An Analysis of Health Care Supply Chain | Deloitte US has been saved
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The last two blogs have focused on two distinct aspects of health care supply chain’s response to the COVID-19 pandemic—including what went wrong and what went well. Both blogs were focused on learning what we could from the immediate past, so we can plan for a more efficient and effective response in the future. The culmination of this series on health care supply chain’s response to COVID-19 will focus on that goal—how do we take what we have seen so far such as needed risk management and demand forecasting, rapid innovation, and collaboration across public and private sectors and make significant improvements for the future.
The COVID-19 pandemic has caused major disruption to health care supply chain but prioritizing three factors can help the industry effectively respond to this situation going forward: (1) a coordinated approach with federal, state, and local governments along with public/private health systems, (2) a resurgence of US manufacturing capability for critical equipment and supplies, and (3) digital supply networks.
Source: High-Impact Diversity & Inclusion study, Bersin, Deloitte Consulting LLP, 2017.
We have seen the usage of the Defense Production Act, as well as officials from the Federal Emergency Management Agency (FEMA) and the Department of Health and Human Services (HHS), take measures to respond to this crisis by engaging manufacturers nationwide to shift gears into making vital medical supplies and working with state governments to set up field hospitals.1 Through the Cares Act, we have seen legislation requiring manufacturers to identify and report supply disruptions for items that are critical to public health, including PPE and life-sustaining or life-saving equipment and supplies, during a public health emergency.2 We have also seen health systems take on the accountability of sourcing and procuring essential medical supplies by engaging in gray markets and facing price inflation. Although there are some instances of collaboration, these efforts are mostly siloed and duplicated. COVID-19’s impacts are reaching all corners of the country, and a unified approach is needed to source and procure critical medical supplies, devices, and drugs and allocate these supplies to states and companies in the private sector. Left to their own resources, state governments and private corporations are searching the globe for essential supplies and competing directly with each other while some are over-purchasing and hoarding. A national lens on sourcing and procurement and logistics and distribution of essential medical equipment and products is needed to efficiently and effectively respond to this crisis.
Resilient manufacturing strategies seek to achieve the right balance between cost optimization vs. risk optimization. The COVID-19 healthcare supply chain disruption would suggest that many companies have historically placed a greater emphasis on the cost optimization side of the equation. This emphasis led to a significant concentration of manufacturing activities for critical PPE supplies and equipment in Asia that exposes the supply chain to a wide variety of risks including geo-political, currency, trade policy, import/export restrictions, sanctions, intellectual property loss, data security, and global logistics. And now during the periods of extreme shortage, grey-market entrants, profiteers, layers of middle-people, and unscrupulous manufacturers have resulted in the hyper-inflation of these critical products completely defeating the original cost optimization objective of producing them abroad. Take, for example, the average N95 Respirator that sold for $0.50 per mask in February 2020 and is now priced at well over $4 per mask.3
While it is impractical and unrealistic to suggest a complete domestication of PPE supply and equipment production, the system as whole would likely benefit from a diversified mix of on/offshore manufacturing. Low labor costs were the primary reason for moving manufacturing abroad.4 But recent rises in the costs of transportation and tariffs on international products may give pause for consideration.5 This combined with the advancements of the smart factory movement have radically improved the agility, productivity, and overall efficiency of manufacturing operations domestically.
Factoring in the total landed cost to the US of manufacturing abroad and considering the quantitative value of the variety of risks identified above, one can quickly develop a strong business case for greatly increasing the mix of domestic production for critical pandemic requirements like PPE supplies, equipment, and generic pharmaceuticals.
To help mitigate the lack of visibility to the supply and demand required for such a catastrophe and communication gaps between suppliers and buyers digital supply networks (DSNs) are now being explored more in the market. The traditionally linear supply chain model is transforming into digital supply networks, where functional silos are broken down and end-to-end visibility, collaboration, agility, and optimization are enabled. A DSN is a dynamic, interconnected system that can more readily incorporate ecosystem partners and evolve to a more optimal state over time. They can be leveraged to dynamically connect supply inventories with forecasted demand models to quickly shift to alternative suppliers when supply shortages arise. The continuous monitoring of suppliers can be used to create dynamic risk profiles and risk mitigation strategies, enabling a more adaptive and responsive system to market disruptions. DSNs leverage advanced technologies such as the Internet of Things, artificial intelligence, robotics, and blockchain, and they are designed to anticipate and prepare for future challenges. Whether it is a global pandemic event like COVID-19 or a natural disaster, organizations that deploy DSNs will be ready to adapt and respond to the unexpected.
COVID-19 is a generational public health crisis that has touched every facet of our world. A strong, adaptive, and agile health care supply chain is necessary to respond effectively to this crisis and help ensure our health systems are well equipped to treat patients and protect their staff. Globally and locally, COVID-19 has brought to the surface a myriad of challenges and weaknesses in our existing systems and supply chains. In order to help address these difficulties, we can coordinate among the public and private sectors on an integrated approach, and leverage technology to develop a more responsive healthcare supply chain model. This pandemic has directly exposed some of the weaknesses in our nation’s most critical supply chains, and as we overcome these, it is our responsibility to develop the necessary governance models, technologies, and skillsets to help ensure that we are prepared to handle the next catastrophic disruption. We now have a unique opportunity to learn and make material improvements, so we can create more agile and responsive systems. Although this process may be disruptive in the short term, it is imperative to make decisive transformations now while the memory of how badly the situation could have been is fresh in our minds.
¹ FEMA, “Coronavirus (COVID-19) Response,” April 29, 2020, https://www.fema.gov/coronavirus.
² Eskander Yavar, et al., “Coronavirus Aid, Relief, and Economic Security Act: Manufacturing Impacts,” BDO USA, April 2020, https://www.bdo.com/insights/industries/manufacturing-distribution/coronavirus-aid,-relief,-and-economic-security-act..
³ Isaac Stanley-Becker, et al., “In coronavirus scramble for N95 masks, Trump administration pays premium to third-party vendors,” The Washington Post, Apr 2020, https://www.washingtonpost.com/national/coronavirus-trump-masks-contracts-prices/2020/04/15/9c186276-7f20-11ea-8de7-9fdff6d5d83e_story.html.
⁴ Theo Anderson, “How Much Does It Cost to Manufacture Overseas Versus at Home?,” Kellogg Insight, July 10, 2017, https://insight.kellogg.northwestern.edu/article/how-much-does-it-cost-to-manufacture-overseas-versus-at-home.
⁵ CNBC, “Trump’s 15 percent tariffs on $112 billion in Chinese goods take effect,” September 1, 2019, https://www.cnbc.com/2019/09/01/trumps-15percent-tariffs-on-112-billion-in-chinese-goods-take-effect.html.
Martin Kamen is a principal in Deloitte Consulting LLP’s Human Capital Practice, based out of San Francisco. Martin’s focus is on working with clients to help them manage and prepare leaders and employees for large-scale business transformation. Martin is also the US and Global Human Capital Cloud leader. Martin has an MSc in International Employment Relations and Human Resource Management from the London School of Economics and a BA in Sociology from The George Washington University.