A Vision for the Digital Healthcare Supply Chain


Most of Healthcare’s consumers would state that they are very thankful for the treatments that are available. That said, most would also argue that the value received for every dollar spent should be better, much better. They have a lot of evidence to back up their perceptions. Here are just a few facts to consider.

  • The population of the United States is currently just over 328M and it is estimated that nearly $3.5 trillion will be spent on Healthcare.
  • That equates to about $10,600 per person.
  • To put that in context the average household income (in the US) is just over $61,000 and the average size of a family is just over three.

So why is Healthcare so expensive? One reason, and often overlooked, is a very costly Supply Chain. In fact, from a cost perspective, supplies make up somewhere between 20%-30% of the overall hospital budget and is second only to labor. This is a lot of money and a lot of opportunity! Hidden even deeper within the supply chain is the fact that more than a third (1/3) of the cost of supplies has nothing to do with manufacturing or developing medical devices and medications. Instead this is the amount of money that is spent marketing, selling and distributing to the hospitals.

On the surface, the Healthcare Supply Chain looks much like that of any other industry. However, there is a pretty glaring difference when you look deeper.  The top manufacturers make up much of the overall supplier market; however, in comparison the top hospitals make up just a fraction of the buyer market. Due to the degree of fragmentation on the buyer side (hospitals), the cost to simply sell and distribute supplies is an area of significant overhead. This cost also serves as a barrier to new supplier entrants and therefore reduces competition.  There are two very large Group Purchasing Organizations (GPOs) that do their best to intermediate this market place, but given that they are once removed from providing care the suppliers for the most part seek to by-pass them. In fact, most of the suppliers feel that they (the GPOs) are an added burden and cost as opposed to a value add.

Healthcare has adopted supply chain best practices and technology from other industries such as retail and manufacturing. However, these solutions were simply not designed to address highly fragmented and inefficient markets. As a result they do little to address this core issue. The Healthcare Supply Chain needs a system that is designed to work in a fragmented market place.  For this reason, it is highly likely to migrate to a system that is very similar to what we experience as consumers and many refer to as “Digital”.

To understand “Digital” it helps first to understand the key enabler, the advancement of information technology (IT). IT has changed dramatically over the past 10 years (and it will continue to change).  When our computing platform was first being introduced in the 1960’s the co-founder of Intel, Gordon Moore, made a prediction that is now referred to as “Moore’s Law”. He predicted that compute power per dollar spent would double every year. His prediction has held up for the last 40+ years. This massive amount of compute power drove a lot of innovation. One very important innovation was the World Wide Web. This in turn drove the creation of a lot of data. So much that developers of Search Engines exhausted traditional data base technology and therefore invented what is now referred to as “Big Data”.  These advancements, coupled with cloud computing and storage, devices that generate continuous data and new advancements in automated statistics have allowed for smart systems often referred to as AI (artificial intelligence).

These advancements enabled a new business model. The best way to understand this new Digital Business Model is to compare and contrast how a “Pipe (traditional business model)” works verses a “Platform (the digital business model)”. A traditional business works like a Pipeline.  Value is produced upstream and consumed downstream, creating a linear flow of sequential value, much like water flowing through a pipe. This model is very efficient when you have very large buyers and sellers. The reason is that it works particularly well when large batches are passed down the pipeline. Think of Proctor and Gamble and Walmart for example. The current Healthcare Supply Chain system is a pipeline that is centered on a highly automated system called Enterprise Resource Planning (ERP). It is highly structured, sequential and designed for very large batches at either end of the “pipe”. This model has brought value to the Healthcare Supply Chain but it is far from being optimized as a whole.

Platforms, however, work vastly different and why “Digital” is so disruptive. Platforms allow participants to co-create and exchange value with each other unbound by a specific sequence (a network). Control is provided through curated participation as opposed to the owner of the pipe (often referred to as the “ecosystem”). Because fixed assets are not emphasized and in many cases not needed, scale is maximized and barriers to entry are minimized. To ensure interactions are optimal, Digital Platforms leverage “Big Data” and “AI” to improve the matching of supply and demand. This system is specifically designed for real-time transactions as opposed to large batches. Think Uber, Airbnb and today’s modern traveler. This is how the Healthcare Supply Chain wants to work but can’t because the current ERP systems will not allow them to do so.

Hospitals have started to explore new ways to make their supply chain work differently. However, they are quickly finding out that they are significantly constrained as opposed to enabled by their IT systems. For this reason, I believe that a new system will be created and adopted called the “Digital Supply Chain”.  This system will enable Supply Chain stakeholders to work together, unencumbered and free to act on the specific needs of their customers (as opposed to the “one size fits all” system we have today). The new system will provide new levels of productivity, scale, value and innovation. A “Digital Supply Chain” will greatly reduce transactional and physical effort and therefore the cost associated with developing and delivering products. However, more importantly as skill increases in leveraging these new systems new interactions will be possible that delight patients.

Here is just one example of how we can leverage “Digital” to significantly reduce the amount of manual effort with a technology called robotic process automation. You likely have read news articles and new briefs that were automatically generated by a sophisticated robot named “Heliograf”. Heliograf was developed by the Washington Post. Editors create narrative templates for the stories including key phrases that account for a variety of potential outcomes. Then they hook Heliograf up to a relevant source of data. The software identifies the relevant data, matches it with the corresponding phrases in the template, and merges them. An algorithm checks the story for accuracy, and sends the final story to the editor. In the same way that the Washington Post enabled these digital robots, we can automate various redundant and mundane tasks in our Purchasing, Payables, Inventory Management and Logistics functions. This in turn will allow staff to be redirected to solving real problems (reducing cost, accelerating savings and servicing customers).

However, this is only the beginning as Supply Chains will grow in the mastery of this technology. If platforms are open to various “interactions” within the scope of a single platform could “interactions” be optimized across platforms?  In other words can supply platforms integrate with other non-supply platforms? Could “Digital” be similar to the Integrated Circuit? Might there be a second kind of Moore’s Law (as explained above)? One of the primary objectives of Supply Chain is to extend as far upstream and downstream as possible so that value can also be extended. Might “Digital” be the tool that enables this? The following are just a few examples of what might be possible with this thought in mind.

Supply Chain leaders know that those that can satisfy due dates reliably, shorten lead times, reduce inventory and rapidly introduce new technology will have a competitive advantage. Make to Order (MTO) delivers on all of these requirements. MTO is a manufacturing process in which manufacturing starts only after a customer’s order is received. Dell is a great example of how MTO has been leveraged to create a new business model (and competitive advantage) by reimagining an integrated and extended supply chain. Could this be the future of how high-end and very expensive medical devices or medications are managed in the “Digital Supply Chain”? Could this help reduce the cost of sales and distribution that I referenced earlier? Could it also lower the barrier for entry for this same reason?

Additionally, the world of health care is ever-changing.  Virtual Care is a method, by which physicians and other health care providers, such as nurses or medical assistants, communicate with patients without physically seeing them in the office (a hospital without beds). Virtual visits satisfy patients’ thirst for timely access to care and allow them to communicate with their doctor when it’s convenient for them, whether from home or work, regardless of the time of day. Might a virtual visit conclude with a Virtual Care/Supply Chain “Digital” interaction with supplies being sent directly to the Patient’s home? Might this type of integration and service change the perception of those that question “the value received for every dollar spent”?  Especially if the dollars spent were significantly less?

But what if medicine was much more precise? Precision medicine is a medical model that proposes the customization of healthcare, with medical decisions, treatments, practices, or products being tailored to the individual patient.  Let’s take a very basic view of a simple question to demonstrate how important this is. How effective are common medications? A study that I read recently is quoted as the following:

“We feel that we need to be more realistic about drug efficacy. Doctors may believe that all patients respond to drugs and none to placebo, but neither statement is true because there is no ideal drug.”

In other words, “it depends on the patient”. The treatment works on some and doesn’t on others. This is the promise of Precision Medicine, which is to be more precise in our treatment of individuals as opposed to broad populations. Might a Practice/Supply Chain/Manufacturer “Digital” interaction accelerate the development of products that are tailor made for individuals?  Do we need a “Precision Supply Chain” to support “Precision Medicine”?

While I could go on with other possibilities the future of the Healthcare Supply Chain is obvious. It will be going “Digital”. One of the fundamental issues within the Healthcare Supply Chain is the fact that it is highly fragmented and therefore very inefficient. Digital has proven to solving this very problem through the introduction of a new business model, a Digital Platform business model. The good news is that we experience this new business model every day as consumers. The first wave of innovation will likely appear over time and be somewhat subtle as internal waste and sub-optimization within various functions are automated. However, the implications for the Healthcare Supply Chain (and Healthcare in general) will be far more reaching and far more integrated. This is the vision and power of the Digital Platform business model. The transition will not be easy given the amount of investment that has been made in the current “Pipeline” model but the implications will be significant, impactful and well worth the effort.


Key References

The Washington Post (2012). We spend $750 billion on unnecessary health care. Two charts explain why. Downloaded from https://www.washingtonpost.com/news/wonk/wp/2012/09/07/we-spend-750-billion-on-unnecessary-health-care-two-charts-explain-why/?utm_term=.06a148de3836

United States Census Bureau (2019). US and World Population Clock. Downloaded from https://www.census.gov/popclock/

Fairchild Semiconductor internal publication (1964). Moore, Gordon. “The Future of Integrated Electronics.”

Google (2003). Sanjay Ghemawat, Howard Gobioff, and Shun-Tak Leung. “The Google File System”.

Platform Thinking Labs (2015). Platform Scale: How an emerging business model helps startups build large empires with minimum investment.

Forbes (2019). Enrique Dans. Meet Bertie, Heliograf And Cyborg, The New Journalists On The Block. Downloaded from https://www.forbes.com/sites/enriquedans/2019/02/06/meet-bertie-heliograf-and-cyborg-the-new-journalists-on-the-block/#4a7f461f138d.

NCBI (2015). Stefan Leucht, Bartosz Helfer,Gerald Gartlehner, and John M. Davis. How effective are common medications: a perspective based on meta-analyses of major drugs? Downloaded from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4592565/