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Outsourced services can provide significant financial and risk-avoidance benefits
Drug and device manufacturers are experiencing unprecedented levels of public criticism and governmental scrutiny, while being asked to provide more affordable healthcare products to an expanding base of insured Americans. And to compound the issues, advancements in technology are enabling change at breakneck speeds. What is your company to do? How can you act and react in a manner that addresses these changes and keeps stakeholders satisfied?
To begin to address these issues, you have to start with a basic assumption: that change will be continuous and come at an accelerated pace. So to respond, manufacturers need to create supply chain models that can adapt and change at the speed of this change. My contention is that the current environment makes outsourcing relationships for supply chain management more valuable than ever.
In my opinion, outsourcing is a certainty for small and mid-size manufacturers, and is inevitable for large manufacturers. Why? Because insourced manufacturers can’t flex infrastructure and SG&A (sales, general and administrative) expenses at the speed of the external market. They lack the ability to scale fixed costs and aggregate volume to justify leading-edge technologies to optimize variable costs. Outsourcing and strategic partnering with global distribution and transportation aggregators has moved from optional to imperative to keep up with the pace of change, and those who fail to recognize this will find themselves at risk.
Now let’s look at the other side of the coin. Logistics providers must fulfill the needs I mentioned. They must have innovation teams to convert their learning into new models, they must be investing in new methods and technologies, and they must be willing to manage the allocation of fixed and variable costs over a broad customer base—allowing manufacturers to buy services at or near the point they receive a demand signal from their end customers and pay the logistics provider for those services at or near the point that they are paid for the product sale. The logistics provider has to be the arbitrator of the asset base—willing and able to manage the asset risk—and this is where most logistics providers get uncomfortable. Those with the fortitude to do so will certainly gain a competitive advantage.
So let’s look at some specific examples as to how we develop these ideal relationships:
With volume and variation comes experience, and with experience comes the ability to innovate. However, to be successful we must have partners who share with us their business priorities so we can target what areas to innovate. One idea that continues to have innovative value is the multitenant distribution center.
Let me give you an example of innovation. A major manufacturer decided to investigate outsourcing their distribution operations. Our analysis of their operations revealed poor utilization, allowing us to propose re-engineering their layout and product flows—which resulted in a 40% reduction in warehouse space and a 10% reduction in labor. Additionally, due to high demand for our services in this market, we were able to commit to assuming financial responsibility for the entire facility, targeting new customers for the 40% of space that will be freed up, and allocating back to the manufacturer only those costs they would be consuming.
Another challenge that manufacturers have is the lack of flexibility to mold their current network to what they want and “buy” what services they need because too often they are being plugged into the logistics provider’s model. While the provider will state the “plugging” is optimal, many times it is not. Providers must be flexible here and allow the manufacturer to exercise their desired level of control, and the provider must tailor a solution that meets the strategic needs of the manufacturer.
For example, we recently engaged a Canadian company with whom we designed a model to consolidate multiple operations. This change had the potential to have material impact on their employees as some would still work in the facility that we would operate, by encouraging these employees to take an active hand in the building’s amenities, and to maintain the corporate identity they were proud of. While this may seem minor, our flexibility helped build trust in the relationship. They knew that regardless of the issue, we would be open, honest and flexible to change—which is critical in any successful relationship.
When it comes to meeting ever-changing and increasingly stringent regulatory requirements that are inherent in the healthcare supply chain, it is critical that both parties provide the needed expertise to effectively interpret the regulations and deploy the proper solutions. In support of our clients, GENCO offers a fully validated QMS system, dedicated QMS auditors, and technical system support. We maintain a team of quality management resources to support our industry certifications for ISO 9001:2008, ISO 14001:2004, OHSAS 18001:2007, TL9000 certification in technology areas and ISO 13485:2003 certification in medical device distribution environments. Our quality team is also responsible for implementing new certifications, such as AS9100 and AS9120.
Even so, the best relationships leverage the knowledge of both parties, with the manufacturer leading the effort.
Technology is an area where many manufacturers tie up precious working capital. At a minimum, an effective technology stack includes an integrated enterprise resource planning (ERP) system, and systems for transportation management (TMS), quality (QMS) and warehouse management (WMS), with the latter including a labor management system. It is rare that it makes economic sense for a manufacturer to procure and maintain these systems, and if you do, it is likely you will not fully leverage the cost or functionality that the applications provide. The fixed and semi-variable costs are your drivers here, and a logistics provider or a SaaS model is your best option.
Recently we have witnessed tier-1 manufacturers considering a move away from insourcing certain IT applications—primarily because they have a need to standardize systems across their network, or must further invest in their current platform. Again, here is where a provider can add value by providing best-in-class technology on a variable cost basis, and the provider is responsible for all maintenance, version upgrades, validation and scaling of the application. GENCO is performing just this service for a med-device manufacturer with a WMS that will plug into a global integration layer model whereby we can add additional distribution nodes anywhere in the world with minimal incremental costs.
Outsourced logistics services can provide substantial value both in turning fixed costs into variable ones, and in synchronizing sales cycles to improve cash flow. One GENCO client that insources its logistics is making a shift in its strategic product portfolio, causing both excess warehouse capacity and misallocated assets geographically, but also the wrong mix of assets within those facilities. In addition, due to some changes in their corporate tax structure, there are significant tax advantages for them if they can move their primary distribution center to another targeted state. The problem? By working with GENCO’s combination of warehousing demand (in the state where the misallocated assets were) and warehousing capacity (in the state that made better sense for the client), financial and business problems were resolved.
The collective, myopic view in our industry is that healthcare logistics is about cost control, but I contend it is more about preventing adverse events via an unrelenting focus on quality, executing to disciplined and proven processes, and being constructively paranoid that there are hidden risks in our current models and they must find them before they reveal themselves via an adverse event. As a result of our recent acquisition by FedEx, we are adopting the philosophy and application of quality driven management (QDM). One of its tenets is “Customers Define Quality,” so we work with our clients to proactively identify risk areas and mitigate those risks via accurate assessment and use of scientific methods to develop alternative solutions. At GENCO Healthcare, we remind ourselves every day that “at the end of every transaction is a patient,” and we accept the tremendous responsibility to maintain and improve the integrity of the healthcare supply chain.
ABOUT THE AUTHOR
Kevin McPherson is vice president of Healthcare Logistics, for GENCO, a FedEx Company. With more than 30 years of supply chain and logistics experience, he leads the vision for GENCO’s expanding Healthcare Logistics practice.