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2013

Last week, at Supply Chain Insights, as part of our monthly webinar series, I hosted a panel discussion on the current state of the healthcare value network. Hosting this webinar series is one of the favorite parts of my job as the Founder of Supply Chain Insights.

 

On this webinar, we shared data that we have collected on financial metrics for the healthcare value network (see figure 1) and we asked a panel of Karen Conway from GHX; Ken Thomas, previously of Eli Lilly, and now the founder of Taith Group; and Roddy Martin, previously a Vice President at AMR Research and now at Accenture, the question "How do we Heal the Healthcare Value Chain?" In this blog, I share the insights on the current state of the healthcare value chain and the recommendations of the panelists. (I would also like to encourage supply chain professionals in the healthcare value chain to share their opinions by filling out our survey on the current state of the healthcare value chain. This data will be combined with the financial ratio data and published in an Open Content Research report in April on the Supply Chain Insights Community. Here is a link to the healthcare research study  in the field.

 

Current State:

Costs are rising.  Power is shifting to the hospital. Pharmaceutical companies are struggling with falling margins and rising inventories. Over the last decade, neither the pharmaceutical nor medical device manufacturer has been able to drive the revenue/employee productivity gains of their comparative peer groups.  They each lag in their understanding of supply chain excellence, and are now struggling to build effective supply chain teams.

 

In our work with pharmaceutical companies, most executives wince when we mention inventories. However, most do not realize that the Days of Inventory for the industry has grown 33%.  The level of growth is a surprise. For most, it is a sore point. When the panelists were asked why the level of inventory for the average pharmaceutical companies is 3X higher than their process peers in food, consumer products or chemical companies, Ken Thomas spoke of the need for high service and the commitment for patient care, but he also agreed that the current levels of inventory are not affordable. On the webinar, when the participants were polled on the reason for rising inventories, over 50% of respondents indicated that it was the lack of an executive understanding of supply chain excellence. I think both factors are at play.

 

Figure 2 contrasts the state of cash-to-cash cycles between 2000-2003 and 2008-2011.  While hospital inventories are falling, the inventories of suppliers are rising.  Unlike other industries that have lengthened "days of payables" and squeezed suppliers on payment, this is not the case in this value network. Instead, the primary driver of the longer cash to cash cycles for suppliers is simple. It is rising inventory levels.


What Can We Do?

The winds of change are gathering. Legislation and compliance is increasing. Big Pharma is facing a patent cliff (more drugs are coming off of patent protection than are gaining patent protection.) It is a complex problem. Change will not come quickly. For most companies in the healthcare value chain, supply chain processes are still evolving.

 

It is time to step up and drive change. All segments of the healthcare value chain lag in their understanding of supply chain leadership.  In the past three decades of supply chain transformation, the greatest shifts happened through leaders. A.G. Lafley and Keith Harrison at Procter & Gamble. Angel Mendez at Cisco. Michael Dell at Dell. Sam Walton at Walmart.  I feel that it is time for leaders in the healthcare value chain to stand-up and redefine the supply chain processes to make a difference.

 

For those considering driving this difference, the panelists on the webinar offered three pieces of wisdom for the healthcare executive:

 

Redefine Relationships. Focus on Value-based Outcomes. The industry has shifted from suppliers selling directly to the physician to a more structured selling approach, i.e. selling directly to the healthcare organization or Global Purchasing Organization (GPO) for a group of hospitals. This major transition has happened over the past ten years.

 

Today, most of the " relationships" in the healthcare value chain are transactional:  a buy/sell relationship between the head of procurement and the seller of materials. They are not based on value-based outcomes of the patient.  The evolution of outcomes based on value-based engineering programs is still in its infancy. Leaders in supplier organizations can begin the transformation of selling relationships by redefining sales incentives from volume-based incentives to a value-based outcome incentive.  They can also start measuring cost-to-serve and applying Lean principles to improving the extended supply chain.

 

Improve Visibility. One of the major obstacles to improving the healthcare value chain is the lack of downstream, or channel, visibility. This is an opportunity in the redefinition of selling relationships.  In the redefinition of buy/sell relationships, suppliers can work with hospitals to improve visibility in the channel and drive integration with hospital systems.  For example, on the webinar, Roddy Martin spoke on how Baxter had used RFID to improve visibility to the cabinets in the operating theatres to get a real-time read of the visibility of demand.  This enables the development of a "pull-based replenishment signal" and the use of real-time demand data.  Over history, the major shifts of value networks have been led by individual companies.  It is no coincidence that Walmart improved the consumer value network through the building of RetailLink, or P&G drove the adoption of the bar code through the formation of what is now GS1.


Focus Outside-in through Horizontal Processes. Today's supply chain systems are inside-out, they are not outside-in.  The introduction of standards for medical device companies is a rallying cry for outside-in processes. The standards enable a "common language" and the mapping of the processes outside-in  (from the patient back) enables the maximization or use of the data.

 

At Supply Chain Insights, we are committed to the use of our research as a backdrop for supply chain professionals everywhere to have great discussions. It is for this reason, that we have adopted a format that takes a piece of recent research and asks supply chain professionals to have a spirited debate on a topic. It is a continuation of our free webinar series that we host monthly at Supply Chain Insights.

 

Here is an on-demand link to replay the healthcare webinar.

 

We would like to hear from you! If you give us ten minutes to take our study, we will share the results in a one hour call with your organization.

 

Here are links to the studies:

Corporate Social Responsibility

Healthcare

Bookend: be positioned at the end or on either side of (something)

Oxford Dictionary

 

Today, I published a new report on supply chain excellence. To prepare the report, I worked with Abby Mayer ( @indexgirl ) to analyze ten years of supply chain financial ratios. We waded through spreadsheet after spreadsheet of data for the last three weeks and contrasted the progress of the high-tech, consumer products, food, pharmaceutical and industrial industries.  The storyline of the report is that ONLY the high-tech industry is making progress on the Supply Chain Effective Frontier (effectively balancing progress on growth, profitability, cycles and complexity simultaneously). The rest of the industries are either stuck or moving backwards. Consumer packaged goods (CPG), food and chemical manufacturers are stuck and pharmaceutical and industrial companies are losing ground and moving backwards.

 

 

As I worked with the data, several stories emerged in parallel to the main theme of the report on supply chain resiliency and the progress (or lack thereof) of companies on the path to supply chain excellence.  One story that stands out for me is the race for supply chain excellence within the CPG peer group.  It is a very competitive set of companies.

 

Overall, as shown in table 1, the CPG group composed of Church & Dwight, Clorox, Colgate, Kimberly Clark, Procter & Gamble, Reckitt Benckiser and Unilever, is facing slower growth. With rising commodity prices, increasing complexity of the product portfolio, and escalating costs for transportation, the companies in the peer group are fighting to reduce costs and protect market share.

 

As an industry analyst, over the course of the last ten years, I have worked with all of these companies.  In the process, because I had not done an in-depth analysis of their progress on what I now call the Supply Chain Effective Frontier (performance on driving growth, reducing costs, improving cycles and managing complexity), I saw each of them as equals. They are not.

 

The analysis is tough. This data is hard to get. I am only able to do it now because we invested in systems to analyze financial supply chain ratios at Supply Chain Insights. And, behind the curtain, cranking the numbers is a researcher to help me. I give thanks for Abby Mayer's patience in working with me to run study after study to compare the data.

 

Who Did It Best?

 

As I write this, I hang my head. Over and over again, over the course of many years, I have heralded the progress of Procter & Gamble (P&G) on revenue/employee as a characteristic of supply chain excellence.  As I wrote and pushed forward these ideas, I was challenged by Mark Vollrath, of the Colgate team, on the analysis that I was doing.  He pushed back and asked me to look beyond productivity.  After an in-depth analysis of the data over the course of the last three weeks, on ten years of financial ratios, I see his point. (I know, I know. I can be hard-headed at times.) I now believe that the choice of Colgate versus P&G as the winner on supply chain excellence is based on what is valued. If productivity is valued, the choice is P&G.  If the definition is the balancing of costs and inventory, the winner is Colgate.

 

However, what is now clear to me is that whatever the evaluative metric, Unilever is at the bottom of the CPG peer group and should never be seen as a supply chain leader. Unilever is at the bottom of the list in driving performance improvements in productivity, cost, margin, inventory performance, and growth. The only improvement was an extreme increase in Days of Payables that improved cash-t0-cash, but weakened their suppliers.

 

In table 2, I share insights on progress that the two companies made in the last two years.  Unilever is roughly 4X the size of Colgate. In 2011, Colgate had revenues of $16.7 billion and had 38,000 employees.  In contrast, in 2011, Unilever had revenues of $64.6 billion and  had 169,000 employees. They have some commonalities: both of the companies operate global teams and each defined their supply chain organizations at about the same time.  However, as anyone that has worked with both companies knows, they are VERY different cultures.

 

 

When I first started working with Unilever in Europe, the teams would laugh that you could not work at Unilever without the ability to have a spirited debate. They are right. The Unilever teams in the United States used to laugh that it was hard for them to sort through all of their "science projects," while the Colgate teams were focused on one or two major objectives. The teams are composed of very smart people; however, they have always struggled to gain the same recognition of supply chain excellence at the board level that Colgate and P&G were able to enjoy much earlier.  Unilever also relied heavily on strategic consultants and they started many waves of independent projects. Colgate, on the other hand, was largely driven by internal leadership with a conservative focus on supply chain basics.

 

The definition of global was also quite different for the two companies.  For Unilever, the regional teams operated with a strong independent spirit.  Each region had a high level of autonomy.  As I worked with them, I watched the Indian Unilever team gain a strong  market presence as the market stature of the United States declined.  Colgate, on the other hand, operated with a stronger global hand. The goal of Colgate was to get regional input, but manage a global brand presence. The focus was far more multinational.

 

When the Great Recession of 2007 hit, Unilever went through a massive restructuring with a series of multiple layoffs. Suddenly, inventory management became very important, and the teams got serious cross-functionally at the management of working capital.  Colgate, on the other hand, withstood the market shocks better than Unilever, and continued to build talent systems.  The Colgate team focused on a common IT architecture while the Unilever team allowed more freedom for project-based and functionally-driven IT decisions.

 

When I compare these two companies to their peer group, I see two bookends. Over the course of the decade, Colgate maintained margin of .21 against an industry average of .16 and drove a  high return on assets (ROA) of 18% against an industry norm of 11%. The team continued to reduce costs through the recession.  The Colgate team achieved better growth and better margins with less inventory than Unilever (the average days of inventory for the peer group is 59). They performed better than their peer group on growth. In contrast P&G, often touted as the CPG leader, had an average operating margin average of .18, a ROA average of 9.5%,  an average number of days of inventory of 65 with a growth rate of 7%.

 

This is sharp contrast to the rankings when you study the three companies' performance on improvements on productivity over the last decade as measured by revenue/employee.  The CPG average was $443,000/employee.  P&G was the industry leader with an average of $532,000/employee. Colgate was under the average at $352,000/employee, and Unilever was the laggard at $259,000/employee.

 

Conclusion


So, in conclusion, when I use a more holistic measurement of supply chain excellence as managing the trade-offs of growth, profitability, cycles and complexity, I believe that Colgate and Unilever form the bookends of the CPG peer group. Colgate should be given the award for excellence and Unilever ranks at the  bottom of the pack.  Sorry, Mark. I think that you are right. This is a much better view of supply chain excellence than the easier metric that I used previously of revenue/employee.

 

My take? It is easier to say "supply chain excellence" than to define it. The definition varies by organization and too few supply chain teams stop to analyze the potential of their supply chains and their progress on the Effective Frontier of managing growth, costs, complexity and cycles.  It is for this reason, that I wrote this new report, What Drives Supply Chain Excellence: A Look Back and a Look Forward. Let me know your thoughts when you read it. As an old gal that has been studying this subject for the past ten years, the more that I study the subject, the more I learn. I share my insights to help you learn with me.

 

What do you think of my analysis? I look forward to your feedback.