Contemporary healthcare is among the greatest achievements of the modern world. Since 1900, the average life expectancy across the globe has more than doubled[1], and many debilitating illnesses have been eradicated thanks to the genius of vaccination.
But it isn’t only brilliant medical minds that have made the incredible transformation of public health possible – it also thanks to the widespread availability of healthcare products, from complex medical machinery to cutting-edge pharmaceuticals and operating equipment.
Without access to this panoply of goods, modern medicine would shudder under the weight of demand. And that is exactly what we have discovered during the COVID-19 pandemic, when somehow supply chain mismanagement became global mainstream news.[2]
In the wake of the pandemic, there will be increasing investment and disruption in healthcare supply chains, and in this article we’re going to explore what that could look like, pinpointing exactly where the greatest weakness and opportunities currently lie.
But first, we need to understand exactly what healthcare supply chains are.
1. What is involved in the healthcare supply chain?
Put plainly, healthcare supply chains are responsible for delivering every item necessary for a medical institution – and individual practitioners – to function. This means obtaining resources, managing supply and demand levels, and delivering goods and services to the exact right place at the exact right time.
To get a sense of the scale of the challenge, take a moment to think through every item a healthcare provider might need through the course of a day: Personal Protective Equipment (PPE), syringes, prescription drugs – the list goes on.
The immensity of this means healthcare supply chain managers are under a huge pressure to perform. And because the delivery of medical goods have life-or-death consequences, the stakes are about as high as it gets.
1a. How do we manage success in Healthcare supply chains?
Like any supply chain, the goal is to achieve the most efficient flow of goods, in terms of both finance and expediency. This presents a number of complex challenges, and a balance is forever being negotiated between cost-cutting efficiency and maintaining proper levels of quality.
As with most modern supply chains, parts are often sourced from a number of desperate locations, making logistics complex. And many goods involved in healthcare require a range of rare or unusual components. Most notably, pharmaceutical companies tend to require very many specific chemicals in order to synthesise the various drugs we all take for granted.
This will be familiar to anyone who’s dealt with modern procurement before. However, this is largely where the similarities end.
2. Why are healthcare supply chains different to regular ones?
In recent years, titans like Walmart and Amazon have recently tried to enter the arena of medical supply, and even those businesses - with huge amounts of capital and power – have found it extremely difficult to break into the game. And that is because medical supply chains are fundamentally different to other supply chains in a number of complex ways.
2a. The end product is more is more complex
The human body is notoriously complex, and proper care for it is likewise exceedingly complicated. Compared with virtually any other industry, there is nowhere near the same static set of constraints or predictability in terms of outcomes.
While most supply chains can use predictive analytics and AI forecasting to manage supplies, this is far less effective in healthcare – in large part because demand is not nearly as predictable.
2b. Demand doesn’t work in the usual way
Healthcare is, of course, in some sense a service, it generally doesn’t function in the same way as other services do, with a clear demand curve which can be anticipated and prepped for.
Healthcare is by its nature varied, and specific patients require specific needs. This means efficiently stocking items is more challenging, as it is difficult to know how many – for example – latex-free gloves might be needed.
While stockpiling and demand-forecasting can be done, there is a far higher risk involved in healthcare, and many goods involved in the supply chain simply can’t be ‘stocked’ in the way we might be used to.
2c. There are numerous Intermediaries
Healthcare is an industry where producers and manufacturers don’t generally deal directly with vendors. Instead, there is a complex system of different intermediaries asserting different levels of influence on buying decisions.
Individual practitioners may have favoured goods, and will often have commitments to a specific vendor. This is true of institutions at large and various other positions within them, and the lack of centralised control or transparency makes cost analysis unusually difficult.
2d. Heavy regulation
For obvious reasons – human lives are literally at risk when diligence isn’t carried out – there is heavy regulation on basically all healthcare items. This always makes procurement more challenging, because visibility has to be exceptional and decisions can’t be made at the same speed or with the same agility less-regulated industries can.
Complicating matters even further, regulations often change from country to country, and this affects not just what is allowed, but how it can be procured and the financial equation.
2e. Cultural differences
Countries have different relationships with healthcare, both in terms of government policy and regulatory requirements. This means, for example, that many drugs available in the States may be illegal in Europe. It also means healthcare supply chains are at the mercy of government changes in policy – both in terms of budgets and subsidies.
3. How did healthcare supply chains fare during COVID-19?
With several similar – though ultimately less globally severe – contagious diseases in recent memory, the lack of preparation for COVID-19 – particularly in Western countries – is as shocking as it is damning. Looking back at the years leading up to the pandemic, it’s hard not to see this complacency as hubristic.
Between January and March 2020, it became very quickly evident that healthcare supply chains were simply unprepared for such a massive wave of demand for PPE. Worse, this shock sent ruptures through the entire chain, meaning it wasn't just frontline staff who were struggling – entire healthcare organisations and governments were put in a position of profound financial insecurity.
3a. Failures of stockpiling
Most economically developed countries have some form of emergency stockpiling policy. In the UK, there has been a programme since 2006 dedicated to pandemic preparedness. However, management of this was sourced a few years before the pandemic, and 21 million of the 33 million FFP3 respirator masks included in the original 2009 procurement lists were found to have gone missing without explanation[3].
A similar story occurred in the USA, where vital stocks of face masks were distributed to states and localities during the 2009 H1N1 pandemic, and stocks were never replenished, leaving the nation in a state of desperation as it became clear COVID-19 was going to require huge supplies.
3b. Globalisation bites back
Western countries didn’t realise how serious a threat COVID-19 was or the scope of the supply requirements they were facing.
In February, the European Centre for Disease Prevention and Control estimated that healthcare providers would need 14-24 sets of PPE each for every confirmed case of the disease[4]. And in March, the World Health Organisation claimed that 89 million medical masks, 76 million pairs of gloves and 1.6 million pairs of goggles would be needed every month during the pandemic[5].
This took many by shock, and a desperate race to acquire supplies at whatever cost ensued. The problem was China had become the world’s defector factor for cheap production, and as they too struggled to keep the virus at bay, the country decided to hoard its produce.
The same goes for many aspects of the procurement process: a whole group of arcane chemical known as nucleoside phosphoramidites that are key for developing DNA-based COVID-19 vaccines require precursor materials from South Korea and China, making sourcing next to impossible when internationals borders are suddenly closed.
3c. Vulnerability to fraud
As governments became desperate to buy PPE at any cost, stories of hugely inflated prices and scams flooded the papers. This wasn’t just embarrassing for those involved – it also demonstrated how easily a lack of visibility could plunge supply chains into chaos.
Ultimately, healthcare supply chains took a violent shock during the early months of COVID-19, revealing a number of extreme weaknesses in the existing operating model.
4. What are the current weaknesses in the healthcare supply chains?
4a. Legacy inhibits agility
Perhaps the clearest weakness in existing healthcare supply chains is a lack of agility. While most other supply chains have made this an absolute priority in recent years, healthcare has lagged behind – and there are some very good reasons for this.
Stability has understandably been championed within healthcare, and that has meant change is slow and deliberate. In part, this is a question of management: few want to be held responsible for errors or issues which may occur from changing the system, and this makes conservatism preferential from individual actors’ points of view.
While recent geopolitical shifts – namely the increasing push to escape dependence on China – has increased interest in healthcare supply agility, and the rising popularity of personalised products – devices, pharmaceuticals et al. – has created a powerful commercial incentive, agility is still a huge issue for healthcare supply chains.
In large part, this is down to technological weaknesses.
4b. Slow technological adoption
Healthcare has been shockingly slow in adopting technology on basically all fronts. As recently as 2017, research from Nuffield Trust argued that healthcare was at least a decade behind other industries in its adoption of digital technology[6].
This has a clear impact on not just the agility of supply chains but the amount of effort and resources required to operate them. A 2017 Cardinal Health Hospital Supply Chain Survey of hospital staff fielded by SERMO found that 78% of respondents were manually counting inventory at some point in their supply chain and only 17% stated that their hospital had implemented an automated technology system to track products and inventory in real time[7].
Data is also not being used to the full extent it could be in healthcare. It is often siloed due to vertical internal structures, and while healthcare generates a third of all the world’s data, it is still not being used to its full potential.
Legacy systems make integrating newer tech harder, and fear of technology dehumanising the caring process creates resistance. But this creates major weaknesses in supply chain management, as tech is now essentially for such complex operations to run smoothly.
4c. Misaligned incentives
The nature of healthcare organisations – and their convoluted relationship with suppliers – creates conflicting incentives. And while during extreme situations it’s usually possible to get individuals to line-up behind a specific course of action, it isn’t always possible to act with the necessary urgency.
While individual practitioners might want to stick with brands or providers they were trained with or believe to be superior, other personnel within the organisation might be more interested in sourcing cheaper options, or have their own ties to a specific provider.
The irony of all this is healthcare providers are so obviously united behind a single goal: providing great care to patients. But the existing structure of many organisations can obscure this and make the procurement process more splintered and difficult than is ideal.
4d. Struggles to implement strategy
As is often the case, strategy often overshadows action in healthcare supply chains. The sheer complexity of most large healthcare organisations makes strategy essential, but this also means they end up spending more time figuring out what they should do than figuring out how to do it.
This isn’t a criticism: it is almost inevitable that communication and implementation are difficult in such organisations. And while the pandemic has demonstrated many weaknesses in healthcare supply chains, it has also galvanised the industry to focus on fixing these problems and properly implementing those strategies.
5. How can we improve healthcare supply chains?
5a. Reduce operating complexity
As we’ve discussed, agility is a major weakness in healthcare supply chains. The reality is though, agility is only really possible in a supply chain when the operating model is lean and clear. During the pandemic, many organisations found their operating models become even more complex, and to pursue a more agile procurement process will require this complexity to be radically simplified.
Disintermediating supply will certainly help here, but more importantly the internal decision making roles, rights and policies need to be refined and clarified so that quick, well-informed decisions aren’t slowed by bloated processes.
Here is an example: many claim that physician preference items account for as much as 60% of all healthcare supply chain spending[8]. But if this were changed – within reason, without disempowering practitioners – the decision makers would have more room to make cost-effective and more agile decisions and the physicians would have more time to focus on providing world-class care.
5b. Standardise and make use of data
Standardised data –in terms of metrics, quality, governance et al. – will change the nature of risk management and prevention. This is already beginning to happen during the pandemic, with many organisations establishing for the first time centralised dashboard and control towers.
Not only is data valuable as a means of better managing healthcare supply chains – supply chains are a useful means of gathering data for the organisation – more so even than Electronic Health Records (HER). This mutual usefulness could be a huge driving force for change.
5c. Implement technology to increase visibility
After some of the horror stories during the pandemic, supply chains visibility is absolutely essential to restoring stability within healthcare organisations. Technology is a hugely powerful tool in this way, and leaders should be looking at ways to introduce visibility software.
A.I, predictive analytics – these tools are hugely powerful for understanding supplier risk and managing it effectively. The challenge with this is finding ways for it to integrate such technologies into a centralised process that is stable and reliable.
5d. Localise and diversify supply
The WHO has called on governments to increase domestic manufacturing of PPE by 40%[9], and this looks to set a precedent for far more localised procurement. Of course, this is a widespread phenomenon – many supply chains are looking to decrease their reliance on globalisation.
There is a reality to be confronted here though: having outsourced so much manufacturing to Asia, there is a serious path dependency problem. China produces half of all melt-blown – a vital part of mask filters – and countless other items involved in pharmaceuticals and the like.
Many countries will look to at least onshore the manufacturing in the coming months and years, but this will not fundamentally break the reliance and may even prove inefficient – only time will tell.
Conclusion | A rocky road ahead
Before the Pandemic, around 35% of the average hospital’s expenses were tied up in the supply chain[10], and this was mostly left to CFOs to manage. Moving forward, this will surely change, as improving the efficiency, resilience and agility of supply chains become an absolute priority.
A shift of focus won’t be enough on its own, though. The world is still in the early phases of a radical remould post-pandemic, and there is still so much we don’t know.
We may see changes in regulation; shifting geopolitical patterns; new attitudes and approaches to healthcare practises; and complex new requirements to offer the best medical care in the future.
Leaders should be proactively doing everything they can to pre-empt and prepare for this - an awful lot depends on their success.
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[2] https://www.ft.com/content/9680c20f-7b71-4f65-9bec-0e9554a8e0a7
[3] https://healthbusinessuk.net/news/28042020/uk-failed-stockpile-crucial-ppe
[8] https://revcycleintelligence.com/news/3-most-common-healthcare-supply-chain-management-challenges
