To protect patients and revenue, look to supply chain resiliency

By Paul Kreder, principal, and Jeff Petry, managing director, Deloitte Consulting LLP

A resilient supply chain that ensures patients and clinicians have access to the right supplies at the right time could help to improve everything from job satisfaction to revenue. Rather than waiting until supply chain challenges occur, we encourage hospitals and health systems to be proactive and build a resilient supply chain.

Key components of a resilient supply chain

As architects of Deloitte’s Health Care Supply Chain Management program, we have found that risk-mitigation strategies can sometimes lack prioritization and funding. Health care organizations are dealing with staffing shortages, low volume, and tight margins. But supply chain risk-mitigation can be a value-driver for health care organizations. (High-margin elective procedures are often the first to be cut when supplies start to run short.¹) Our team—along with a group of six (and growing) progressive health systems—has identified several factors that can be essential for a nimble, responsive, and resilient supply chain strategy. These factors include the following:

• An understanding of the complete supply chain: Risk exists at all levels of a supply chain—everything from raw materials to transportation can impact supplies. Some of the biggest threats might lie four or five tiers deep. A health system’s Tier 1 suppliers, for example, might have limited visibility into their own supply chains, let alone product-specific or trade route-specific data. Hospitals and health systems that know which suppliers share similar raw materials and production capacity will likely have a more holistic understanding of critical product categories and substitution strategies.
• An ability to distill and interpret data: The amount of data involved in supply chain management can be overwhelming. But not all risks are equal. Rather than focusing on every potential risk, hospitals and health systems should interpret available data and assign value to the issues that are most likely to impact the supply chain. Case in point: Most of the world’s advanced semi-conductors are produced in Taiwan. If that region becomes less politically stable, devices that rely on semi-conductors could be at risk (see How is the semiconductor shortage affecting medtech?). In addition, hospitals and health systems should be able to verify a vendor’s explanation for imposed higher prices (e.g., price hikes for raw materials, network disruptions).
• A resilient and multidimensional sourcing strategy: Less than 10% of interviewed supply chain leaders rate their organization’s supply chain as “highly resilient,” according to a Deloitte survey of 400 nurses, physicians, service-line leaders, and supply chain administrators (see our report on Health care supply chain resilience). When evaluating new and existing vendors, broader risk criteria should be an integral part of a multidimensional strategy. Hospitals and health systems should consider more than just the cost of supplies. For some product categories, geographic diversity among suppliers could help to ensure a robust and resilient supply chain. For example, supplies manufactured in a rural town could be at risk if a tornado hits a warehouse there. Redundancies, off-site inventory, and alternative suppliers could help protect against unanticipated disruptions.
• A more strategic approach to inventory and infrastructure: Prior to the COVID-19 pandemic, some health systems used just-in-time (JIT) inventory management where vendors sent supplies only as they were needed. The general goal was to free up storage space by having the minimum inventory on hand to meet anticipated demand. Some organizations had cleared out or decommissioned warehouses to reduce storage costs, which may have left them vulnerable when the pandemic hit, and supplies ran short. In general, the sector has since moved away from lean inventories and has become more strategic about supplies and infrastructure.
• An enterprise-wide focus on supply chain resiliency: The likelihood and impact of supply disruptions should not be the sole concern of the supply chain team. A cross-functional investment from leadership spanning Risk, Clinical Management, and Operations can help ensure that the types of capabilities and talent brought to the issue are going to drive material outcomes that actually protect revenue, margin, patients, and clinician’s well-being.

Identify potential risks early

Digital tools such as machine learning (ML) and artificial intelligence (AI) have the potential to help humans identify potential risks and make better-informed decisions. Our CentralSight monitoring tool uses ML and AI to scour more than 1 million news sources.  It evaluates potential threats through an array of 24 Risk Lenses—across 40 distinct and relevant supply categories—and alerts users of potential risks. Everything from geopolitical issues to labor issues to regulatory hurdles are considered. Last fall, the threat of a potential rail strike increased after major unions rejected a proposed contract with the rail companies.² We identified 10 product categories that were at a high risk of wide-scale disruptions if a strike occurred. We then advised our health system clients to consider investing in at least a three-month safety stock of key and critical supplies.

Here’s another example: In the fall of 2021, our monitoring program spotted a potential national shortage of supplies used for phlebotomy. Our team identified alternative supply options and verified the suppliers. One of our clients stockpiled 120 days’ worth of supplies to help ensure that medical procedures would not be disrupted. By the time the broader market found out about the shortages, the primary manufacturers had already put all provider customers on allocation. This meant there was no longer an opportunity to stockpile or even receive outstanding orders. At the same time, some unverified third-party suppliers started to see opportunity. Some of them increased the price of the supplies by five times the normal price. The early warning resulted in $450,000 in cost-avoidance for one health system alone.

Conclusion

The pandemic underscored the fragility of the supply chain across many industries. The health care sector might still be trying to recover from the effects of the COVID-19 pandemic on its supply chains. This may make it difficult for some health system leaders to invest in the resiliency of their supply chains. However, we urge hospitals and health systems to take a proactive approach to their supply chain, rather than wait for something to go wrong. Now might be the time for health care organizations to develop better visibility into the risk of their most critical supplies and suppliers as a healthy supply chain could help support better revenue, stronger margins, and improved patient care.

Acknowledgements: Michelle Colacion, Ryan Nangle

Latest news from @DeloitteHealth

Endnotes:

¹ Supply chain strategies needed: fewer elective procedures, higher costs, HealthLeaders, September 30, 2021

² Possibility of a nationwide rail strike looms as another union rejects deal, National Public Radio, September 21, 2022

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Return to the Health Forward home page to discover more insights from our leaders.