Volatility, uncertainty, complexity, and ambiguity (VUCA) have plagued medtech’s supply chain since the pandemic. Drug shortages last year hit their highest levels in a decade, with 99% of hospital and health system pharmacists experiencing medicinal dearths, according to an American Society of Health System Pharmacists (ASHP) survey. Eighty-five percent of survey respondents described the severity of drug shortages as critically or moderately impactful. Similarly, Premier survey results showed that more than 50% of hospitals and health systems were forced to cancel or reschedule procedures due to product shortages, and 80% of respondents said they expect supply chain issues to remain the same or worsen. The bottom line is that supply chain disruptions are the new normal.
Cause of Supply Chain Disruptions and Volatility
The pandemic pushed the global supply chain out of alignment, and it has not yet rebounded. Best described as a system of systems, the global supply chain is only as strong as its weakest link. Thus, as parts of the supply chain recover from various disruptions, the end-to-end chain is nevertheless burdened by the weakest link and is forced to overcome the latest bottleneck. The more complex the supply chain, the more likely interruptions persist.
Medtech’s global supply chain is complex. A series of disruptions causing shortages, inflationary pressures, and volatility in the industry’s supply chain has triggered frequent disruptions in recent years. Case in point: Companies that became disillusioned with backlogged U.S. West Coast ports during the pandemic sought cost and service relief through the Panama Canal, which supplies 40% of products and supplies to the U.S. East Coast. However, a lengthy and historic drought in Panama caused widespread delays, as the Panama Canal Authority reduced the number of daily crossings in order to conserve water. By November 2023, the Authority was permitting only 25 daily crossings—a 30.5% dropoff from the 36 allowed under normal circumstances.
Problems at the Panama Canal caused some companies to reevaluate their plans and reroute products through the Suez Canal, which impacts 10% of all maritime trade and 30% of the world’s container traffic. This solution wasn’t much better, though—after the Israel-Hamas war broke out, Iran-backed Houthi rebels started attacking ships in the Suez Canal. Mariners were forced to turn their vessels around and divert around the Southern tip of Africa, adding 10 days and 5,000 to 10,000 nautical miles to the trip. The situation disrupted and delayed shipments to Europe and America’s East Coast, and hiked transportation costs.
These examples are key supply chain chokepoints, but there have been a plethora of others. Weather-related interruptions such as hurricanes or tornados are fairly common now, and threats of labor unrest and/or strikes have prompted companies to reshuffle their logistics to avoid key transportation modes like rail, package carriers, and seaports. There have also been quality issues (Abbott Laboratories’ well-publicized infant formula recall) as well as labor shortages that have created far-reaching impacts. Additionally, there is a skills mismatch with a shortage of high-skilled resources and automation of low-skilled jobs. Medtech companies are frequently prioritizing higher profit customers and products with scarce resources, thereby further exacerbating supply chain disruptions.
Will Volatility and Disruptions Continue
As geopolitical and supply chain risks increase, volatility and disruption become the norm. For instance, the global supply of advanced computer chips is threatened every time China threatens Taiwan. Since that East Asian country produces 90% of the worldwide need for advanced computer chips—embedded now in most medical devices—it is a risk executives can no longer ignore. And, as the need for advanced computer chips increases, the threat becomes more concerning. China already proved during the COVID-19 pandemic that it could shut down a key supply channel and generate shortages (remember the PPE scavenger hunt early in the pandemic?) Geopolitical risks are running rampant, with unrest in the South China Seas threatening sources in Vietnam and Thailand; the two-year Russia-Ukraine war impacting required medical device manufacturing commodities; and the volatile and potentially expansive Israel-Hamas-Hezbollah war threatening to further disrupt already fragile supply chains in that area.
Members of the supply chain are most impacted by these disruptions, forcing some companies out of business and others to consolidate or pivot. These changes create a ripple effect on the supply chain. For example, if a company reshores 30% of its volume, the rest of the old supply chain is impacted. Often, this can occur without notice as executives do not want to be deprioritized. On the other hand, a new supply chain must be created, thereby impacting demand in the new supply chain. These types of transitions create further volatility, uncertainty, complexity and ambiguity, enabling disruptions to continue.
Disruptions and Inflation Go Hand-in-Hand
Supply chain disruptions lead to inflationary pressures by adding cost to the end product or service. Products with quality issues might have to be reworked, reproduced, and quality processes installed. If a container ship is rerouted, for instance, the cost of fuel, labor, inventory, and capital increase as more vessels are needed to transport the same number of goods. Labor costs rise because additional resources are needed to rectify, reroute, and revamp supply chains. According to the American Society of Health-System Pharmacists, the shortages added as much as 20% to hospital drug budgets.
Inflationary pressures create further disruption as companies search for lower priced alternatives that can beget decreased quality, longer lead times, and poor reliability. Pursuing cost-cutting strategies typically produces win-lose customer-vendor relationships instead of strategic alliances with win-win customer-partner relationships. The innovative and collaborative companies that design win-win solutions will have more opportunities than they can fulfill during this period of volatility and disruption.
Supply Chain Optimization to the Rescue
There are many strategies that can propel companies to the top of their respective industries during these volatile times, but only three core tactics will help the best firms pass their competitors.
Assessment. The best organizations evaluate their entire supply chain with an eye toward resiliency, predictability, and sustainability, determining for example, whether they have a backup source of supply in which they can purchase at least 20% of their weekly volume. Companies also must decide whether they should mitigate risk by reshoring, nearshoring, or regionalizing their supply chains. A modern ERP system with advanced technologies that can predict disruptions, evaluate impacts, and suggest solutions is important as well. Other items of consequence include overall performance (are the basics being handled well, or is cost left on the table?) and an SIOP (Sales Inventory Operations Planning) process that enables organizations to stay ahead of changing customer and supplier conditions so they can find new suppliers, purchase equipment, reallocate manufacturing, and adjust their supply chains.
Supply chain optimization. From prioritizing the appropriate supply chain network changes to upgrading planning processes to right-size inventory with exceptional customer service and high margins, the successful companies are optimizing their supply chains. They evaluate strategic shifts with proactive SIOP programs in collaboration with customer and supplier partners, prioritize based on customer and product profitability analyses and strategic fit, and roll out upgrades to their supply chain processes. Our most successful clients focus in on the order fulfillment cycle to achieve happy customers, investors, partners, and employees.
Automation and digitization. Companies in control of their supply chains do so by automating, digitizing, and using artificial intelligence to support elevated customer requirements and profitable growth. From upgrading and better utilizing a modern ERP system to rolling out robotics, digital twins, and predictive analytics, medtech organizations are increasing visibility, optimizing supply chain performance, and supporting increased efficiencies and higher margins with enhanced customer value.
As business risk is heightened and disruptions continue, successful medtech companies will face this harsh reality upfront. The best will design a forward-looking supply chain and optimize it to deliver superior customer value and bottom-line results. As the masses struggle with disruptions, inflationary pressures, and volatile business conditions, the proactive will be prepared to take market share and blow past the competition. They will have a unique opportunity to craft their future success.
Originally posted on Medical Supply Chain Optimization on September 24, 2024.