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

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Another area where transparency can translate into bottom-line benefits is cost-to-serve. Pharmacos need to build transparency on their total cost of supply, including conversion, transport (inbound, interplant, primary/secondary distribution), warehousing, inventory holding, staff and obsolescence. This enables both operational cost savings and optimization of route-to-market approaches and product portfolios.

Performance transparency is a key building block on the journey to a new healthcare supply chain. Upping the game isn’t just about IT investments. It requires particular attention to cross-functional alignment and operational discipline.

4. Alignment. Imagine a future where manufacturers could monitor real-time patient demand changes and shift their production schedules accordingly; hospitals and pharmacies knew exactly where short-supply devices and drugs are and when they would be delivered; and regulators could recall adulterated products with accuracy from every point in the supply chain. Unfortunately, in today’s world, manufacturers and their trading partners struggle to deliver “perfect orders” and spend countless hours chasing down errors in financial transactions and cleaning up the orders they receive from customers.

The healthcare industry must align around a single set of global data standards that support the processes and capabilities required to cost-effectively achieve the kinds of benefits we describe in this article. The grocery industry has demonstrated the value of this kind of global data standards alignment with its adoption of GS1 standard barcodes, a change which was nothing short of revolutionary and has created billions of dollars in value. While new processes, tools and systems were required to deliver this value, data standards were a critical prerequisite. The healthcare industry is still to adopt a common global data standard, but that may have to change if the industry wants to reap similar benefits as in the grocery sector. Without a single, global data standard, tackling the challenges of product complexity, global reach and improved supply chain safety and security will be significantly more costly and difficult for pharmaceutical and medical device companies.

5. Collaboration. Effective, transparent communication through the use of common standards is part of the challenge for true end-to-end supply chain integration, but as in other sectors, different players in the supply chain need to find ways to collaborate more effectively on the basis of that data in order to reap the full potential benefits.

For example, when two channel partners in the healthcare industry embarked on a recent collaborative project to improve supply chain performance, they were able to identify opportunities to reduce their joint inventory by 20 percent while still increasing service levels enough to deliver a predicted 1% increase in revenues.

Often, the key barriers to such collaboration are not technical, but cultural. In the example above, just getting to the collaboration table was the most significant challenge for the two companies, which had previously had a primarily transactional relationship. Making the collaboration work required great care in determining how it would be managed and how benefits would be shared, with considerable involvement from senior managers to overcome roadblocks. But as a result of the process, the two companies now enjoy a closer and more open working relationship, laying the foundations for future collaborations in other areas.

Many companies struggle to create any significant impact in their efforts to improve supply chain performance because they limit their change efforts to functional silos, like manufacturing, warehousing or logistics. In practice, the supply chain function is one of the most cross functional of all business processes, and any attempt to drive improvement must also be cross functional in nature. The most successful supply chain improvement efforts make strenuous efforts to overcome the problem of local optimization, often by using an integrated “control tower” approach, in which a small group of leaders from across the organization work closely together to identify opportunities for performance improvement and to capture them by driving change quickly though the entire organization.2 One company that had initially failed at reducing inventory, subsequently achieved 23% inventory reduction while improving service levels with this approach.

In 1975, the business case for barcodes in the grocery business estimated the annual benefits to the industry at $400 million. Twenty years later, research showed that the benefits exceeded $16 billion3, thanks in part to almost universal adoption of barcode standards and the enormous value of point-of-sale data gathered and shared electronically.

Given the synergies of teamwork, technology and imagination, the global healthcare system is likely to benefit from advances we can’t foresee today, just as the grocery industry has from what began as an approach to speeding checkouts.

About the Authors:
Thomas Ebel ( , Katy George (, Erik Larsen ( and Ketan Shah ( are leaders in McKinsey & Company’s Pharmaceutical Operations practice.

1. Evaluate, CPAT, BMI, OECD, EFPIA, HRI, Espicom corporate reporting; POBOS, McKinsey analysis.
2. “17 Billion Reasons to Say Thanks: The  25th Anniversary of the UPS and Its Impact on the Grocery Industry” (PWC, 1999)
3. “17 Billion Reasons to Say Thanks: The  25th Anniversary of the UPS and Its Impact on the Grocery Industry” (PWC, 1999)

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