What Happens Next

One expert discusses how we arrived at the crises that surfaced amid the COVID-19 pandemic, and what the road ahead may look like.

In many ways, the COVID-19 pandemic was “the perfect storm” for the U.S. healthcare supply chain, said Dr. Eugene Schneller, a professor of supply chain management at the University of Arizona State’s W. P. Carey School of Business, and the principal at Health Care Sector Advances.

“If you think about the last decade to two decades in healthcare, the mergers and acquisitions, the changes in technology, a number of things have happened,” he said. “Number one, we pushed as much as we could outside of the hospital. And by doing that we turn out to be one of the countries at the tail of the curve of number of beds per thousand, with one of the fewest.” While Japan, North Korea and others are leaders in this area, the United States has a relatively low number of beds, “because we put so much into outpatient surgical centers and other settings.”

Second, the U.S. has made an unrelentless push towards lowering costs. “One of the things we’ve done is push lean,” said Schneller. “Lean means that we have relatively few products. We’ve pushed all of the distribution of those products over to our traditional distributors. And they then are looking at their inventories and those inventories they’ve become more lean to in terms of how they manage those.”

Thus the perfect storm – reduction in beds, outsourced products, and a move toward lean. Also add the impact of mergers and acquisitions. “Really, by not thinking ahead about how those big organizations can respond collectively, we have found ourselves in big trouble.”

In a podcast recorded in mid-April 2020 during the COVID-19 shelter-in-place order, Dr. Schneller discussed the immediate and long-term implications from the pandemic on the U.S. healthcare supply chain with The Journal of Healthcare Contracting Publisher John Pritchard.

What will happen in the second wave of disruption?

As companies domestically as well as in China, India, and around the world find themselves economically challenged, what will the impact be to the U.S. healthcare supply chain?

Schneller described the U.S. healthcare supply chain as one of the most resource-dependent supply chains that exists across industries. “And hospitals are probably the most highly dependent on other resources than any other industry you can think of,” he said. “They make almost nothing of what they use.”

Tier two and tier three suppliers – those who are making compounds that go into pharmaceuticals, parts that go into high tech or low tech devices – are very economically challenged due to COVID-19. Some may go out of business. “I think that the hospitals will begin to see shortages in those devices, as well as in the parts that are needed to repair devices when they become inoperative,” said Schneller. “So I am trying to look forward at this point, a month, two months and really worry a lot about what’s going to happen.”

Our obsession with cost ultimately cost us

“We’ve had this cost obsession,” said Schneller, “and it’s really let lead to lean taking over all of our thinking.”

Lean can be wonderful in that it looks at and deals with the issue of demand, and it means that we can predict demand. “But one of the things we found out is we’re not very good at predicting demand for a pandemic.”

Linking public health with the everyday supply chain

There has been a huge separation of planning for public health versus planning for everyday health in the United States, Schneller said. This came to a head with the national stores for pandemics. “We didn’t manage them very well,” he said. There were products in warehouses for long periods of time that weren’t inspected and checked properly, or had expired. For instance, ventilators had parts that needed to be maintained or inspected, such as plastic tubing. 

As the principal investigator on a large Department of Defense grant, Schneller led a team that faced the same kinds of issues of maintaining large stores for emergencies. “But they understood that you need to be able to rotate stock,” he said. “Various products basically have expiration dates on them. And if you can’t move stock around very quickly, those national repositories aren’t going to serve the purpose.”

One of the realizations of the COVID-19 pandemic is we need a much better interface between our public health supply chain and our everyday hospital supply chain, Schneller said. “And we need to think about how to finance that,” he said. “Think about this; we finance the fire department because we hope no houses will catch fire, but they’re on standby. We need to know how to understand how to fund standby in the supply chain, and we need to be able to divert some funding to do that. I’m not sure if the national level is the only level to do it.”

To listen to the full podcast,
visit: www.nationalaccountexecutives.com/2020/04/national-accounts-today-episode-8-dr-eugene-schneller.