Supply Chain in the time of the coronavirus

The coronavirus pandemic has brought supply chains into the televisions of almost every American. As a supply chain professional, this is a silver lining behind this very dark cloud we are under. When compared to other industries, hospitals are underinvested in supply chain tools. Much of this is due to their business model, and by business model I am referring to “business as usual.” Unlike a manufacturer who must forecast today the mix and number of products they believe they will sell four months from now, hospital supply chains have been designed to be reactive. Hospitals normally replenish suppliers based on usage. While this may work for C type items, how did that PAR location replenishment work as COVID-19 hit? Kind of like the manufacturer who finds a million dollar jet engine held up due to a $.50 fastener. In addition to the COVID-19 event – using forecasting terms – today’s hospitals are also seeing fewer elective surgeries and are investing capital in protecting their care providers. We will also address a change in philosophy that will allow hospitals to better deal with the unexpected as well as daily business as usual, once we all move forward from this crisis.

Vince Lombardi used to start every training camp by holding up a football and saying, “Gentlemen, this is a football.” The supply chain equivalent for providers is, “Gentlemen, timely and accurate information could be a matter of life and death.” However, as hospital executives know, you are also running a business. Let’s look at how best-in-class supply chains can help providers to do both.

Product hub data

In the healthcare industry, products are not standardized across the supply chain. Teamed with the tremendous volumes of data hospitals must deal with (new product introductions, end-of-life (EOL) products, and variability in procedures, etc.) this becomes quite challenging. Our fundamental football will start by having hospitals utilize a hub approach to data. This will ensure that all items are standardized, regardless of their individual supply chains. The hub will also let the provider place attributes on each of these items. The product hub, combined with attributes, can be used to provide visibility to product alternatives, as well as facilitate recalls on items. This expands the value beyond the supply chain to purchasing partners, operations, and even the financial end of hospitals. For example, this same strategy of a product data hub will allow hospitals to quickly and accurately integrate financials across different organizations, or business entities.

Forecasting history to future

The art of forecasting used to be summarized by a statement similar to “the future will be similar to the past.” Today’s supply chain professional uses numerous different information streams to develop scenarios of the future, as well as the costs associated with them. From here, decisions can be made as to the optimal course of action for the hospital.

Getting to a best-in-class approach to the current  COVID-19, we will start our forecast by looking at the last five years of flu admissions - our history - and compare this to what we might see with  COVID-19. In addition, we will also compare our history with some other available information that is not from our history. This type of information is called causal factors, and it might be general US flu information from the Centers for Disease Control and Prevention (CDC), our local state, or perhaps even Google (https://www.google.org/flutrends/about/data/flu/us/data.txt).

Forecasting software can compare our history with these causal factors and develop a curve for how  COVID-19 might act. We are in effect treating  COVID-19 as if it is a new product introduction. Once we have the  COVID-19 curve, we can manually put in additional ‘what if’ scenarios, each of which have costs associated with them. Using the power of collaboration these forecasts, assumptions, costs, etc. can be not only shared but used in collaboration to achieve the best outcome for the hospital.

Getting away from COVID-19, doing this on a yearly basis will allow your hospital to get early visibility to the flu and perhaps secure the required stock levels of Tamiflu, while other providers who do not have such strong supply chain processes find themselves facing stockout situations.

Forecasts are not only used for Rx products. Like manufacturers who have a bill of material (BOM,) hospitals have preference cards. They also have schedules from their practicing surgeons that, while not 100% accurate by any means, are in reality much more predictable for many types of surgeries than that above mentioned manufacturer. While it might not be as politically feasible to rationalize the items in a preference card among the physician groups in a hospital, having a true cost comparison to such changes might help to get them executed.

Measuring forecast error

Before we move on to discussing how the forecast impacts supply decisions, let’s address forecast error. You know, that concept we are not hearing about now as we all see the latest “numbers” that various agencies and centers are using for their coronavirus forecasts.

Forecast error is the difference in what was forecasted and what actually happened. Now, it can get complex as generally (but not always) the closer you are the more accurate your forecast will be. The key for hospital supply chains is to pick a lag time that you want to measure and use this to measure your forecast error. If you have an item with a three-week lead time, for instance, that is the error you will use.

What I call the “art of forecasting” comes in when we consider the error. Is it showing bias by consistently over or under forecasting, or is it bouncing around up and down? Both of these situations require a different “massage” in the generated forecast, and if we are talking about what supply goes with that forecast, the error will help us to size our safety stock.

Capacity planning and profit

Like best-in-class manufacturers, hospitals should also use the forecast to collaborate with their suppliers, whether they are replenishing via a PAR location or direct to the distribution center or hospital. This information can also be used when negotiating rates and terms of your contracts. It can even help answer strategic decisions such as “Does it make sense to do a window buy for our items?”

Best-in-class supply chain companies also forecast for capacity planning, and many times, optimization. This is not something that hospital supply chain managers often do. Simple capacity planning can also be done using a forecast for surgeries. Utilizing such things as physician preference cards, individual preferences (for example, back surgeries on Mondays) and history of past surgeries will allow hospitals to more effectively plan and time phase purchases or assemblies for those ORs. Throw in some causal factors (perhaps skier forecasts from the trade association in Colorado for a Denver hospital, for instance) and you have the makings of a capacity plan that can lead to strategic decisions, with cost and even profitability implications.

Best-in-class supply chain processes as outlined above can drive profitability for the business in many different ways. For example, what would changing your OR mix from 20 percent orthopedics to 40% orthopedics do to your revenue? An accurate way to estimate either new product introductions and/or EOL products will see the optimized decisions drop right to the bottom line of the hospital. In the current  COVID-19–specific environment, a hospital would be able to forecast ICU capabilities, costs to increase these capacities, as well as provide a forecast for everything from manpower requirements to ventilators.

Supply chain visibility, testing

Complete supply chain visibility, and the ability to impact changes in said visibility, is another best-in-class supply chain concept hospitals should be focused on. Many hospitals order items, even with expedited freight costs, while a different location of the same hospital or a sister hospital a few miles away might have four weeks supply of that same item. Visibility, matched with the ability to align supply and capacities with where they are needed, will eliminate such non-value added reactions.

I used to be on the board of directors of a major financial institution, and every year we would do an interest rate “shock test” for our book of loans. While hospitals may not need to test their debt instruments in this manner, what they should do on a regular basis is “shock test” their supply chains for  COVID-19–type pandemics, or even local emergencies (we are addressing you, California hospitals!). Ideally, the hospital should have a committee made up of supply chain and financial professionals, who can do these shock tests on at least an annual basis. Only a best-in-class supply chain process will allow hospitals to do this, and make decisions based on anticipated outcomes and costs associated with these shock tests.

There is a reason why the Superbowl trophy is called the Lombardi Trophy. With best-in-class supply chain processes, there is no reason whatsoever that hospital executives cannot implement best-in-class supply chain processes that increase patient outcomes as well as efficiency. Strive to be the best!