Applying Supply Chain Best Practices From Other Industries

Exhibit 1: Healthcare Success with Core Supply Chain Issues
Charts Supply Chain Success 1
Photo courtesy of UPS

Regulatory issues, whether they be with FDA or the hurdles of entering a new market, consistently rank among the largest challenges for medical device supply chains, according to UPS’ 2015 Pain in the (Supply) Chain survey results. While some jockeying occurs between cost management and product protection (damage, spoilage, even anti-counterfeiting maneuvers), the top three answers remain steady and have so in the eight years that the report has been released. This is an indicator that device companies of all sizes have not yet implemented best practices to solve the steady stream of fluctuating supply chain challenges.

The levels of success that firms experience dealing with those three challenges shifts from year-to-year, says Robin Hooker, Director, Healthcare Marketing, UPS. This year's results can be seen in Exhibit 1. Hooker adds that in areas where medical device companies have chosen to focus their energies, like collaborative logistic efforts, the segment has outperformed its peer groups: pharmaceuticals and biopharmaceuticals.

This year, for the first time, the UPS survey also explored specific ways that companies and firms seek to reduce costs. Due to fluctuating fuel prices, the number one answer was optimizing transportation costs. Tied for the second most cited cost-cutting measure: gaining better inventory visibility and consolidating the total number of transportation providers.

Scrutiny of the supply chain extends beyond OEMs and their transportation providers. Hospital systems also seek to reduce spending on supply chains.

Cardinal Health recently completed a national survey of hospital executives, in which 85 percent of respondents said that their health systems are currently working to identify or implement new ways to reduce supply chain waste and related costs.


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“I’d say that we’re seeing a trend in which health systems want ways to better leverage data and analytics, and to promote transparency and efficiency in the supply chain,” says Mike Duffy, President of Hospital Solutions and Global Supply Chain at Cardinal Health.

Shriharsha Parampalli, Senior Consultant for WNS, says that better leveraging data could eliminate some of the problems his company sees in the orthopaedic supply chain, including a dearth of timely, accurate information related specifically to pricing. A recent study, Parampalli says, showed that orthopaedic surgeons “drastically underestimate the cost of the device to be implanted in the premium (over $5,000) category.” That misguided estimate has profound implications for the supply chain, as well as the end-consumer. Parampalli says that pricing opaqueness leads to a distorted view of supply chain costs and difficulty in unbundling supplier product price from overall procedure costs, which would help minimize wasteful expenses.

Cardinal is working with integrated delivery networks (IDNs) to identify these hospital systems’ aggregate spend across care sites, to locate areas of potential cost avoidances. Then, Duffy says, they work together to rationalize product portfolios and manage system-wide formularies so there is more control over the supply chain.

Major Pain Points

Tommy Russell, Manager, Global Field Operations for Arthrex, acknowledges a number of individualizing factors that make orthopaedic supply chains unique versus other industries, including the tight windows for delivery and the life or death nature of inventory. But many pain points are shared across all OEMs and are already familiar to most of the industry.


For example, Duffy lists the main challenges to orthopaedic supply chains as increasingly high cost of supplies; management of hospital-owned, consigned and company-loaned instruments; lack of visibility in the supply chain; manual supply chain processes and the significant burden on clinician time and workflow, which can result in delayed room time and unaccounted-for items.

While many of those challenges have been around for years, Parampalli believes that OEMs are now more willing to leverage best practices and solutions from other industries. Those sources of inspiration are as diverse as high-tech, e-commerce and retail.

While the highly-regulated nature of the industry presents obstacles to adopting new supply chain practices, Parampalli thinks that increasing price transparency and the unbundling of supplier product cost from total pre/post-procedure costs will push the segment forward.

Parampalli believes that as the industry moves toward new supply chain models, companies will look to and adopt best practices from other industries. One practice that more OEMs are examining is the use of outside distribution vendors.

Best Practices

As mergers and acquisitions squeeze the market, causing demand for quicker turnaround on orders, more companies are considering the use of third-party logistics (3PL) providers and forward-stocking locations (FSL). Alphatec Spine, for instance, has begun to leverage UPS services to provide better service to its end-customers.

“We’re small. We’re $200 million in annual revenue. We’re nimble and agile enough to fully leverage UPS’ services,” says Mike Plunkett, COO of Alphatec. “Our vision is to have a model where inventory from our suppliers would go right to a UPS facility where they would keep inventory, receive sets from hospitals, clean the sets, replenish the inventory, inspect the instrumentation and replace it as necessary. We would fully outsource our whole process.”

But using a 3PL isn’t going to work for every company. For example, Russell says that while using an outside vendor for distribution may be a future consideration, that model wouldn’t currently fit with Arthrex’s priorities.

So, how do companies determine whether or not to use a 3PL?

Chris Franzen, Vice President of Sales & Operations at Shipware, a logistics consultancy, says that while the unique aspects of the orthopaedic industry present certain wrinkles, like a less than two-hour delivery window, much of the supply chain is similar to other industries—meaning an evaluation of a 3PL can be conducted using certain tried-and-true metrics.

“Less than truckload (LTL) and parcel shipping have commonality with almost any manufacturer or distributor of products,” he says. “These should be areas of focus for determining if a 3PL is the right choice for a company, and if it will increase service performance or decrease costs.”
Companies should also be looking to modally optimize their supply chain, he says. That may mean a few things. Namely, it could be diverting traditional parcel shipping away from FedEx or UPS and moving to USPS and regional carriers. It may also mean seeking out LTL consolidation for multi-stop truckloads, which can provide faster service, less expense and expose you to less opportunity for damage.

Franzen says that OEMs should consider adopting more of outside industries’ best practices. One that he particularly suggests is the arena of audits, payment and reporting of transportation invoices. The average cost to process a freight invoice internally is much higher than what an outsourced partner can provide, he says. Some companies have been processing those invoices for as much as $10. A 3PL can process freight invoices for anywhere between $0.10 to $1.35.

“Last, but not least, many industries have been slow to adopt an Inbound Freight Policy that includes vendor compliance,” Franzen says. “It is imperative for any decently sized shipper/receiver of goods to take control of the routing of their inbound freight and leverage this spend with outbound volume.”

Franzen believes there has been a hesitancy to use 3PLs. He believes that there is a common sentiment among OEMs that their needs are unique compared to other industries, making 3PLs less effective.

Parampalli concurs, but adds that attitudes are shifting; more device companies are considering adoption of best practices from other industries. He says most commonly, that means OEMs are more willing to use collaborative warehousing and joint distribution to reduce costs, invest in technology to improve visibility, engage in transportation mode optimization, develop a renewed focus on cycle inventory and lean manufacturing, harness otherwise unstructured data and utilize more contract manufacturing.


WNS recently conducted an in-house study of supply chain advisors and management to determine how the supply chain will evolve over the next decade. Parampalli noted a larger focus on data.

“Unstructured data will be extensively mined and funneled back for supply chain management process improvement,” he says. “There will also be an estimated 50 percent increase in supply chain configuration (unique combination of customer segment, channel and product type). This will call for more sophisticated and accurate master data management.”

Alphatec is utilizing WebOps to handle its scheduling and visibility. Plunkett says that the software allows his company to schedule a surgery and subsequently achieve full transparency and visibility so that they’re not forced to pay for an expensive courier service at the last minute. The software allows the company to track equipment from schedule through surgery.

Duffy says that Cardinal Health frequently looks to other industries for inspiration, including guidance on use of data.

“A key lesson from retail is the implementation of common data standards, such as GS1, as a critical step in building a foundation for the efficient sharing of information across trading partners,” he says. “Cardinal endorses GS1 standards for common location (GLN) and product (GTIN) identifiers and believes the industry-wide adoption of these standards in healthcare will enhance supply chain visibility, drive opportunities for cost savings and improve patient safety.”

Steve Downey, Senior Vice President, Healthcare at OHL, a 3PL, echoes Duffy’s comments, noting that opening a package to discover the contents is a time drain. Instead, he suggests capitalizing on the use of GS1 labelling or UCC-128 labels. The process would work like this, he says:

It starts with your Electronic Data Interchange (EDI) transaction to the customer. When the customer sends their EDI order, you send back an advanced ship notice, or 856. Within that 856 is all the information about the shipment, including part numbers, lot numbers, serial numbers, expiration dates, deliver to addresses, etc. Then you print a UCC-128 label, which barcodes a single Advance Shipping Notice (ASN) reference number and contains some key human readable information. Upon receipt, the receiver scans the label and all the shipment contents are now visible from the ASN. If there are multiple cartons or pallets, all of that shows.

“Imagine being able to take a pallet full of supplies and know exactly what is inside, without opening the cartons,” Downey says. “If orthopaedic companies started implementing UCC-128s on their shipments, providers would absolutely see the value in it.”

Creating a patient-driven supply network is achieved by connecting technological solutions throughout the entire supply chain. Capturing data at the point-of-use and providing real-time access and visibility simultaneously to all trading partners in the chain has driven dramatic improvements, Duffy says.

“With an Radio Frequency Identification (RFID)-enabled inventory management solution, for example, that integrates EHRs and Maintenance Management Information Systems (MMIS), hospitals, distributors, and manufacturers have access to a patient-driven, data-enabled supply chain that solves inventory challenges and creates cost-saving opportunities and efficiencies in myriad ways: lower investment in inventories, the ‘right’ information to use for predictive planning, reduced expiration and loss, fewer physical cycle counts,” he says.

Downey says retail has also recognized the burdensome nature of a multitude of small packages. Placing small, individual orders and the payment processing for each order is complicated. Adding in processing and costs for individual parcel shipments, single parcel receipts, handling and inspecting each receipt, logging that into a system, then delivering the goods where they need to arrive creates a logistical challenge.

Downey suggests adopting some of retail’s practices for combating those challenges, such as consolidating orders to the same destination via a 3PL, establishing a ‘sailing schedule’ and using consolidators.

  • Consolidating orders to the same destination: Using a 3PL or improvements in their own warehouse software, companies could consolidate orders that are shipping to the same destination into larger shipments. For overnight shipments, they would consolidate during the day and still ship before the end of day cutoff.
  • Establish a ‘sailing schedule’: In partnership with their customers, orthopaedic suppliers could establish regular shipment dates to customers for ground transport. For example, orders shipping from the Midwest to the west coast would ship every Monday and Thursday, east coast every Tuesday and Friday. Orders to the same address would consolidate into one box; orders to similar destinations would consolidate together into LTL shipments. The result would be a smoother receiving process, lower shipping costs and fewer receipts.
  • Use consolidators: Many retailers have pushed suppliers into their operations to ship via consolidators. Some of these take ownership of the inventory (a la Owens & Minor and Cardinal in medical supply), but others are purely shipping consolidators. They receive the shipments for that customer into their network, combine it with other shipments, consolidate them into larger and larger amounts at warehouses along the way and finally deliver a consolidated shipment to the retailer. 3PLs serve this process for medical devices today, and it’s a practice that will only grow.

Challenges to Adopting New Practices

New supply chain methods may need to undergo regulatory scrutiny, Parampalli says, which mandates periodic checks, cycle counts, recertification/sterilization and budding cold chain requirements (temperature-controlled shipping for equipment or goods that must be stored and transported within a particular temperature-range), all of which can increase the length of inventory cycles. He adds that inventory in orthopaedics matters more than in retail. An out of stock item could potentially mean a life or death situation, which necessitates some conservative supply chain practices.

Obstacles to adoption of new practices are plentiful. Franzen says that overcoming the inertia of the status quo may be the single largest hurdle, though. He says that OEMs need to maintain an open mind and embrace practices that may divert from previous routine, and that hiring supply chain experts from other industries may be the most streamlined way to infuse new methods and practices into an organization.

“By no means should every hire come from another industry. Hiring a few, key positions from other industries could prove invaluable in increasing supply chain efficiencies and creating better policies,” Franzen says.

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