Shoshanah Cohen, Stanford University

Priorities are shifting as the healthcare supply chain continues to increase in complexity, with a rapidly evolving channel and distribution network and every country in the world being part of the overall ecosystem of production and consumption. Ongoing macroeconomic and regulatory events are constantly changing the shape of the competitive and operational environment in which supply chain managers make their strategic and tactical decisions.

Limiting healthcare costs to society has become a critical priority. At the same time, the industry faces a rapid rate of change for new therapies and diagnostics and a proliferation of products, many of which require specialized distribution networks. In the U.S., generics are increasingly being sourced directly by large retailers who are procuring these drugs the same way they do other commodities. Also, new biological and human plasma-based drugs require a completely different, temperature-controlled supply chain.

The scale and scope of change is unprecedented.

Healthcare executives today are under intense pressure as they face increasing competition in this world of complex government regulations, product portfolio expansion, managed care policies, and patient demands to control their own care — realities that continue to diminish the comfortable profit margins enjoyed by the industry for many years.

The tradeoff equation is shifting, with boards and shareholders now expecting companies to balance product availability with cost management, moving efficiency and effectiveness in operational execution and logistics higher on the management priority list.

Many healthcare companies struggle to align their cost structure with market expectations. Participants in the most recent 

survey say that their companies are underperforming. Over the past five years, at least half of all respondents have consistently indicated concern or lack of success with managing supply chain costs. Another study, “Fee-for-Service Contracts in Pharmaceutical Distribution Supply Chains,” from 2012 made the bold statement that supply chain management is an area that the pharmaceutical industry knows least about.

While every management team approaches challenges differently, high-performing companies can tune performance and increase efficiency by using a set of core disciplines to align their supply chain with the demands of the healthcare industry:

View the supply chain as a strategic asset.

A well-run supply chain drives success not just by controlling costs but also by creating value.

The supply chain must be an integral part of the business strategy and a source of value creation, enabling expansion into new products, advanced technologies, and new markets and geographies.

Strategy expert Michael Porter teaches that successful business strategy relies on the concept of “fit”—a group of activities that support a chosen basis of competition. Although any single activity can be copied, the activities taken together form a system that is virtually impossible to duplicate.

Develop an end-to-end process architecture.

Companies with high-performing supply chains design an integrated architecture in which the core processes associated with planning procurement, production, order fulfillment, and logistics work together in a highly coordinated fashion.

A robust supply chain process architecture satisfies several key tests: end-to-end scope, strategic fit, reliability, and adaptability.

Be deliberate in designing an organization for performance.

The days of supply chain operations as a cost center are winding down as CEOs in all industries are turning to their supply chain as a competitive differentiator.

Successful supply chain executives have a broad range of experience — sales, marketing, finance, and research and development. Whether they use the title of vice president of operations, chief supply chain officer (CSCO), or some other designation, the head of the supply chain function should have a place in the C-suite.

When the leader of the supply chain organization has input into major strategic decisions, it’s much more likely that the company will be able to deploy a differentiating supply chain strategy.

Build an effective model for collaboration.

Less thoughtful leaders can fall victim to a potential peril of outsourcing—referred to as “thinning the core.” This occurs when a company, in an effort to meet aggressive cost-cutting objectives, cuts too deep or opts for a strictly transactional relationship, thereby eroding its ability to effectively control the outsourcing arrangement.

Companies must be careful to retain valuable boundary-spanning individuals who can facilitate inter-organizational communication and cooperation.

Especially in the healthcare industry, identifying, selecting, developing, and working in concert with key partners is a critical management function.

Companies outsource supply chain activities to gain access to other companies’ scale, scope, expertise, or resources. For healthcare companies, logistics is a logical candidate for outsourcing; the infrastructure requirements and specialized expertise necessary to meet the demands of an ever-changing and increasingly complex industry don’t just require a major investment, they demand constant surveillance to stay on top of new regulations and rapidly shifting market channels.

Clearly, the future of any healthcare business rests partly on its ability to create a supply chain that anticipates customer needs and stays ahead of them. Consequently, the choice of a logistics partner is one of the most important that a business owner will make. The wise decision maker knows that there are considerations beyond price.

The world is getting more complicated, especially in healthcare. Healthcare and life science companies have to be prepared. Smart companies pay attention to their supply chains, anticipate what’s coming, and invest and partner accordingly.

As the healthcare supply chain experiences a “coming-of-age,” more than ever before, senior management understands logistics is not only a cost center, but also a potential competitive differentiator.

Note: This excerpt was taken from “The Health of the Healthcare Supply Chain” white paper, sponsored by UPS, as a supplement to the annual UPS Pain in the Chain survey. To download the complete white paper, click 

Shoshanah Cohen is a global thought leader in the field of supply chain strategy. She is co-author of “Strategic Supply Chain Management: The 5 Disciplines for Top Performance” and one of the original developers of the Supply Chain Operations Reference-model (SCOR®). She currently serves as director of Community Engaged Learning at Stanford University.

Shoshanah Cohen, Stanford University

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