What will it take to have a more secure, and less disrupted, healthcare supply chain?
In a recent conversation with The Journal of Healthcare Contracting, several supply chain leaders discussed a variety of topics including sustainability, supply assurance and the importance of nearshore manufacturing. Participating in the discussion were:
Tim Bugg, CMRP, President & CEO, Capstone Health Alliance
Allen Passerallo, Former supply chain leader at Johns Hopkins Health System, current Vice President Category Management, Vizient
Mark Welch, Sr. Vice President, Novant Health
John Wood, Chief Executive Officer, Encompass Group, LLC
Sustainability
Allen Passerallo: We evaluate suppliers as best we can, especially within warehousing and the ability to fill their orders. We measure their ability to meet our demands and take that into consideration for our penalty language in our contracts and agreements as well as future strategies when awarding multiple suppliers.
If it’s a category that is frequently disrupted and the players come from the same geographical area, it requires us to diversify. Ensuring we have a sustainable operation requires supply assurance.
When we’re managing cost structure with clinicians and trying to standardize and reduce variation for a lower price point, but they’re bringing up their preference and want to have more suppliers to support future patient treatment, it’s challenging. We don’t have anybody to pass the cost on to.
Cost has to be taken into consideration. We try to balance the good and bad of having multiple suppliers to support our clinical needs, while achieving a competitive price point. We bid contract opportunities in multiple ways – single vendor, dual vendor and more. We create a structure where we’re evaluating risk based on the cost savings difference between those different contract structures.
Tim Bugg: In our annual meeting this past October, I had a supplier session. I asked them what they thought the average margin of a hospital was. I had answers of three, four, six and eight, but of course, the answer in this country is below one. I showed them a scale of how provider costs continue to rise, and reimbursements continued to decline.
I find the reps in the hospitals are not in tune to the market in which they sell. Words like sequestration and pay go are foreign to suppliers, but they shouldn’t be. Sequestration has been delayed since the pandemic. That is 2% cuts of Medicare year over year as part of the Affordable Care Act in 2010. Pay go is the 4% Medicare cuts to pay for the Covid dollars from 2020 to hospitals which has not been implemented yet. At some point, providers could expect an additional 6% cuts coming.
Our suppliers must understand the market they’re selling in and why sustainability is important. Cost pressures are important.
Healthcare is at approximately 18.5% of GDP at present. I’ve been told 20% is the magic number. If we hit 20%, then is it unsustainable? And at some point, does the government step in?
Increasing cost, declining reimbursement, and unaligned goals with suppliers make sustainability a hard goal to achieve.
John Wood: The supplier community probably doesn’t fully understand all of the nuances that are causing financial pressures, but I think good suppliers understand that these pressures are real and that sustainability and flexibility in the supply chain is important.
As Encompass increased our nearshore presence in 2018 and 2019, it was about mitigating risk in the environment and the quality of employees we could get nearshore. The communication with our employees in our nearshore manufacturing facilities is much better than it is in Asia. Lower transportation costs, a better environmental footprint and a reduction in supply interruption has created a much better experience for our customers.
We continue to see fluctuation in transportation, raw material, and labor cost globally. And we are very concerned about worldwide unrest. For these reasons, Encompass continues to use a mix of onshore, nearshore, and offshore approaches.
Mark Welch: Sustainability is a priority. Our organization set Science Based Targets to reach net zero by 2050. We are working to reduce our greenhouse gas emissions, divert waste from the landfills, and optimize our water utilization.
As an organization we understand that in order for us to fulfill our cause and create a healthier future and bring remarkable experiences to life, we need to address the impacts we are making on our community today. Specifically, as a Supply Chain we are identifying opportunities to reduce the use of products with harmful chemicals. We’ve engaged our GPO partner to help us identify opportunities to move away from devices which have Phthalates, and other hazardous content. Also, our pharmacy held several successful medication take-back drives and collected 432 pounds of unused medicine from our communities to safely dispose of. We are also choosing to reprocess certain devices thus removing single use products from the landfills. While we are investing a lot in order to achieve our goals, unlike previously expected many of these initiatives are a cost savings for our organization.
Finally, our goal for 2050 is to only work with suppliers who set their own Science Based Targets and have reached net zero in their operations. We set a 2022 baseline and are currently at 52% of our goal, so we have some way to go. Our team’s goal next year and beyond is to have strategic conversations with our vendors and encourage them to meet this goal in partnership.
Supply Assurance and Nearshoring
Passerallo: Supplier assurance means as much or probably more to us than it does on the nearshore side. I’d rather have the reliability of the supplier being able to fill the orders. When we look at shoring capabilities, the few we’ve engaged with have trouble meeting our demand.
If they’re a smaller startup and want to diversify their customer base, they don’t want to say they’ll only provide five versus 500, for example, therefore wanting 10% or 15% of your market. That’s challenging. We have come across that a couple of times. It depends on the company, but it’s been a challenge for us. Nearshoring is a great opportunity to investigate for us and go after. But it continues to come back to cost pressures.
Bugg: From a holistic perspective, we’re starting to self-correct going back to pre-2020. We’re seeing many of our member hospitals moving to hybrid models of self-distribution and traditional distribution. Pre-Covid paradigms such as just-in-time inventory are not the discussions of the day.
From a perspective of nearshore vs. offshore, supply assurance is important to get orders filled, especially after all of the back orders. They can’t manage back orders for factor. Providers aren’t as concerned as to where product is coming from as long as their orders are filled It’s about who can provide product and get it to them, whether it’s made in Toledo or Taiwan. Our standard is to ensure we have contracts with suppliers who can ensure supply.
Looking forward, Capstone is seeking ways to invest in organizations or companies who are focused on assurance, consistency, and striving to change the supply chain in an innovative way. We have two investments with suppliers today who are doing just that. One is reimagining how things are being manufactured in Asia, and another that’s onshore manufacturing in the U.S. We’re proud of those two.
We’re trying to be progressive in how we source products and services going forward.
Wood: Different regions of the world are good at manufacturing different raw materials. Just because you can manufacture gloves in many locations doesn’t mean the raw materials are available from those regions.
We were able to stand up an isolation gown manufacturing line in the U.S. during the pandemic. One reason that we were successful was that raw materials were readily available in the U.S.
The question isn’t “is the product manufactured onshore”, the question should be is the supply chain sustainable and reliable even during difficult times. We believe that a hybrid approach allows Encompass to do this.