Globally, healthcare spending is expected to be at
Of all the industries in the global economy, healthcare is truly unique as it is directly responsible for the lives of billions across the world. Population growth, coupled with advancements in medical technology and improved access to healthcare, has meant the continual flourishing of the industry.
According to Deloitte, healthcare spending globally is expected to rise and will continue to be a vital pillar of economic growth and development.
As with many industries, the effective functioning of the healthcare industry is underpinned by the efficiency of its underlying supply chain. However, the coronavirus pandemic has forced the industry to reconsider the principles and priorities their supply chains run on.
Understanding the myriad factors behind this disruption requires knowledge of how the supply chain works. An uphill task, given that its complexity is arguably analogous to the complexity of administering healthcare itself!
Here, we will break down the various components of healthcare supply chains and how they work together, their various stakeholders, key trends shaping supply chains of today, and the importance of bringing resilience to supply chains.
To ensure that patients get the healthcare products they need, supply chains grew to become incredibly efficient. And incredibly complex.
Healthcare supply chains are notorious for spanning across several touchpoints and geographies. A McKinsey report noted that such supply chains could start in Asia and circumnavigate the globe twice!
Despite this immense complexity, healthcare supply chains can broadly be categorized under three types: the first mile, the middle mile, and the last mile. The principal players of the first mile are pharmaceutical companies and medical equipment manufacturers.
Once an order is placed with these drug makers and product manufacturers, they are shipped off to distribution centers. From here, these products are then shipped to the hospitals, clinics, other healthcare centers, and pharmacies that ordered them. The transportation of products from the manufacturer to distribution centers and the healthcare centers constitutes the middle mile.
The patients are central figures of the last mile in the supply chain, as it involves the delivery of drugs and other healthcare products to patients. Online pharmacy and healthcare companies have been making their mark in this space with rapidity. A big reason for this is the growing popularity of online healthcare services and telemedicine in a post-pandemic world.
Source: Rock Health’s H1 2021 digital health funding report
As a result, providing healthcare is no more confined to traditional centers such as hospitals and clinics. Healthcare can now be provided at a patient’s home in many instances, making the last-mile delivery of healthcare products crucial.
Up until the ’80s, healthcare supply chains were largely decentralized, and its operations were manually run. Each hospital or healthcare center would periodically compute its supply needs and meet them by individually reaching out to vendors. In essence, every healthcare center was an island that was operating and maintaining its supply chain.
However, this meant that hospitals had little leverage against suppliers, leading to increased costs, which also reflected as high healthcare costs for patients. The manual process of taking inventory also had greater scope for making errors, often leading to oversupply and eventual wastage. The reverse is also true, where clinicians would often not have their desired products at hand.
Since then, supply chains have evolved to become more centralized. Concepts such as integrated delivery systems (IDSs) have helped hospitals’ supply chain managers gain greater inventory visibility. IDSs are essentially a conglomerate of healthcare companies owned by a single parent company. They enable a flow of data and necessary resources, and also allow healthcare companies to enlist the help of group purchasing organizations (GPOs). These are third-party organizations that often pool the procurement needs of multiple hospitals to gather collective bargaining power from suppliers. Thus, GPOs help reduce the expenditure on supplies and make healthcare more accessible.
The past decade has seen more significant efforts towards the digitization of information, advancements in logistics technology and innovation, and the increased adoption of data analytics. The end goal is improved supply chain visibility, better inventory tracking, and reduced wastage of supplies.
Estimated value of the supply chain management market in 2021
CAGR of supply chain management market in 2021-2028
The pandemic has accelerated the digitization of the healthcare supply chain and telemedicine and digital healthcare. All these trends have led to the maturation of the last mile in the healthcare supply chain.
Increase in telehealth usage in 2021 from pre-COVID-19 baseline
Funding received by the US digital health sector in H1 2021, up from $1.1 billion in 2011
As a result, patients can now receive healthcare services and medicines at their homes, often on the same day, thanks to the parallel advancements in supply chain logistics.
While the motivations behind the various stakeholders in the supply chain might differ, they all operate on a fundamental principle: to facilitate the best possible healthcare, both patients and clinicians must have access to the relevant healthcare products in a timely manner.
This is a task easier said than done. Given the diverse spectrum of ailments and equipment needed to treat them, hospitals on average stock up an average of 6,000 to 8,000 stock keeping units (SKUs). They are estimated to have close to 35,000 products on their formulary, which is the list of drugs and medicines that they can count on to buy at any time.
Estimated percentage of total hospital budget earmarked for supplies in 2019.
Product choice of clinicians is also one of the major factors affecting supplies at hospitals. If there is a lack of communication over stocking these products, hoarding becomes commonplace. On the other hand, catering to the diverse choices of all clinicians could mean overstocking of supplies and eventual wastage.
Ex: A US-based hospital managed to save $30,000 a year by reducing the number of sanitizers it stocked in its healthcare system from 30 types to three.
The COVID-19 pandemic has arguably been one of the strongest change drivers in the healthcare logistics space. It has exposed the weak links in having efficient supply chains spread over many countries.
Estimated percentage of one year’s earnings that MedTech companies could lose over a 10-year period from shocks.
Estimated percentage of one year’s earnings before interest, taxes depreciation and amortization that pharmaceutical companies could lose over a 10-year period from shocks.
Loss caused by forty weather disasters in 2019
Increase in the number of ransomware variations from 2018-2019
The spectrum of risk has also evolved, ranging from cyberattacks to disruptions caused by tariff wars and political instability, to force majure events such as earthquakes, tsunamis, and even pandemics. The interconnectedness of supply chains means that such disruptions can have ripple effects throughout the healthcare industry. This has made resilience one of the top priorities for supply chains. In the past, supply chain resilience would come at the cost of efficiency. However, developments in supply chain technology and management are making it possible for both qualities to go hand-in-hand.
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