What makes this confusion more atypical than in the past is that the stakes are much higher than ever before. The medical device industry, which is a very important part of the healthcare ecosystem, has become very competitive globally, coupled with the fact that healthcare represents more than 20 percent of the United States’ gross domestic product. This discussion is easily framed within the context of the health and well-being of lives for generations to come.
What is surprising—and concerning as well—is that many organizations appear to be focusing on, or configuring their supply chains around, a single element of the ecosystem rather than the ecosystem itself. You don’t have to look further than the U.S. automobile industry in the 1980s to understand why this is important.
Organizations that understand the ecosystem, and properly configure their organizations within it, not only will be successful, but will improve healthcare. In order to better understand this point, consider the definition of the ecosystem as well as one of its elements—the food chain—that seems to be getting a lot of attention, and which, unfortunately, played a key role in derailing the automotive industry.
The Ecosystem
Merriam Webster defines ecosystem as “the complex of a community of organisms and its environment functioning as an ecological unit.” In the context of the healthcare system, the community of organisms could simply be defined as the medical device and pharmaceutical companies and their suppliers. In fact, the community of organisms is much larger and consists of many other elements of the supply chain such as hospitals, doctors, clinicians, payers, inventors and distributors, just to name a few. Their environment has become the Affordable Care Act, which has morphed from a political hot potato into an all-encompassing legal statute defining how the organisms would work within the environment to form the ecological unit. In order for the ecosystem to function properly, whether one likes it or not, the community of organisms now must coexist with the new environment. This isn’t an endorsement of the Affordable Care Act, only an apolitical recognition that it is now statute, and until something other than it creates an environment, supply chains must be properly configured within this “new normal.”
The Food Chain
Merriam Webster further goes on to define ecosystem as “energy and matter passed along the ecosystem’s food chain” where the food chain is an “interconnected feeding relationship where one organism can be consumed by more than one other type of organism.” Herein lies the trouble in configuring the supply chain correctly. If the feeding relationship becomes an unhealthy relationship of “eat or be eaten,” the supply chain likely will be configured incorrectly (again, think U.S. auto industry in the 1980s). This doesn’t mean that companies shouldn’t be competitive. The point is that an organism within the food chain must recognize its proper place within the chain. It should know what its mission is, configure itself correctly and then act upon it. It should be competitive in areas where it should compete for dominance, but also be supportive to other organisms (partners) that can help it achieve its mission. In other words, the supply chain of organisms must be configured correctly.
Much has been written about the incorrect configuration of the U.S. automobile supply chains. Many of those are painfully spelled out in the book “Crash Course: The American Automobile Industry's Road to Bankruptcy and Bailout-and Beyond” by Paul Ingrassia. Fortunately, many of the elements addressed in the book do not exist within the healthcare space today, but some very critical ones do. It’s important that we learn from history and not make some of the same mistakes again in an area such as healthcare, which is so important to our future.
Simply put, this author grew up in an automotive town and experienced firsthand a devastating configuration error within the food chain where the elements (organisms) of the supply chain no longer could determine who was friend and who was foe. Organisms within the ecosystem were eating other organisms that were supposed to be supportive. As an example, instead of this particular U.S. automaker in Indiana competing with other similar organisms for dominance (such as Honda or Toyota), it ignored those in favor of destroying organisms (such as suppliers) that should have been its partners. One example of this misplaced competition was with pricing. The pricing the car company would allow its suppliers to achieve would, in essence, make survival impossible for the suppliers. The company created an “I win, you lose” scenario, which was the beginning of a major transformation within the supply base. By the time this automotive company realized it was destroying its suppliers, it was too late. The firm’s suppliers fled to help the competition. Those organisms (suppliers) sought safety (survival) and formed relationships with foreign competitors leaving it difficult, to say the least, for the U.S. automotive company. This is only one example of numerous configuration errors.
Signs the Healthcare Ecosystem is Changing
Many discussions with leaders throughout the ecosystem, including medical device OEMs, pharmaceutical companies, reimbursement payers, doctors, inventors, part suppliers and everything in between, have signaled changes occurring. Some changes taking place are encouraging, while others are concerning and similar to those of the 1980s auto industry. Not surprising, the degree of concern, or comfort, has a direct correlation to where the individual sits within the ecosystem.
Here are a few examples of changes (though there are many others) occurring within the ecosystem based on recent discussions and research:
- There has been some movement toward hospitals or clinics making their own products instead of purchasing them from medical device companies. A number of questions come to mind. Is this an act of competing for dominance and friendly competition for margin? Is this an act of survival on behalf of the hospital to manage the reimbursement challenges it is dealing with? Is this the beginning of hospitals and clinics competing against what should be their partners, the medical device OEMs? One could argue, all of the above. Depending on where one sits within the food chain, the view likely will be different. In the 1980s, while one U.S. automobile company was eating its suppliers, another was partnering with them. It’s not a coincidence that one needed the U.S. government to bail them out and the other one did not. The lesson here is the importance of configuring the supply chain correctly.
- There has been movement toward generic devices such as what has taken place in the pharmaceutical industry. Is this an act of pure competition for dominance and the spirit of the free enterprise system alive and well? Or is this the beginning of the commoditization of the medical device industry where differentiation value is no longer appreciated, reimbursable or needed? It depends on which lens you are looking through.
- There has been some movement toward pushing the increased costs of the Affordable Care Act downstream as far as it can go to the “low man on the totem pole.” Are the costs shifting from the government, to the hospital, to the medical device OEM, to the supplier, to the supplier’s supplier and so on? Many small suppliers (or even doctors or clinics) that no longer can afford to operate simply will cease to exist. Organisms that once were strong in the food chain will become weak and no longer able to exist. They simply cannot function within the ecological unit any more.
- The reduction in Medicare and Medicaid reimbursement is forcing hospitals and clinics to cut costs in any way possible, up to and including, physician compensation. A well-known doctor recently said, “salary cuts look good on paper until it’s you on the operating table needing that life-saving surgery and personnel isn’t available.” One discussion this author recently had was with a doctor who owned three practices. He was forced to close two of them because they no longer were financially stable due to changes in reimbursement and the ability to find staffing willing to work after wage cuts. What’s the bottom line? Less supply to fill demand that results in increased costs to the consumer.
- There have been comments from some private equity groups that their dollars are better used funding the next iPad because medical device technology no longer is seen as a good return. Imagine the risk to innovation and the patient population, if this tone becomes the norm in the ecosystem. This author heard shocking testimony by a panel at a recent Cleveland Clinic innovation summit stating that “the incredible progress in treating leukemia would not have occurred if the current risks to reimbursement would have been in place 10 years ago.”
- There is clear movement (though this isn’t a really new trend) of medical device OEMs acquiring next-generation devices and concepts rather than simply inventing within. Medical device OEMs increasingly are becoming comfortable acquiring proven, next-gen technology from outside their organizations while internal organizations focus more on maintenance of current technology. But what happens when the innovative environment of startup device makers dries up?
Using Tools, Techniques and Talent to Configure the Supply Chain
A wise professor I had 30 years ago made a comment that remains true today: “In the course of time, tests don’t change, only the answers do. And, depending on what lens you are wearing, the answers can be different, so I grade on a curve.” A supply chain is like a test being graded on a curve.
Healthcare supply chains have been, and always will be, needed. The answers (configuration) will change based on the changes taking place within the ecosystem and the lens you are wearing based on where you sit within the food chain. There are no 100 percent correct, black-and-white, answers. What is most important is to recognize the need to change and to act accordingly. Using a supply chain configuration from 2000 for a 2013 (and beyond) ecosystem likely will be a horrible mistake.
Fortunately, there are many tried-and-true methods for properly configuring the supply chain. In more than 30 years of personal experience configuring supply chains, from various roles and positions within the food chain, creating the best answer to the test comes from the intersection of three basic elements:
- Deploying a regimented, but simple, multi-tiered approach to aligning your organism (organization) within the ecosystem and food chain;
- Using the tools and techniques of the American National Standards Institute’s Supply Chain Operations Reference (SCOR) model; and
- Acquiring and deploying talent to implement the chosen supply chain configuration.
Element 1: Regimented Alignment of Business Direction
Business 101 has proven that the best business results come from the proper ordering of business direction. In four simple steps that many books have been written about, supply chain personnel can configure and execute a business direction or strategy.
The four steps are:
- Step 1: Pick a business direction for the organization. Simply put, in the ecosystem, how will your organization (organism) thrive and win amongst the complex of a community of organisms within the new environment of healthcare? When will you eat? When will you partner with others so you are not eaten? And when does it make sense for you to be eaten (maybe be acquired)? Textbooks galore exist on helping an organization determine its business direction. But before supply chain experts can configure, a business direction must first be set.
- Step 2: Configuration. Ensure that the proper actions are configured throughout the supply chain to execute a business direction. After a direction is chosen for the organization in Step 1, configure all activities to align with it. In many cases, supply chain configuration decisions errantly determine business direction instead of the supply chain configuration executing the business direction. An example of this is supplier pricing discussions. We have all heard of examples of companies calling suppliers to a meeting and telling them by the time they leave the meeting, they will reduce their prices by X percent or no longer retain the company’s business. Without any discussion about how partners can work together to take cost out, a simple edict is implemented and trouble often ensues. Partnerships that evolved over many years disintegrate in a heartbeat. The critical question is: How does this support an ecosystem being a complex of a community of organisms and its environment functioning as an ecological unit? Not much functioning as a unit, is there?
- Step 3: Actions. Only after a business direction and configuration is determined (Steps 1 and 2) do you put actions into motion. Books are filled with examples where actions were not aligned with business direction. Many organizations have failed to achieve their direction simply because actions were put into motion that had no directional alignment to where the business was supposed to be going. An example of this is offshoring products that never should have been moved offshore where transportation costs offset reductions in labor cost or placing a facility in a location on the other side of the earth to where it really needed to be simply because it was “cheaper” there. The list goes on.
- Step 4: Metrics. “Business 101” has demonstrated that you get what you measure. Make sure, however, that your organization measures the configuration put into place. Once again, organizations have failed because their metrics are not aligned to the business direction, its configuration or the actions implemented. Don’t measure simply to measure.
Element 2: Got SCOR?
The Supply Chain Operations Reference model is a must to help supply chain experts do what they do best—configure, set actions and measure. I had the privilege of being one of the founding authors when the Supply Chain Council (www.supply-chain.org) was created after PRTM and AMR pulled together approximately 55 multi-industry experts to craft a best-practice supply chain model that could adapt to stand the test of time. Multiple revisions and 15 years later, this has become the worldwide industry standard for supply chain and business professionals abroad. No supply chain should be configured or implemented without first exploring how this model can help.
Element 3: Talent
Finding, acquiring and deploying supply chain talent is mission-critical. What sounds simple is actually quite difficult. The reason for this is that most organizations expect their supply chains to be configured by those coming only from the planning or procurement career path. That career path is a great start as it provides experience on how to see the big picture and how to put the pieces together. But properly configured supply chains are more holistic in nature requiring experience far greater than simple planning and procurement. Supply chain configuration is synonymous with business configuration and needs to be driven and endorsed by the highest levels of an organization. Many company presidents and CEOs are coming via the supply chain career path. Those organizations recognize that supply chain configuration is synonymous with business configuration and want their organizations driven by that mind set. Want proof? Tim Cook, CEO of the most valuable technology company in the world, Apple, is a supply chain guy. Take a look at his biography and you will find a strong supply chain background. It’s how all of the pieces go together. Where are we going? How are we going to do it? Who is going to do it? How are we going to measure it to make sure we are indeed getting there?
The Power Of Partnering
The healthcare ecosystem indeed is changing. The lives and wellbeing of our loved ones are at risk if we as a complex of a community of organisms (our companies) do not function as an ecological unit (as partners) within the new environment (the Affordable Care Act). Right or wrong, which is in the eye of the beholder, the U.S. government has chosen a business direction for the healthcare market. Now is the time to deploy the best talent possible and configure supply chains across the ecosystem for maximum benefit. There is incredible power in partnering across the ecosystem—hospitals and clinics working hand in hand with medical device companies; medical device companies working with suppliers; suppliers working with their suppliers; doctors and clinicians working with researchers; etc. Now is the time for us to configure a supply chain that works across the entire ecosystem, one that doesn’t become so competitive on the “eat or be eaten” end of the food chain that we lose sight of the very purpose of healthcare (the patient). Our health and wellbeing should not be graded on a curve.
Chris Oleksy is the CEO and founder of Oleksy Enterprises, which offers consulting support across the healthcare ecosystem. For 30 years, he has held supply chain leadership positions at Dow Corning Corporation, Medtronic Inc. and most recently as president of ATEK Medical. He can be reached at chris@oleksyenterprises.com.