Insights on Building a Healthcare Value Network
A Closer Look at Trading Partner Relationships in Healthcare
10/8/2013, By Lora Cecere, Founder and CEO Supply Chain Insights LLC
You cannot escape it. Healthcare is front and center in international news. In the last decade, so much has changed — value analysis programs by the provider, pharmaceutical serialization, Unique Device Identification (UDI)of medical devices, greater dependency on cold chains for new forms of distribution, custom drugs for specialized therapies, and the automation of hospitals through custom cabinets and the Internet of Things—yet, so much remains the same. The industry is struggling to move forward.
The healthcare value chain is being pressured by legislation, taxation, and compliance, but the relationships in the value chain are dysfunctional.While companies say that they are collaborating, there is little progress. As a result, companies are notable to make progress to balance health outcomes in the face of rising costs and complexity.
A major issue in this value chain is a clear definition of the “customer.” At the start of the decade, the manufacturer sold to the physician. Over time, there was a shift to sell to the healthcare provider. The futurestate is the delivery of patient-based outcomes and the recognition of the patient as the customer. However,the design of buy/sell relationships and the associated incentives have been slow to change to accommodate the shift. The gap between the supply chain organization and the commercial functions within the supplier’s organization is a fault line in the building of an effective value network in healthcare.
With high margins,suppliers’ supply chain organizations have had little reason to drive meaningful change. In fact,we find that the best balance of metrics in the healthcare supply chain happens in supplier organizations with lower margins. In the words of Philippe Lambotte, prior SVP of Merck,at the Supply Chain Insights Global Supply Chain Insights conference, “It is hard to build a guiding coalition to build supply chain muscle when times are good.”
In table1 we show the shifts in the industry trading partners over the last decade. The ‘patent cliff’ and the slowing rate of bringing new drugs to market have significantly cut pharmaceutical margins.While all of the segments of the industry have improved productivity, as measured by revenue/employee, they have been unable to find a balance and resiliency of cost, working capital cycles and complexity. These productivity improvements are due to advances in technology, connectivity, and work processes.The parties in the value chain are not equal partners. Suppliers not only have higher margins, but they are also3–4X larger in size.The industry is crying for supply chain leadership. There is opportunity to drive new outcomes through new business models.In this report, we share the latest insights from quantitative research, value chain analysis,and client interviews to provide insights on the state of the healthcare value chain.