J. Paul Dittmann, Ph.D., Global Supply Chain Institute 04.06.16
Cost management remains a substantial healthcare supply chain issue for healthcare manufacturers and distributors. In fact, according to the recent UPS Pain in the (Supply) Chain survey—a study that measures healthcare supply chain executives’ logistics challenges and opportunities—healthcare companies continue to struggle with supply chain costs related to rapid business growth, fluctuations in fuel and raw materials costs, increasing regulations, new market expansion, aging IT systems, and technology investments, to name a few.
In order for medical device companies to remain competitive, they must continually review and raise the bar in business practices, which includes looking at all aspects of the supply chain to bring better efficiencies and reduce costs.
Inventory and Order Management Cost
Having accurate data visibility throughout the supply chain can go a long way toward addressing the inefficiencies in many healthcare order and inventory management processes. For instance, global GS1 standards (data standards used in bar codes and other product identifiers) can bring the whole healthcare supply chain industry together around uniform identifiers. That, in turn, could facilitate the automation of a host of supply chain operations, bringing major cost and inventory savings. If GS1 standards are used by the manufacturer, distributor, and customer, then:
A scoring system is often helpful for software selection. To maximize organizational buy-in, the scoring team should ideally be large and cross functional. For best results, each element in the evaluation criteria should be listed and weighted for its relative importance. Then for each major capability, the scoring could look something like this:
X Not enough information
The average healthcare firm has 60 percent or more of its cost in purchases from suppliers. With a cost level this high, it is critical to follow best-in-class procurement principles. Of course, cost is not the only variable that must be managed. Cost must be balanced against delivery that is fast, on time, and complete. Though it may not fall within the area of responsibility of all supply chain managers, procurement is a supply chain function and is critical to all firms in the healthcare field.
Keep in mind the optimal procurement cost is not necessarily the lowest unit price. In order to achieve the optimal cost, there are a number of other considerations. It is important that firms support their suppliers and provide them with the information and commitment they need to innovate. Suppliers should be contractually incentivized to generate savings through innovation. Also, pricing should always be quoted two ways: prepaid and collect. Determine whether you want to control the inbound transportation, or leave it to the supplier. Alternatively, you could contract with a third party to manage it on your behalf.
In many cases, lead time is a critical variable in managing both inventory levels and out-of-stocks, especially in the global medical device supply chain. And, it’s rare to see total landed cost quoted (that is, the total cost of a product arriving on the buyer’s dock including taxes, transportation, and so on). Shorter lead times allow vendors to be more flexible and responsive, which can help reduce cost, stock outs, and inventory levels.
Suppliers should develop packaging that can help minimize logistics costs, especially supply chain transportation costs. Practices commonly associated with sustainability measures—including the use of appropriately engineered packaging that avoids wasted space and sustainably sourced materials designed to complete the shipping process so that resends are unnecessary—have environmental, cost, and even reputational benefits, especially for shipments delivered to end-consumers.
Vendor scorecards need to include key logistics measures, such as damage rates, on-time delivery, lead time, packaging evaluation, and transportation cost. When these items are aggressively managed, this typically results in a major positive impact on a firm’s cost structure.
The procurement team, in preparation for supplier contract and price negotiations, should carry out an in-depth commodity or competitive analysis. Additionally, there should be professional procurement training in place and a personal development plan for each procurement professional.
Reduce Warehousing-Associated Costs
Cost reduction best practices in distribution centers largely fall into six areas: receiving, packing and order fulfillment, lean warehouse management, warehouse management systems (WMS), warehouse space optimization, and warehouse network optimization.
Starting with receiving, use automatic shipment notifications, which have been shown to reduce receiving costs by 40-50 percent. Using only qualified suppliers who ship on time with quality and reliability will improve overall distribution center efficiency. After shipments are received, put away product quickly to alleviate congestion and its associated waste and manage returns efficiently. Also, consider a profiling process to locate the highest volume SKUs in the easiest-to-pick locations.
Next, look to opportunistically coordinate inbound and outbound loads in order to eliminate put-away and picking operations that represent the lion’s share of the labor in a distribution center. Keep it simple and focus first on total employee involvement, management walkabouts, and visual management; keep things in order with a quick and effective methodology. Later on, plan to take out 20-50 percent of the operation’s waste with value-stream mapping and consider using Six Sigma techniques to reduce process variation and improve efficiency.
Manufacturers should plan to use an appropriate level of automation, such as radio frequency picking, pick-to-light, etc. Consider whether the organization has the right level of focus on the omni-channel, and develop an efficient process to fulfill web orders.
Turning to better system upgrades, implementing a modern WMS is a smart way to efficiently organize put-away, picking, shipping, labor management, yard and dock management, and other key distribution center activities and make sure the distribution center doesn’t become too crowded. Second, optimize warehouse space by managing all stacking heights, appropriately using racks and mezzanines, managing docks and aisle size, and so on. Finally, use modern software or a partner resource to evaluate how many distribution centers you should have, where they should be located, and which customers they should serve.
Optimize the Transportation Network
Healthcare decision makers are recognizing the increased value of partnering with an outsourced supplier or a 3PL. According to UPS’s recent Pain in the (Supply) Chain survey, 57 percent of global healthcare firms used logistics and distribution partnerships to successfully address cost management concerns. That number is even higher among medical device companies surveyed, with 61 percent turning to logistics and distribution partnerships. More than half (56 percent) of healthcare firms distribute to wholesalers or distributors, and 46 percent ship directly to customers. About one-third of overall transportation and warehousing spend is outsourced.
Perhaps the most important first step is finding a good partner. Selecting and contracting with a good third-party provider that will flex with a company’s needs is critical to controlling cost in the healthcare supply chain.
Another approach to take to save on transportation is to focus on cube utilization (i.e., consolidating orders). If the average cube (or weight) per load can be increased, the additional product rides for free.
Using more rail and intermodal clearly reduces cost. However, it often means adding time to the supply chain, which translates into additional inventory in the system and may be inappropriate for many medical device products. This is also one of many areas where there is a classical tradeoff between transportation cost and inventory cost. Switching from air to ocean transport alone can save 70-80 percent of cost in the healthcare supply chain.
Another important initiative is optimizing the network—a strategic approach to reducing transportation cost by revising which stores should be served by which distribution center. Manufacturers can do much the same thing by reevaluating which customer locations should be served by each distribution center.
Many companies also actively look for ways to reduce backhauls to avoid empty miles and generate revenue to offset cost. One way to do this is to actively sell empty capacity on backhauls and generate millions in revenue each year that flows as a credit into its freight account.
Inbound freight often finds its way into vendor product purchase price rather than to the transportation budget, but it ends up being a transportation cost nonetheless. Leading firms request freight collect and freight prepaid bids from all of their vendors and then take over the control of the inbound shipments that make economic sense.
Global transportation represents a major source of transportation cost in international corporations. Special expertise is typically required to efficiently manage freight in the global environment and often implies world-class, third-party relationships, along with advanced in-house expertise.
Finally, serialization and bar coding is now a focus for medical products and requires a comprehensive system to track and trace the movement of products through the entire supply chain. Also, losses from counterfeiting efforts can be reduced significantly by implementing product serialization and e-pedigree documents.
Prepare for Future Success
Since more sophisticated products are expected to enter the global market, the stakes are only likely to get higher for healthcare companies to ensure growing demands are met with innovative, sophisticated supply chains. Those who implement best practices and leverage solid partnerships could potentially have a huge competitive advantage, increase customer service, and be poised for significant business growth.
J. Paul Dittmann, Ph.D., is executive director of the Global Supply Chain Institute at the University of Tennessee College of Business Administration. He has consulted for more than 50 companies, including UPS, and is the author of two books: The New Supply Chain Agenda and Supply Chain Transformation.
In order for medical device companies to remain competitive, they must continually review and raise the bar in business practices, which includes looking at all aspects of the supply chain to bring better efficiencies and reduce costs.
Inventory and Order Management Cost
Having accurate data visibility throughout the supply chain can go a long way toward addressing the inefficiencies in many healthcare order and inventory management processes. For instance, global GS1 standards (data standards used in bar codes and other product identifiers) can bring the whole healthcare supply chain industry together around uniform identifiers. That, in turn, could facilitate the automation of a host of supply chain operations, bringing major cost and inventory savings. If GS1 standards are used by the manufacturer, distributor, and customer, then:
- Orders can be scanned at receipt and put away efficiently;
- Accuracy can be better verified;
- Inventory systems can be automatically updated upon scan;
- And the replenishment process can be automated. GS1 standardization can also serve as a foundation for other supply chain technology.
A scoring system is often helpful for software selection. To maximize organizational buy-in, the scoring team should ideally be large and cross functional. For best results, each element in the evaluation criteria should be listed and weighted for its relative importance. Then for each major capability, the scoring could look something like this:
X Not enough information
- Does not meet needs
- Partially meets needs
- Meets needs but open questions remain
- Meets needs
- Exceeds needs
- Use the latest technology: Systems exist to optimally set safety stocks based on unique product characteristics, such as supply and demand variability.
- Improve forecasting: Measure the accuracy of demand forecasts SKU by SKU and make it visible to those within the company.
- Measure and reduce lead time: Measure lead time at each phase of the supply chain and look for ways to reduce that time.
- Reduce unnecessary SKUs: In most healthcare firms, 20-30 percent of the SKUs are dead and need to be eliminated for efficiency.
- Address obsolete and slow-moving inventory: Regularly dispose of aging or obsolete inventory, which never gets more valuable.
The average healthcare firm has 60 percent or more of its cost in purchases from suppliers. With a cost level this high, it is critical to follow best-in-class procurement principles. Of course, cost is not the only variable that must be managed. Cost must be balanced against delivery that is fast, on time, and complete. Though it may not fall within the area of responsibility of all supply chain managers, procurement is a supply chain function and is critical to all firms in the healthcare field.
Keep in mind the optimal procurement cost is not necessarily the lowest unit price. In order to achieve the optimal cost, there are a number of other considerations. It is important that firms support their suppliers and provide them with the information and commitment they need to innovate. Suppliers should be contractually incentivized to generate savings through innovation. Also, pricing should always be quoted two ways: prepaid and collect. Determine whether you want to control the inbound transportation, or leave it to the supplier. Alternatively, you could contract with a third party to manage it on your behalf.
In many cases, lead time is a critical variable in managing both inventory levels and out-of-stocks, especially in the global medical device supply chain. And, it’s rare to see total landed cost quoted (that is, the total cost of a product arriving on the buyer’s dock including taxes, transportation, and so on). Shorter lead times allow vendors to be more flexible and responsive, which can help reduce cost, stock outs, and inventory levels.
Suppliers should develop packaging that can help minimize logistics costs, especially supply chain transportation costs. Practices commonly associated with sustainability measures—including the use of appropriately engineered packaging that avoids wasted space and sustainably sourced materials designed to complete the shipping process so that resends are unnecessary—have environmental, cost, and even reputational benefits, especially for shipments delivered to end-consumers.
Vendor scorecards need to include key logistics measures, such as damage rates, on-time delivery, lead time, packaging evaluation, and transportation cost. When these items are aggressively managed, this typically results in a major positive impact on a firm’s cost structure.
The procurement team, in preparation for supplier contract and price negotiations, should carry out an in-depth commodity or competitive analysis. Additionally, there should be professional procurement training in place and a personal development plan for each procurement professional.
Reduce Warehousing-Associated Costs
Cost reduction best practices in distribution centers largely fall into six areas: receiving, packing and order fulfillment, lean warehouse management, warehouse management systems (WMS), warehouse space optimization, and warehouse network optimization.
Starting with receiving, use automatic shipment notifications, which have been shown to reduce receiving costs by 40-50 percent. Using only qualified suppliers who ship on time with quality and reliability will improve overall distribution center efficiency. After shipments are received, put away product quickly to alleviate congestion and its associated waste and manage returns efficiently. Also, consider a profiling process to locate the highest volume SKUs in the easiest-to-pick locations.
Next, look to opportunistically coordinate inbound and outbound loads in order to eliminate put-away and picking operations that represent the lion’s share of the labor in a distribution center. Keep it simple and focus first on total employee involvement, management walkabouts, and visual management; keep things in order with a quick and effective methodology. Later on, plan to take out 20-50 percent of the operation’s waste with value-stream mapping and consider using Six Sigma techniques to reduce process variation and improve efficiency.
Manufacturers should plan to use an appropriate level of automation, such as radio frequency picking, pick-to-light, etc. Consider whether the organization has the right level of focus on the omni-channel, and develop an efficient process to fulfill web orders.
Turning to better system upgrades, implementing a modern WMS is a smart way to efficiently organize put-away, picking, shipping, labor management, yard and dock management, and other key distribution center activities and make sure the distribution center doesn’t become too crowded. Second, optimize warehouse space by managing all stacking heights, appropriately using racks and mezzanines, managing docks and aisle size, and so on. Finally, use modern software or a partner resource to evaluate how many distribution centers you should have, where they should be located, and which customers they should serve.
Optimize the Transportation Network
Healthcare decision makers are recognizing the increased value of partnering with an outsourced supplier or a 3PL. According to UPS’s recent Pain in the (Supply) Chain survey, 57 percent of global healthcare firms used logistics and distribution partnerships to successfully address cost management concerns. That number is even higher among medical device companies surveyed, with 61 percent turning to logistics and distribution partnerships. More than half (56 percent) of healthcare firms distribute to wholesalers or distributors, and 46 percent ship directly to customers. About one-third of overall transportation and warehousing spend is outsourced.
Perhaps the most important first step is finding a good partner. Selecting and contracting with a good third-party provider that will flex with a company’s needs is critical to controlling cost in the healthcare supply chain.
Another approach to take to save on transportation is to focus on cube utilization (i.e., consolidating orders). If the average cube (or weight) per load can be increased, the additional product rides for free.
Using more rail and intermodal clearly reduces cost. However, it often means adding time to the supply chain, which translates into additional inventory in the system and may be inappropriate for many medical device products. This is also one of many areas where there is a classical tradeoff between transportation cost and inventory cost. Switching from air to ocean transport alone can save 70-80 percent of cost in the healthcare supply chain.
Another important initiative is optimizing the network—a strategic approach to reducing transportation cost by revising which stores should be served by which distribution center. Manufacturers can do much the same thing by reevaluating which customer locations should be served by each distribution center.
Many companies also actively look for ways to reduce backhauls to avoid empty miles and generate revenue to offset cost. One way to do this is to actively sell empty capacity on backhauls and generate millions in revenue each year that flows as a credit into its freight account.
Inbound freight often finds its way into vendor product purchase price rather than to the transportation budget, but it ends up being a transportation cost nonetheless. Leading firms request freight collect and freight prepaid bids from all of their vendors and then take over the control of the inbound shipments that make economic sense.
Global transportation represents a major source of transportation cost in international corporations. Special expertise is typically required to efficiently manage freight in the global environment and often implies world-class, third-party relationships, along with advanced in-house expertise.
Finally, serialization and bar coding is now a focus for medical products and requires a comprehensive system to track and trace the movement of products through the entire supply chain. Also, losses from counterfeiting efforts can be reduced significantly by implementing product serialization and e-pedigree documents.
Prepare for Future Success
Since more sophisticated products are expected to enter the global market, the stakes are only likely to get higher for healthcare companies to ensure growing demands are met with innovative, sophisticated supply chains. Those who implement best practices and leverage solid partnerships could potentially have a huge competitive advantage, increase customer service, and be poised for significant business growth.
J. Paul Dittmann, Ph.D., is executive director of the Global Supply Chain Institute at the University of Tennessee College of Business Administration. He has consulted for more than 50 companies, including UPS, and is the author of two books: The New Supply Chain Agenda and Supply Chain Transformation.