High costs, late deliveries and excess inventory are ailments experienced by many companies. Symptoms of inefficient supply chain management, these common business issues can have serious implications for long-term success and survival. Medical technology and healthcare companies are not immune from these conditions, and to make matters worse, when their supply chains fail, patients can quite literally suffer.
With governments as customers and human lives at stake, medical technology and healthcare companies are under the most extreme pressure to contain costs while making effective treatments available to patients precisely when needed. They have to manage complexity, maximise efficiency and deliver reliably to earn success and a solid reputation in the industry. These are among the challenges faced by Gambro Renal Products, the business area in Gambro Group with leading positions in renal and intensive care — products and services. Its commitment to improving patient and customer care, and to doing so cost efficiently, led it to completely transform its supply chain.
Over recent years, medical technology and healthcare companies have found themselves needing to manage more complex supply chains while simultaneously reducing costs. The labyrinth of global rules and regulations for medical products and services has grown and continues to grow and change on a constant basis. In addition, the requirement for ever-larger clinical trials demands more monitoring and less flexibility and has led to longer planning cycles over the years.
As a result of this complexity, medical technology and healthcare companies have inevitably seen an increase in their costs, both in research and development and in operational areas. These costs are hard to absorb and medical technology and healthcare companies must realise efficiencies in other areas of their business to compensate. Governments and private payers are constantly looking for less costly care alternatives that still deliver high quality results and can shop around for competitive prices. Global healthcare spending has increased year on year, and public spending on healthcare, particular, is closely monitored.
The need to reduce costs in the healthcare industry is clearly important, but so too is the need to deliver on time. Medical technology and healthcare companies have an obligation to ensure that products are available to the patients when they need them. If shortages of dialysis products occur, the patient’s safety is at risk. To avoid this eventuality, healthcare companies frequently build up large stocks of medical products, but if this policy helps prevent shortages, it does not help reduce costs.
Healthcare companies clearly face a difficult challenge to cut costs while also maximising product availability. As far as Gambro was concerned, the only real solution was a radical one.
A lack of co-ordination
The supply chain in Gambro’s business area for renal products had evolved and grown with the success of the organisation but was now not as coordinated on a global basis as the company wanted. To maintain the strength of its brands and ensure efficient supply, the business area decided to completely remodel its supply chain strategy, processes and organisational structure.
‘We started looking at our supply chain because we realised our stock levels were too high, our delivery reliability was low and we were spending too much trying to manage both,’ explains Klas Arildsson, senior vice president, Global Supply within Gambro Renal Products. ‘The marketplace was changing more and more rapidly, and we had to follow our customers and what they wanted.’
The desire to respond directly to customer needs was the main principle that guided the redesign. Like those in many companies, Gambro’s supply chain was based on a traditional ‘push’ model; products were pushed into the market based on what the factories produced, rather than based on what customers demanded. Gambro executives realised that this supply chain model was not as efficient as it could be, leading to surplus stock and unnecessary costs. As a result, they determined to create a new supply chain that was predominantly driven by demand.
The transformation project that Gambro embarked on was comprehensive. The business area started by designing its optimum new global supply chain structure, which involved developing and simulating 24 alternative network scenarios. The performance of each option was estimated in terms of future cost, service level and delivery lead-time, to ensure that it created the supply chain that would deliver the maximum possible benefits. In parallel, the business area drew up new organisational structures, with new roles and responsibilities.
Complications of scale
The reorganisation was complicated by the sheer scale of the business. Gambro’s giant network encompassed 52 warehouses in Europe alone, as well as European sales offices and further operations in Japan, Mexico, the USA and Australia. The business area decided to dramatically alter-its network of sites, by replacing its European warehouses with four regional distribution centres and two new satellite offices. With the new structure defined, Gambro next turned its attention to the need for new global processes to help it better understand and respond to customer needs.
The success of the demand-driven supply chain model depends heavily upon a company’s ability to accurately measure demand and plan supply accordingly. Accurate demand planning is crucial, but often hard for medical technology and healthcare companies to achieve due to the number of unknowns that the industry is subject to. An unexpected outbreak of a disease or a disaster such as the recent tsunami can change plans in an instant. Allocation of supply may need to be altered, as well as transportation plans changed and manufacturing ramped.
The forecast needs to be accurate because it will be used to determine how much of each product to produce. Ensuring an adequate supply of products is perhaps the most critical issue for medical technology and healthcare companies — its customers can suffer and develop serious complications if certain products are unavailable. Medical technology and healthcare companies cannot afford to take risks that affect lives as well as profits.
At the same time, however, it does not make economical sense for medical technology and healthcare companies to over-produce. Like all companies across all industries, excess inventory leads to inefficient asset utilisation and unnecessary costs. Closely watched by shareholders and the financial markets, healthcare companies have to be able to make predictions for new product releases and sales volumes and meet them or risk loss of market value. Balancing supply and demand is a technical and tricky task and technologies can be deployed to equip companies with the tools to make more accurate predictions and calculations.
Gambro selected solutions from i2 Technologies to help it accurately create forecasts on a monthly basis and make decisions regarding production volume needs in order to meet the on-time delivery requirements of its customers. ‘i2 Demand Planner and i2 Supply Chain Planner allow us to maintain balance in our supply chain,’ says Arildsson. ‘Maximum production capacity is achieved, while ensuring that we have also adequately prepared for our customers’ future needs.’ The solutions were integrated with an assortment of existing ERP systems, including SAP R/3 in Europe, and enabled Gambro to consolidate its IT landscape by reducing the number of different systems used globally from 27 to five.
Moving to the demand-driven supply chain management model as opposed to the more traditional supply-driven model, involved a complete change in the way that Gambro did business. However, the comprehensive approach taken — spanning all product lines and all locations worldwide — has delivered tangible improvements that will strengthen the company’s position.
‘Cutting our inventory, including overall costs in supporting that inventory, has enabled Gambro to focus more on the customer, letting us produce what we sell, instead of selling what we produce,’ explains Arildsson. ‘This has created a fundamental shift in the way we work that is more positive and productive.’
With its global supply chain now in place, Gambro is enjoying improved business performance and significantly reduced costs. The business area reports that it has achieved a reduction in inventory of more than 40 per cent, a decrease in overall logistics and inventory costs and a 30 per cent increase in on-time deliveries.
One enabler for the business improvements is the better information that Gambro now has at its disposal about its customers’ needs. It knows what the forecast is for each product and how the market is developing. It also has access to all of the facts regarding its inventory, which allows it to take appropriate action much more quickly. Decisions about what to produce are made based on accurate weekly forecasts for demand and actual stockroom figures.
The demand-driven approach to supply chain management has proven successful at Gambro. What is more, it is being adopted more widely with other medical technology and healthcare companies, as the industry as a whole attempts to become more responsive to its customers. Confident that Gambro made the right decision, Arildsson is optimistic about the future. ’When the marketplace tells us what to do, we are now much better prepared to be faster in changing our internal alignment in order to adapt,’ he says. With its new customer-focused supply chain strategy, Gambro has found an effective cure for some of its most pressing challenges.