Key determinants for resilient health care supply chains

Based on our research, very few health care organizations have the right levels of organizational commitment and spending to be highly resilient when supply chain disruptions occur. Most health care organizations fall into one of four zones (figure 1):

• Reactive (low organizational commitment, low spending): Organizations in this category aren’t proactively making their supply chains more resilient. They’re focused on day-to-day operations and deal with disruptions after they occur. Leaders aren’t invested in building resilience, and the organization lacks the commitment and spending needed to become more responsive and agile.
• Inefficient (low organizational commitment, high spending): These organizations are focused on continuing supply chain operations without major interruptions. Building supply chain resilience and mature capabilities aren’t leadership priorities, but operational continuity is. These organizations spend heavily to address problems to ensure the supply chain remains operational, but often with expensive manual workarounds.
• Point-solution (high organizational commitment, low spending): Organizations in this category are agile and resourceful. All levels of the organization, from leadership to front-line workers, seek solutions to increase resilience in the supply chain. They invest in niche solutions to digitize aspects of the supply chain but lack the funding to layer innovative capabilities into comprehensive solutions to make the supply chain fully resilient.
• Resilient (high organizational commitment, high spending): These organizations view supply chain resilience as a competitive advantage that’s foundational to organizational success. Commitment to and actions toward these goals permeate through the organization from leadership to front-line staff. Organizations that build highly resilient supply chains invest in holistic solutions to digitize their supply chains and spend wisely on people, operations, and technology.

Uncover the root causes of health care supply chain challenges before selecting technology solutions

Throughout the COVID-19 pandemic, supply chain vulnerabilities were exposed across all industries. The interviews highlighted the importance of understanding the root causes underlying these vulnerabilities. When organizations fail to spend the resources to conduct a thorough root cause analysis, the implemented solutions likely won’t resolve their supply chain vulnerabilities because the root causes are unknown. One organization we interviewed secured the raw materials needed to manufacture its end product but didn’t identify potential issues with the packaging for the end product. As a result, product shipments were delayed due to shortages in the ink used to print expiration dates on the packaging. The adequate supply of ink for labeling, not raw materials for production, had become the bottleneck in the supply chain.

The same technology could have varying impacts on resilience at discrete organizations because the underlying issues behind supply chain challenges differ across organizations. For example, when building end-to-end supply chain visibility, a medical device manufacturer likely needs a deeper level of visibility than a retailer. A medical device manufacturer likely would need visibility into subtier suppliers to proactively respond to potential upstream supply disruptions of limited sources of raw materials. However, to have the most impact on resilience, a retailer should focus on diversifying its tier 1 supply base instead of increasing visibility into subtier suppliers, given the different value chains between the retail and medical device industries. Technologies that are designed to manage supply chain risk can help organizations diversify their suppliers and map their supplier networks at all tiers to identify where disruptions could occur.

During our interviews, supply chain leaders shared the challenges they encountered during the COVID-19 pandemic. The most prevalent problems included data issues, labor shortages, and a lack of alternate supply chain sources (figure 2). More than two-thirds of all interviewees experienced data-related challenges such as data availability, data quality, and data integration. Across the board, the pandemic exacerbated existing health care organizational vulnerabilities and illustrated the critical need to address these issues to respond to and recover from the pandemic, and to prepare for future supply disruptions.

Spend strategically to increase resilience

Resilient supply chains aren’t new, but they aren’t commonplace either. In fact, less than 10% of the supply chain leaders we interviewed rated their organization’s supply chain as highly resilient. Prior to the pandemic, many health care organizations were focused on building efficient supply chains. However, most efficient supply chains aren’t built to be resilient, they’ve been built to minimize costs. According to Harvard Business Review, “The search for supply chain efficiency has come at the cost of resilience, with hospitals and health care providers now dependent on fragile global supply chains vulnerable to disruptions from ‘black swan’ events like COVID-19.”⁴ While just-in-time supply chains operate effectively when demand is predictable, the lean strategy can result in supply shortages when demand is volatile and unpredictable during disruptions and catastrophic events.

Resilient supply chains can’t be achieved without robust investments, but not all spending has the same impact. More than half of the interviewees indicated that creating safety stock and maintaining idle production capacity can increase resilience but aren’t always cost-effective solutions. Supply chain investments should address the root cause of concrete issues, rather than perceived concerns with supply chain performance. For example, several leaders we interviewed made costly investments to build safety stock after experiencing what they thought was inadequate inventory at certain points of use. However, there was sufficient inventory in the system. Without visibility into on-hand inventory throughout the supply chain, they couldn’t see that inventory was depleted in some locations and well-stocked elsewhere.

Spending strategically on resilience is critical as innovative solutions, such as artificial intelligence–enabled automation, have implementation costs. Without sufficient spending on resilience, an organization can only implement point solutions to address individual supply chain issues. Our research determined that robust spending is required to layer capabilities with individual solutions to improve enterprise agility and responsiveness and drive overall resilience.

Organizations that target their spending to solve concrete challenges can see greater resilience. These investments should be focused on resolving the root cause of supply chain problems, rather than aligning to perceived concerns with supply chain performance. For instance, we interviewed multiple organizations that were operating in the “inefficient zone” and were experiencing inventory shortages. To address the lack of on-hand inventory, they built new warehouses to store more safety stock. However, supply shortages continued at various front-line points of use because the new warehouses didn’t address the root cause of the supply shortages. There was sufficient inventory in the system, but the organizations lacked visibility into on-hand inventory throughout their supply chain. Inventory was depleted in some locations and well-stocked elsewhere, and data quality issues exposed inaccurate counts of inventory.

Rather than increasing warehouse space, the organizations should have invested in control towers and inventory management solutions. This strategy could increase end-to-end supply chain visibility, enabling the organizations to proactively respond to internal and external disruptions to mitigate supply shortages.

Regardless of their size, all health care organizations have limited resources given the industry’s focus on cost reduction and the perpetual existence of narrow margins among health systems. However, when determining spending priorities, some leaders can leverage their organization’s size to drive resilience. Large organizations we interviewed have more resources to invest and can better withstand lulls in revenue during supply disruptions. Conversely, large organizations experienced roadblocks like greater bureaucracy to gain approvals for investment and implementation. While the smaller organizations we interviewed had limited buying power and less mature supply chains, they had greater agility. Leveraging smaller organizations’ ability to quickly pivot and fulfill short-term requirements during volatile demand periods is key to responding to supply chain disruptions and catastrophic events.

Make an organizationwide commitment to resilience

Our research found that the commitment to resilience should start with leadership buy-in and extend to managers and front-line personnel, a more critical lever than technology. In a 2021 survey conducted by Deloitte and the Scottsdale Institute, 80% of participants said that leadership is a key accelerator of digital transformation, more than any other option.⁵ In fact, an organization’s leadership-driven vision to build a resilient supply chain may falter without buy-in from staff to implement revised policies and operational changes. Having the entire organization’s support is even more important as health care organizations shift their focus away from cost reductions and other supply chain priorities that have been in place for decades.

To build more resilient supply chains and enable short-term agility, leaders should consider empowering and challenging their supply chain teams to think outside the box. For instance, we interviewed an organization in the “point-solution zone” that proved resilient during the pandemic by completely changing its go-to-market strategy from business-to-business (B2B) to business-to-consumer (figure 1). This agility was possible due to leadership support and the organization’s quick realization that maintaining the existing B2B strategy wouldn’t be sufficient to maintain resilience during the pandemic, given drastic reductions in existing client spending.

A common theme among the interviews was the need for supply chain leaders to have a permanent seat at the table to help ensure an organizationwide commitment to resilience. Supply chain leaders should play an integral part in crafting the enterprise strategy as an overall organization can’t be resilient without a differentiated supply chain. Supply chain team members should be integrated into day-to-day operational activities to help ensure that supply chain capabilities meet changing patient and consumer expectations as technology drives changes to health care delivery.

The leaders we interviewed overwhelmingly cited people—more than digital investments or enhancing traditional supply chain capabilities—as a key factor to increase supply chain resilience (figure 3). Fifty percent of the leaders we interviewed highlighted the importance of strong relationships in lessening the pandemic’s impact on their supply chains. Here’s how to invest in people to help an organization’s supply chain be more agile and responsive:

• Make a commitment to resilience-building initiatives across all levels of an organization
• Establish stronger relationships with key suppliers and implement foundational supplier relationship management practices, regardless of whether the organization is investing in end-to-end supply chain visibility
• Empower supply chain team members of all levels to identify and address problems
• Collaborate and communicate across the entire organization, from top to bottom but also bottom to top
• Build digital supply chain skills and technical expertise
• Ensure technology is being used to spur people to make supply chain decisions
• Couple investments in automating manual processes with upskilling resources to enable more value-add activities

While investing in technology should increase supply chain resilience, our research found that organizations can’t build a resilient supply chain without considering the impact of people and ensuring that the implemented technologies complement staff capabilities.

Make the right technology investments

Of course, technology can play a critical role in achieving supply chain resilience, but our research found that health care organizations have many factors to consider. One of the biggest changes that organizations are undergoing is the digitization of traditional supply chains. Digital supply networks (DSNs) can both improve efficiency during normal operations and build resilience during supply chain disruptions and catastrophic events. DSNs use new technologies and tools to transform traditional linear supply chains into agile interconnected networks to unlock value across digital nodes. However, building a fully integrated DSN isn’t feasible for many health care organizations, including those in the “resilient zone” because real-world constraints such as fragmented, physical supply chains are embedded in the supply networks.

The long-term evolution from traditional supply chains to DSNs can be critical to developing mature supply chain capabilities (figure 4). As health care organizations mature to DSNs, certain traditional supply chain elements likely will remain for the foreseeable future until we can overcome some of DSNs’ barriers. According to our research, the most prevalent barriers to implementing DSNs were cost, data quality and standardization, and getting stakeholder buy-in.