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Managing Cost in the Healthcare Supply Chain

What are the potential pitfalls costing you valuable savings? Part one of a two-part series.

J. Paul Dittmann, Ph.D. | University of Tennessee

Healthcare will consume 18 percent of U.S. GDP in 2015 and is projected to grow to 26 percent in 20 years’ time.

In addition, all areas of the healthcare industry are becoming more competitive, whether big pharma, medical device manufacturers, healthcare retailers, or healthcare distributors.

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J. Paul Dittmann, Ph.D.

The simultaneous overall growth in healthcare overhead costs, as well as the increasing competitive intensity is putting healthcare supply chain costs under scrutiny like never before.

Maybe this is why, in the seventh annual UPS Pain in the Chain study, “managing supply chain cost” was identified by survey respondents as the least-met supply chain need.

Five to ten years ago, the supply chain component of the healthcare cost structure was not on the radar screen in many firms even though it consumed 50 percent or more of total cost.

This lack of focus resulted in the average healthcare supply chain having a lower maturity level than the supply chains of other industries.

Today, there is a growing recognition that a lot of low-hanging fruit exists for those healthcare firms that aggressively embrace excellence in managing their supply chain costs.

Some healthcare firms have gotten the message and are leaving no stone unturned. They are looking to third-party logistics providers (3PLs) to bring best practices from other industries.

And in general, companies in the healthcare field have found a major opportunity for cost reduction lies squarely within their supply chain.

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Today, there is a growing recognition that a lot of low-hanging fruit exists for those healthcare firms that aggressively embrace excellence in managing their supply chain costs.

Supply chain professionals in most industries are traditionally charged with controlling and cutting costs, and managing the company’s cost structure. Healthcare firms are realizing that a 15 percent reduction (or more) in cost is very feasible in the short run with much more possible.

There are five areas of supply chain cost on which to focus.

1. Inventory and order management cost
A major cost problem for healthcare companies is inventory and order management cost. Managing orders should be an efficient, error-free function of the supply chain organization. However, many healthcare providers, distributors, and manufacturers seem to struggle with a large error rate. That often translates into major cost issues.
Ignore the impact of inventory on the balance sheet at your peril.

2. Supply chain security and regulatory compliance cost
The costs of maintaining security and global regulatory compliance exist in most supply chains in most industries. But these factors are magnified by an order of magnitude in the healthcare arena. Healthcare supply chain professionals are faced with major decisions with cost implications to deal with regulation and security issues. This calls for a strategy with a prioritized, multi-year action plan.

3. Procurement cost
The average healthcare firm has 60 percent or more of its cost in purchases from suppliers. With a cost level this high it is critical to follow best-in-class procurement principles. Of course cost is not the only variable that must be managed. Cost must be balanced against delivery that is fast, on time, and complete.

4. Warehousing cost
More than half of the respondents in the UPS Pain in the Chain study cite labor cost as a major challenge. The lion’s share of supply chain labor often resides in warehouse operations. Cost reduction best practices in distribution centers fall into 6 areas: receiving; picking and order fulfillment; lean warehouse management; warehouse information systems; warehouse space optimization; warehouse network optimization.

5. Transportation cost
A major cost management challenge cited by 63% of the respondents in the UPS Pain in the Chain study is transportation cost. One solution is to simply wash one’s hands of this issue and depend on an outsourced supplier, or a 3PL. Headwinds facing transportation professionals as they manage transportation cost are driver shortage; rail, port, and highway capacity; government regulations; and security.

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Healthcare supply chain professionals are often on the front line when it comes to managing costs in their companies.

Healthcare supply chain professionals are often on the front line when it comes to managing costs in their companies. That role will only intensify as healthcare costs become even more visible and the industry becomes more competitive.

If managing costs were the only thing we had to do, life would be challenging enough. But we have two other big things on our plate, both equally important to cost management.

One, we manage our firm’s inventory and therefore we have a major impact on its cash flow. And two, we’re responsible for customer service—getting the product to the right place on time.

Because the supply chain is the key to dealing with this critically important three-legged balancing act, more and more companies understand that supply chain excellence is essential to driving shareholder value. goldbrown2

Dittman’s white paper, Best Practices for Managing Cost in the Healthcare Supply Chain Part 1, can be downloaded here.

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J. Paul Dittmann, Ph.D. is the Executive Director of the Global Supply Chain Institute at the University of Tennessee. Dittmann comes to the University of Tennessee after a 30-year career in industry. He has held positions such as vice president, logistics for North America; vice president global logistics systems; and most recently served as vice president, supply chain strategy, projects, and systems for the Whirlpool Corporation.

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1 Comment

  1. Pingback: Still Pushing Your Customers Around? | Longitudes

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