Over the past 30 years, the percentage of the U.S. GDP devoted to logistics costs has dropped from 17.9% in 1980 to 8.3% in 2011, which is a testament to how smart companies have gotten at reducing waste out of the supply chain. It's a far different story, though, for U.S. health care costs, which have soared from 9.0% of the GDP to 17.6%.
Cardinal Health, a $103 billion distributor of health care products, has been a close observer of both trends as it sits right in the middle of the health care supply chain, points out Andy Keller, the company's vice president of inventory management. "We're a critical link in the supply chain because we talk to both suppliers and health care providers," he says, adding that the company handles one-fourth of all medications prescribed every day, and delivers to 60,000 sites daily. One daunting problem facing not only Cardinal but all of its partners is that there is a lack of common tools and approach in the health care supply chain.
Cardinal Health began its lean journey in 2007, as part of an initiative to drive collaboration in the health care supply chain, with the goal of achieving zero errors, zero waste and zero lost revenue. That initiative involved thousands of kaizen events, and led to the order error rate dropping by 30% over a three-year span. But that was just the beginning of Cardinal's journey.
"While we've made progress internally, we realize inefficiencies still exist in the health care supply chain," Keller says, "such as redundant warehouse assets, excess inventories leading to losses and write-offs, and mismatched demand/supply locations." The next step, then, was to extend the scope of the lean Six Sigma effort to Cardinal's supply chain partners.
"Lean Six Sigma provides the structure, the tools and a common language" conducive to collaboration, Keller says, noting that because it is data-driven, it also adds an element of trust to the relationships. Cardinal works closely with key supply chain partners on lean Six Sigma workshops to learn, educate and problem solve.
He notes that people often fail to ask, "What do you really need?" from their supply chain partners, which makes it that much more difficult to gain efficiencies because the specific goals are unclear. Through the workshops, though, Cardinal has been able to determine exactly what is crucial and what is just "nice to have." For instance, does a hospital absolutely require next-day deliveries, or would a less time-sensitive – and less expensive – alternative be sufficient?
Achieving 'A-ha' Moments
Terri Stentz, Cardinal Health’s director of global sourcing, offers an example of how sales and operations planning helped get demand planners and inventory managers on the same page. A customer was ordering items one at a time, multiple times per day, Stentz explains. An examination of this purchasing process revealed the customer usually ordered seven pieces per day; however, the items were being pulled from cartons that held 10 items. Why not just purchase an entire box at a time, rather than buy them individually?
One of the biggest problems in achieving these types of supply chain “a-ha” moments is actually getting all the right people together in the same room, or in this case, the same warehouse, Stentz points out.
It's crucial that health care providers do not experience drug shortages, Keller adds, so Cardinal focuses on availability, visibility and responsiveness. The company uses predictive analytics, fed by transactional information provided by suppliers, to increase the speed of communication from the manufacturer to the end customer.