Have you noticed an uptick in backorders and product allocation?

The healthcare supply industry has experienced rapid consolidation in both IDNs and suppliers in recent years. Hospitals have joined forces to roll up into systems of increasing size and breadth, and found new ways to concentrate their purchasing power. Likewise, product brands, distributors, and GPOs have formed new partnerships, with many smaller brands absorbed into large corporate concerns.

Consolidation inside the supply chain can exacerbate existing supply chain risk and introduce new risks.

Supply chain experts have long been aware of “act-of-God’ or politically-determined risks: things like earthquakes, fires or hurricanes that knock out an individual manufacturing facility, or trade deals that impact raw material or finished product availability. These infrequent events do become riskier for purchasers with supply chain consolidation. We saw an example of this in recent years, when a fire devastated the sole remaining U.S.-based producer of patient urinals, leaving health systems scrambling to use makeshift alternatives for bed-bound patients until imported products could reach their facilities.

Supply shortages of this type are managed with the temporary allocation of products from supply partners, as suppliers try to preserve their strategic partnerships with health systems and distribute all the product that they have available. This is an established practice in the healthcare supply chain, and many organizations include specific contract clauses to ensure that their allocation reflects their overall relationship with the supplier.

But in addition to the known risks of being “put on allocation’ due to externalities, health systems must also face the risk of business decisions that happen far outside of their relationships with trading partners. Rapid consolidation has introduced a new risk for IDNs: that the products and brands the health system uses will be eliminated by new corporate owners. Most IDNs contract for the majority of their supplies with middlemen: GPOs, purchasing coalitions, distributors, or occasionally with the corporation that manages a brand. Any of those supplier-side business entities can make a unilateral decision that a particular product or even a whole brand shouldn’t be a part of their business portfolio. The products can be cut from the catalog, the brand can be sold, or the whole business can be spun out, disrupting supply to their IDN customers. Distributors and GPOs can be left scrambling for supplies as well, if the brand or product production decision was made at the manufacturer level or elsewhere along the value chain.

So what should IDN supply chain leaders do in a fast-changing trading environment?

  1. Diversify supply chain relationships: commitment is valuable in an IDN-supplier relationship, but don’t discount the benefit of leaving a portion of your business with an alternate supplier. You may appreciate having an alternate in a crisis.
  2. Consider direct sourcing: Direct sourcing cuts out middlemen from the supply chain, connecting health systems to product manufacturers. Streamlining the value chains aligns your business interests with product manufacturers’ interests, without the risk of conflicting objectives from other organizations.
  3. Keep the lines of communication open about risk management: No matter what supply chain strategies you choose, stay in close contact with your vendors and trading partners. Understand what’s keeping them up at night, what the business forecast is for their organization, and what risks they identify in their own value chains.

ASP Global unlocks direct sourcing for health systems, putting the health system in control of their supply chain. To learn more about how direct sourcing cuts risks for health systems, contact William Fallon at william.fallon@aspglobal.com