chain professional in the hospital is six years. Hospital supply chain teams have 1/3 the tenure of the supplier’s supply chain organization. The most common reporting relationship in the organization is to the hospital’s Chief Financial Officer (CFO). The most common reporting relationship in the supplier organization is to a leader of supply (focus on logistics, distribution, materials sourcing and customer service). The focus has been on sourcing and managed costs. They lack the greater understanding of planning and value network design. While hospital supply chain organizations have made progress in the last decade, the gap has widened between the supplier sectors of pharmaceuticals and medical device manufacturers and other manufacturing industries.

For suppliers, the focus has been on the supply chain organization as a function, not the building of end-to-end processes. Both sets of trading partners have concrete mental models that define the supply chain. For the hospital, the focus has been on materials management and negotiating of lower costs. While 72% have a value analysis team, they have not matured to assess value. These processes are still in their infancy. They are primarily focused on cost management on new purchase decisions. By and large, they struggle to gain cross-functional alignment on process redesign to improve outcomes. They lack the understanding of continuous improvement programs and struggle with alignment.

Most care providers are working to get physician and clinical alignment to focus on the right balance of standardization, product utilization, and innovation. The historic practice of incentives for direct payment to physicians drives bad behavior that is hard to control.  Through employee downsizing and consignment-based sales, they have shifted costs to the suppliers. These costs now lack controls. The answers to healthcare are about much, much more than process mapping.

In contrast, suppliers are large and global players. Over the course of the last five years, they have fought the shift in power. In fighting for every sale they have become very sales-driven. They have taken on consignment-based sales without redesigning processes outside-in.  (In exchange for acceptance of a consignment model, suppliers could have redesigned processes to enable better sharing of daily usage and case scheduling on a daily basis.) The mental model is one of supply. For the supplier team, they see the supply chain as a function. They struggle to define end-to-end processes. The teams fight for recognition to participate in top-to-top meetings. In the evolution of supply chain excellence over the last decade, the gap in core capabilities to drive supply chain excellence has grown between healthcare suppliers and other industries. They have lost core talent while the industry is facing a talent shortage.

There are new challenges:

• With managed care, in the United States, the hospital will bear the costs of infections from hospital stays. The standards for accountable care are evolving.
• 63% of hospital operating room costs are implantable devices. The supply chain for implantable devices is complex and immature.
• Pharmaceutical products are growing more complex. Cold chain capabilities and serialization require a redesign in product handling and supply chain execution.
• The industry has created the most complex rebate incentives of any industry value chain. The administration of bifurcated trade is a barrier to the improvement of trading partner relationships. The changes in reimbursement make this even more complex.
• Pharmaceutical companies are facing a patent cliff with a 24% decline in operating margins over the last decade.

 What should Companies Do?

This cannot be about process mapping and improvement of the current state. It requires a shift in the mental model and leadership. New models are required. This is both an opportunity and a risk for existing organizations:

The good news is that trading partners want to get started. There is a compelling event to move a fragmented industry forward. The challenge is changing the mental model to move from supply-centered processes focused on transactions to more holistic supply chain thinking based on value-based outcomes. 

For more on healthcare, check out our recent webinar.

If you are a healthcare supplier, we would love to hear your voice in the research that we are doing on supply chain practices. Please let us know your thoughts in our confidential survey.(If you share the data with us, we will be glad to share the data with your team.)
Please use this link:  http://tinyurl.com/sci-hlt-lc
Some helpful reports include:

Supply Chain Metrics That Matter:  The Cash-to-Cash Cycle
Published by Supply Chain Insights in November 2012.

Supply Chain Metrics That Matter: A Focus on the Pharmaceutical Industry
Published by Supply Chain Insights in December 2012.

Supply Chain Metrics That Matter: Driving Reliability in Margins
Published by Supply Chain Insights in January 2013.

Supply Chain Metrics That Matter: A Focus on Hospitals
Published by Supply Chain Insights in January 2013.

Supply Chain Metrics That Matter: A Focus on Medical Device Manufacturers
Published by Supply Chain Insights in February 2013.

For most companies, growth has slowed. Profits are sluggish. Complexity reigns and cycles are longer. The challenges and opportunities of business are greater.  We believe that supply chain excellence helps a company to better balance demand and supply. We also believe that it helps companies to be more resilient:  weathering demand and supply volatility while maximizing opportunities and mitigating risks. We believe that supply chain excellence matters and is important to improving financial market performance. After a decade of investment, many companies are asking me, “How do I take this next hill? How do I push forward? What does the future of supply chain excellence look like?”  For many, despite spending 1.7% of revenue on supply chain applications, the promise of an agile, flexible supply chain that can respond as the business changes seems like an illusion.

This week, at Supply Chain Insights LLC, we published our 11th report in the series titled Supply Chain Metrics That Matter.  Over the course of a year, we analyzed a decade of financial data to gain an understanding of how companies and industry sectors are balancing growth, profitability, cycles and complexity. These reports are available in our community and on our website.

To write these reports, I work with Abby Mayer (twitter: @indexgirl), Research Associate at Supply Chain Insights. We start by analyzing industry sector progress on company growth, profitability, cycles and complexity. Using our database of financial ratios (shown here), we analyze company and industry sector progress over the last decade. Financial ratios allow us to analyze performance across the peer group (large against small companies) and across currencies. We look for year-over-year improvement. We also look for companies that have out-performed their peer groups. When we find these two characteristics, we interview industry leaders to analyze why.  We do not believe that there is much value in putting all companies into a spreadsheet and shaking them up… or looking at singular metrics without analyzing the intricate trade-offs of the supply chain when viewed as a complex system.

In developing the methodology for this series of reports, we defined supply chain financial ratios and tracked the progress of each industry sector in scaling what we term the Supply Chain Effective Frontier (carefully making trade-offs on growth, profitability, cycles and complexity to improve shareholder value in financial markets). The table shows the financial ratios that we work with. In many of our reports in this series, we show clear patterns of the trade-offs made between operating margin and cash-t0-cash cycles, and operating margin and revenue/employee. Three trends are clear:

The industries are not making equal progress.  Companies are competitive. They are constantly asking us “Who does this best? Which industry sector can we learn from?”  Through this series of reports, we now can see that consumer electronics has pulled ahead of the pack.  Consumer Packaged Goods (CPG) and chemical companies are close behind, but they are having difficulty “taking the hill.”  The hospital industry has made progress, while the pharmaceutical and medical device companies are stalled.  Apparel is actually moving backwards.

Companies that are good at planning—use of supply chain design and supply chain planning technologies—are outpacing other industries. Active management of value networks and scenario planning makes a difference. When companies look at singular metrics (labor costs or inventory), they have moved backwards.

There is no substitute for leadership. Industries that have formed cross-functional leadership teams combining source, make and deliver together have made the fastest progress. In parallel, when supply chain concepts are well-integrated into the design of trading partner relationships by both sales and procurement, there is an acceleration of value.  The trade-offs are easier and the value network strategies more straightforward.

Aligning metrics matters. Companies making the fastest progress have designed metrics to ensure that all functions are held accountable for operating margin, cash-to-cash cycles, growth and productivity.  When this happens, proxy metrics like Return on Assets (ROA), Overall Equipment Effectiveness (OEE), Days of Payables (DOP), Material Costs, Transportation Costs or Sales and General Administrative Costs (SG&A) can be discussed and trade-offs can be made easily cross-functionally. Functional metrics in isolation degrade value.

The gaps between industry sectors have widened over the decade. I have studied supply chain excellence for the last decade as an industry analyst.  As I write these reports and work with Abby, I am amazed how much these gaps have widened. It is clear basics matter.  Leaders manage the supply chain as a system and improve the potential of the system to make trade-offs. Laggards let the supply chain whip them around and make unconscious trade-offs through indecision. The gaps between the two have grown.

Supply Chain Excellence Matters.  In our work on the Supply Chain Index, where we are correlating progress on the Supply Chain Effective Frontier to financial market performance, we can see that supply chain matters. The leaders that have managed the supply chain as a complete system are able to achieve better financial market valuations.  We will be sharing more on the Supply Chain Index over the summer in our monthly webinar series with a final summary presentation at our Global Summit in September. It is exciting to see the correlations.

In closing, in our writings and our research, the term supply chain means the processes from the customer’s customer to the supplier’s supplier. Unfortunately, for many of our readers, the word supply chain is now a politically charged term. We find this unfortunate and often disheartening. The shift in definitions can be a barrier to driving progress.

How so? For software application providers, it is often reduced as a subset of applications. I find it sad, when I attend a conference where the term supply chain is only used to describe supply chain execution (SCE) or  advanced planning optimization (APS).   Likewise, I find it sad when I work with a company that had defined the supply chain organization very narrowly. It is often reduced to be the Supply Chain Department that has been functionally defined to ONLY focus on a part of the supply chain like transportation, customer service or distribution planning.  These limiting definitions confine the potential.

The companies that are the furthest along in “taking the hill” have a process manager focused on managing the “end-to-end supply chain.”  For these companies, the mission is clear.  There is no debate on what supply chain means. It is about the company’s ability to manage growth, profitability, cycles and complexity to improve the potential and capabilities of the company.  In the end, isn’t this what matters anyway? I have little energy to debate the term supply chain. I just want to get on with driving value.

We hope to see you on our upcoming webinar series as we share more on the Supply Chain Index.

I also hope that you enjoy the  Supply Chain Metrics That Matter series.  We enjoy writing them! We have learned a lot through this activity.

These reports will be the foundation of the new book that we are writing for 2014. We will release preview copies as ebooks over the course of the summer.

I will be writing the first draft of the manuscript on my way to South Africa on May 30th.  Talk to you soon! We will share the insights on the Index and the Metrics that Matter over the summer. And, we look forward to your feedback!