#no6

by Thorsten Winkelmann

#Abouthealthcareandsupplychain #No6

The healthcare supply chain agenda 2021 and beyond: Uniting what looks like opposites - by digitalization

When setting an agenda, it is advisable to have a look at the mega or at least current dominating trends. For supply chains, for healthcare supply chains in our case, the relevant trends are

  • Digitalization and automation
  • COVID-19 - both, as a health crisis and as an example demonstrating the vulnerability of a globally integrated economy with supply chains as its the blood circulation and nervous system
  • Climate change and the need of green initiatives

These trends are impacting the supply chain agenda 2021 not only by determining specific initiatives, but also on a meta level. The meta level gets clear, if we see what these trends have in common: they do both, enable us on the one side but also  enforce us on the other side to “unite what looks like opposites”. Uniting what?

  • Humans with technology – creating bionic companies and supply chains
  • Economies of scale with supply chain segmentation
  • Central inventory and network management with national, local and even point-of-care availability

I will use these as a framework to identify the specific initiatives I put on the supply chain agenda for 2021 and beyond.

Uniting humans with technology: Building bionic companies and supply chains

New technologies are powerful and there is a lot potential to improve supply chains, creating more value by increasing revenues and reducing cost. But these technologies need to be implemented – by humans. Moreover, in the foreseeable future, digitalization and automation will not completely replace humans. Instead, people will shift from operating processes to designing them. [1] Therefore, and finally, it is not only identifying the areas and right technologies to implement and designing the processes, but also mundane things like improving data quality. Master data management e.g. is a hot topic for supply chain executives again for good reason. To implement modular technology, data and AI you need digital talents and provide them with an enabling organizational setup. Specifically, that means for the supply chain agenda:

  • Go to the cloud as a basic enabler and build partnerships with technology providers for data, AI and warehouse automation technology
  • Find and train people in cloud, AI, data and automation
  • Transform into an agile and ambidextrous organization, which is able to excel in daily operations on the one hand and perform innovation and implementation projects on the other hand. This includes essentially to prioritize and staff projects to make sure they get done, not only started.
  • Democratize access to data.
  • Interface with partners in the supply chain.

One can say, with building a bionic company and by connecting with others in the supply chain, we are creating the foundation to take advantage of digitalization, automation and thus supply chain optimization.

Uniting economies of scale and (dynamic) supply chain segmentation: Modularization

Digitalization and automation are not at all for free. They require investments into people, assets and immense project work. Therefore, economies of scale are highly relevant in the competitive race and per-se this requires standardization. In contrast, more and more complex and personalized products, direct-to-consumer and patient delivery require supply chain segmentation. Not enough, digitalization opens opportunities to respond to very specific and even changing customer behaviors by dynamic segmentation and an according execution.

How to unify standardization and segmentation requirements? The answer is modularization of value chain activities, reaching from order management, via warehousing, transportation, field inventory management to invoicing and collection, each with various specific characteristics (which are ideally parameterized only) to meet the customer segment’s needs and expectations. Essential is that all these modules are interfaced in principle and can be combined very flexible and on demand. This means for example that a storage module can be interfaced with a B2B as well as a B2C pick and pack module. AI can then for example decide where a B2smallB should be fulfilled, e.g. depending on the order workload in various areas.

Thus, the combination of various value chain modules with different characteristics creates a specific and segmented supply chain. At the same time, economies of scale are achieved in each modularized supply chain activity.

Obviously, the highest level of economies of scale can be achieved by outsourcing, as the logistics services provider combines volumes of many outsourcing principals.[2]

I want to be more specific when defining the supply chain agenda 2021 and beyond. Therefore, I will focus on the distribution of (semi-)finished goods, namely order and cash, warehousing and transportation for three reasons. First, according to a PWC study 50% of supply chain cost occur here. [3] Second, these are the customer facing activities, therefore determine the customer experience and thus play an important role as revenue generator, above all when B2C channels come into play. Third, this is the area where major supply chain ‘sensors’ and KPIs are placed and generate highly granular data, e.g. OTIF, days on hand inventory, days sales outstanding. We can say, here is where the rubber meets the road in supply chain.

Specific initiatives to take advantage from digitalization and automation should be:

  • Evaluate investment into warehouse automation or outsource to a service provider running appropriate automated warehouses, considering current and future customer and order profiles and segments as well as internal or external economies of scale.
  • Utilize digitalization for transport management optimization and move away from one-size-fits all to best-in-class carrier for each combination of product, customer segment, and service level, ideally dynamically AI-selected considering near-time data like traffic, weather and recent local carrier performance. This comprises also finding the right balance between cost and service level per customer segment, including order consolidation opportunities.
  • Evaluate and apply IOT when economically reasonable, e.g. to online monitor shipments for security, temperature, and shock, or to monitor consumption and trigger replenishment of medical devices at the point of care.
  • Business intelligence: Take advantage of the high granular data generated in the order-to-cash logistics process to support reporting, analytics and prediction in sales, supply chain, finance and strategy. Combine this data with other data generated in your company as well as with external data, e.g. from market research. Take it from there and build a close loop to sales and supply chain execution.
  • Evaluate and get ready for B2C e-commerce. Even if only relevant for certain product niches in healthcare yet, more and more medtech and pharma companies see opportunities to increase revenues by getting in direct contact with patients and customers.
  • If relevant for your companies’ products: get ready for patient individual digital supply chains, e.g. for cell and gene therapy or home care delivery of medicine which needs accompanying patient support programs. These patient individual digital supply chains are often not linear but require multiple stakeholders in the supply chain which needs to be orchestrated.

 

Uniting central inventory and network management with national, local and even point-of-care availability

It is an ever-returning topic: how central or decentral should a distribution network be? Coming from a very traditional approach where logistics was attached to a countries’ national sales organization, the last 10 to 20 years showed a trend to more centralization or centrally coordinated and harmonized regionalization- in medtech much stronger than in pharma, and in specialty pharma much stronger than in traditional pharma. This was mainly driven by the higher focus on supply chain optimization and the benefits of controlling it on the one hand, and enabled by decreasing transport cost on the other hand.

These days, the trends mentioned in the beginning seem to let the pendulum swing in the direction of decentralization, whereby digitalization is an enabler. Digitalization makes it much easier to make decentral supply chain processes and stock levels transparent, so that the need of physical centralization is lower. Already in the last few years we observed a preference to go into the larger countries with distribution centers and customer service again and consolidate smaller countries into regional logistics clusters, just to be closer to the end customer, even further reducing delivery costs and lead times and go for direct distribution models.

Now, an additional push for decentralization is coming from green initiatives and the Covid-19 pandemic. Whereas the green initiatives are focusing on reducing carbon emissions by avoiding unnecessary transports, the Covid-19 push to decentralization is driven by reducing supply chain vulnerability and striving for resilience.

The last is two folded: first, having decentralized stocks means not to put all eggs into one basket, in other words to be able to ship even if the one or the other warehouse is locked down. The second point is that a European network of various national warehouses under one common management provides a built-in business continuity option.

When designing the multi-site network, one should be aware that digitalization can support sophisticated stock allocations. This makes it e.g. possible to take decisions on SKU and customer level, and not only to decide to have a central warehouse or a number of country warehouses. In addition to store in warehouses, it may also make sense to keep stock in the field, at or close to the point of care. Here we are talking about forward stocking locations or even on the premises of the customer itself, being it short-term and long-term consignment stocks. All that will be supported dynamically by AI including a close loop to execution. I call it smart inventory management.

In order to reap the benefits of a decentralized warehouse network, appropriate centralized management of this site network and its associated inventory must be established, in detail:

  • Review the current and define an appropriate warehouse network setup, e.g. central warehouse with satellite warehouses, central warehouse in combination with a field inventory management approach, hub and spoke system, full range regional warehouses. Field inventory management should be analyzed down to the point-of-care level encompassing forward stocking locations, short-term and long-term consignment and vendor managed inventory.
  • Harmonizing IT systems (ERP, WMS, TMS and CRM) if not yet done.
  • Establishing BCPs taking advantage of a decentral warehouse network, amongst others by defining alternative ship-from / ship-to scenarios, planning of BCP capacities, definition of product-customer priorities.
  • Building a smart inventory management which manages the allocating of stock levels in the defined network setup, integrates postponement strategies, all with the goal of optimizing working capital, avoidance of obsolescence and lost sales due to stock-out.

Summary

Digitalization is the key driver and enabler of change in the supply chain. Therefore, …

...the supply chain agenda for 2021 and beyond must firstly provide the framework to embed digitalization in our organizations (bionic company). Second, it must transform processes and support changing business models, with modularization enabled and enforced by digitalization playing a key role. And third, supply chain leaders should look at network design and how it is coordinated, even more than in the past to respond to COIVD-19 and climate change-related requirements.

The proposed supply chain agenda 2021 and beyond is obviously done from a service provider perspective looking on our current and future client portfolio. However, it is not only taking the inward view, but also envisions what we think should be done from our clients’ perspective. The width and depth of initiatives let guess that this cannot be done and achieved in one year only – that is why I call it the supply chain agenda 2021 and beyond.

The more we advance, the more planning and execution will be integrated to a close loop, the closer we get to a self-driving supply chain.

It is a long way to go - again, digitalization is its key enabler. And clearly, it is time to start now.

 

[1] The bionic company  https://www.bcg.com/de-de/publications/2019/bionic-company

[2] See also #AboutHealthcareandSupply Chain #No1 and #No2: Outsource integrated process chains and whole networks, or use best-of-breed service providers?, Thorsten Winkelmann.

[3] Connected and autonomous supply chain ecosystems 2025, PWC.

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Dr. Thorsten Winkelmann

Dr. Thorsten Winkelmann

President - Healthcare