Strength in Unity: The Case for Global Supply Chain Standards
Agreement around common supply chain standards and supporting processes could revolutionize the healthcare sector
By Thomas Ebel, Katy George, Erik Larsen, and Ketan Shah
Imagine a world where a patient’s records capture the brand, dosage, and lot number of each drug and medical device she uses, along with the name of the physician who ordered the product and the nurse who administered it; where bedside scanning confirms that she gets the right product in the right dosage at the right time; where hospitals and pharmacies know the exact location of short-supply medical devices and drugs and when they can be delivered; where regulators can recall adulterated products with accuracy and speed from every point in the supply chain; and where manufacturers can monitor real-time demand changes and shift their production schedules accordingly.
In this world, patients would enjoy consistently safer and more effective healthcare, with fewer mistakes and shorter average hospital stays. Redundant activities and costs would be driven out of the system – reducing the cost of healthcare to society and enabling broader global patient access to cutting-edge medical technologies. Doctors and nurses could spend less time with paperwork and more with patients. Opportunities for innovation would open up – enabling new progress in personalized medicine, customized devices, and mobile health.
Major Pain Points
This world is technologically possible today. But the reality is a long way from the ideal. Major pain points in the current healthcare value chain range from patient outcomes to supply chain efficiency, including the prevalence of medication errors, inefficient and ineffective product recalls, and bloated inventories. The healthcare supply chain, from manufacturer to patient, remains fragmented, with limited visibility and interconnection. Certain channel partners are making progress by collaborating, and individual companies and even countries are documenting excellent results with cutting-edge practices. But only a few players are making these innovations and advances.
To build a world of interconnected cost-effective healthcare, the healthcare industry could align around a single set of global standards that support the processes and capabilities required to achieve the kinds of benefits outlined above. The consumer and retail industries have demonstrated the value of this kind of standards alignment with their adoption of GS1® standard barcoding, which has reshaped these industries and created billions of dollars in value. While new processes, tools and systems were required to deliver this value, use of one single global standard was a critical prerequisite.
This year, McKinsey & Company carried out a research effort, with the participation of more than 80 healthcare industry and regulatory leaders around the world, to estimate the potential value of adopting a single global standard in healthcare. Taking a conservative approach, our models suggest that cost could be reduced by $40 – 100 billion globally (see exhibit), mainly from reduced follow-on cost of medication errors ($10 – 60 billion), cost from improved inventory management (financing, processing, obsolescence cost reduction of $30 – 40 billion), and reduced data management cost ($1 – 2 billion). The final figure may even be substantially higher, since global standards may deliver a variety of smaller benefits that are more uncertain or difficult to quantify.
Those are compelling numbers, but to make standards work, individual players in the healthcare value chain must have the confidence that the direct rewards will be worth the necessary investment. In this article, we will focus specifically on the costs and benefits of adopting such standards for pharmaceutical manufacturers.
The business case
For our models, we took the case of a representative global pharmaceutical manufacturer, with 25 packaging lines, annual revenue of $4 billion, and earnings before taxes of $720 million,(18% of sales, in line with McKinsey industry benchmarks). We assume 70% of revenue is earned in developed markets and 30% in developing markets (used to estimate exposure to high-counterfeit markets).
The key elements of global standards are product identification, location identification, and master data synchronization. Manufacturers would be required to make investments to implement these standards. The precise size of that investment depends on many factors, including the type of identification adopted (basic product identification including batch number and expiry date information, or separate serialized identification of each individual unit), whether barcoding is applied to primary or secondary packaging, and the current state of the manufacturer’s current IT infrastructure to be extended to accommodate global standards. Our analysis suggests that such costs would range from $150,000 to $500,000 per packaging line and between $1million and $5million in licenses and software integration costs for the organization for our representative manufacturer.
Do the potential benefits justify the cost? We believe so. By adopting global standards in partnership with its trading partners, our representative pharmaceutical manufacturer might expect a range of benefits worth about $40 – 60 million annually, which represents about 1 – 2% of base revenue and about 5 – 10% in earnings before taxes. These benefits arise from a variety of sources, including reduced obsolescence, lower data management costs and improved transaction accuracy, and potentially a reduction in sales lost to counterfeits. In addition, a one-time cash flow benefit of about $90 million would accrue due to reduction in inventory assets, enabled by improved supply chain visibility. Accumulating the benefits and both one-time and annual costs over 10 years, we expect barcoding at the secondary packaging level to deliver about 20-25x times more benefits vs. costs. Serialization would have approximately a 4X benefit/cost ratio.