Building Strengths in Healthcare Supply Chain

As operations become more complex, even small improvements in efficiency can translate into huge savings

By Thomas Ebel, Katy George, Erik Larsen and Ketan Shah

1 of 2 < 1 | 2 View on one page

Products, markets, regulators and patients are making new demands on pharmaceutical and medical device supply chains, from the factory floor to the bedside, and these demands are increasing at an accelerating rate. For example, McKinsey’s proprietary POBOS benchmarks suggest that complexity, as defined by number of SKUs per packaging line, has increased by more than 50% over the last 5 years. The industry’s current supply chain model will not be able to meet these challenges forever, forcing companies in the sector to develop new capabilities and new ways of working in order to transform speed, efficiency, flexibility and reliability across the entire value chain.

Better supply chains won’t just allow pharma and medical device companies to tackle the issues they face today. Higher supply chain performance has significant and strategic benefits for pharma and medical device companies. First, it can reduce costs, by shortening manufacturing lead times, slashing inventory levels across the value chain, and cutting product obsolescence. Second, it can improve access, reducing drug and device shortages in developed markets and delivering affordable healthcare to millions more people in emerging markets. Third, it can transform safety, by making it harder for counterfeit products to enter the supply chain and reducing the human and financial toll of medication errors.

We estimate that end-to-end supply chain expenses (including conversion cost, warehousing and distribution, inventory carrying cost and obsolescence cost) now represent nearly 25% of the pharma value chain costs and more than 40% of the medical device value chain costs. The annual spending is so vast — about $230 billion in pharma and $122 billion in medical devices — that even minor efficiency gains could free up billions of dollars for investments in other areas. Our analysis suggests that, just by adopting some straightforward supply chain advances that are already well established in other industries, the healthcare sector has the potential to improve its margins by $130 billion. With greater collaboration across the value chain, the impact of supply chain innovation in healthcare could be even larger.

A New Healthcare Supply Chain
A typical Asian laptop manufacturer can accept an order on a Monday and deliver a pallet of freshly assembled computers to a European customer on Tuesday of the following week.1 A typical pharmaceutical manufacturer can take an order for blister packs of pills and deliver them in about 75 days.

How can medical device and pharmaceutical manufacturers develop the superior supply chain capabilities currently enjoyed by fast moving consumer goods companies or consumer electronics manufacturers? We have found that most need to strengthen capabilities in five key areas: segmentation, speed, measurement, alignment and collaboration.

The first three of these are “internal” capabilities that companies can develop by themselves. The last two, potentially the most powerful, require them to work together with their customers, their suppliers and even their competitors.

1. Segmentation. Many pharma and medical device companies are close to running one-size-fits-all supply chains. Where they do differentiate between product lines, it is often only for cold-chain products. In practice, however, profitability, value density, demand variability, criticality to patients and the cost and service expectations of customers can all vary significantly. These differences can have a profound effect on the optimum planning, production, inventory carrying and logistics processes for different products, markets and customer groups.

Leading companies, in the healthcare sector and others, are now tackling these problems by intelligently segmenting their supply chains according to differing product characteristics and customer requirements. They then develop appropriate forecasting, production, inventory and distribution strategies for each category.

2. Speed. In the changing pharma and medical device environment, using high inventory levels to maintain service is becoming a costly and ineffective approach, but it is still the one adopted by the majority of healthcare players. Typical replenishment times in the sector are around 75 days, with the best pharma players achieving 30. High inventory levels hide other problems, too, reducing the incentive to improve manufacturing efficiency and leaving companies with large quantities of obsolete or defective stock on their hands when things go wrong. Our research shows that obsolescence alone wastes $51 billion globally per year across the healthcare sector, for example (mainly at providers and manufacturers).

There is plenty that companies can do today, even with existing manufacturing processes, to greatly improve their supply chain speed. Closer collaboration with customers can help improve forecasting and provide better transparency of real demand. Sharing forecast data with suppliers can help too, ensuring that production is not delayed by shortages of packaging materials, for example. Companies can increase their production frequency, shifting the average for a majority of their SKUs in packaging from once in 2-3 months to once every 2 weeks, for example. This can go along with shortening the “frozen” planning windows from 3 months to 3 weeks, allowing faster market supply and best use of available demand data. In addition, optimum selection of routes, transport modes and delivery frequencies can accelerate the movement of product between production sites, regional distribution centers and end customers.

3. Measurement. Any systematic attempt to improve a business process requires companies to understand their current level of performance. Many pharmaceutical manufacturers still struggle to obtain sufficient transparency on supply chain metrics, however. The challenges are diverse, including a lack of standard definition of key metrics, different calculation approaches in local systems, and a lack of central data transparency. While metrics like inventory reach, forecast accuracy, and customer service level are mostly available, there is a particular need to improve the transparency of key structural drivers or capabilities. Responsiveness (for example, replenishment lead time); manufacturing frequency; supply reliability (shown by production or supplier service level); and stability (for instance, share of rush orders, planning accuracy) are often not systematically measured or managed across the network.

1 of 2 < 1 | 2 View on one page
Show Comments
Hide Comments

Join the discussion

We welcome your thoughtful comments.
All comments will display your user name.

Want to participate in the discussion?

Register for free

Log in for complete access.


No one has commented on this page yet.

RSS feed for comments on this page | RSS feed for all comments