Across industries, manufacturers and distributors have long employed practices to increase efficiency and minimize redundancy, with purchasers and end users reaping the benefits of lower priced goods and services. But cost-saving practices such as geographically concentrated manufacturing or exclusive sourcing agreements come at the expense of supply chain resiliency.

Health care isn’t like other industries. When providers confront medical product shortages, they don’t just risk losing revenue, they risk losing lives. The Covid-19 pandemic illuminated the need for health care product sourcing, manufacturing, distribution, and inventory management to function differently, with a greater emphasis on flexibility and adaptability, even if doing so increases costs.

The need to mitigate supply chain risk does not just apply to critical products like PPE. Many experts predict waves of shortages for supplies including anesthetics and even over-the-counter painkillers throughout 2020 and 2021. As such, all medical suppliers should anticipate customer pressure to showcase their “in case of emergency” contingency plans. Purchasers will hold pandemic-essential suppliers to higher standards of guaranteed availability, but all suppliers should respond to heightened demands for risk mitigation.

Adding redundancy and flexibility into the supply chain inevitably increases costs, the magnitude of which will vary by product and practice. In some instances, adding higher-cost U.S. manufacturing sites may be warranted, but in other cases, suppliers may be able to increase overseas production capacity or diversify raw material sources without adding significant costs.

We don’t yet know how much this added resilience will cost, or who will bear the burden of these added expenses. Most likely, manufacturers, providers, and federal/state governments will all have to shoulder some of this increased financial burden.

Pressure from the government

Legislative and regulatory bodies will put pressure on manufacturers to mitigate future risk. The federal government, via the CARES Act, mandates that certain pharmaceutical companies develop contingency plans, and that other suppliers report discontinuations or interruptions in production. Since the Covid-19 crisis first emerged in Spring 2020, federal lawmakers have introduced over 20 bills to overhaul the drug supply chain. In August, President Trump signed an executive order that will mandate federal agencies purchase US-made pharmaceuticals defined as essential. However, increased production costs in addition to massive pushback from PhRMA and environmental activists makes such mandates unlikely to carry much weight for the foreseeable future.

At the same time, state governments are tasking providers to build contingency plans. For example, New York’s Governor Cuomo will require all New York hospitals to maintain a 90-day supply of PPE. We expect other governors to follow suit.

Pressure from provider organizations

Purchasers will also scrutinize manufacturers’ and distributors’ logistics transparency as well as their delivery performance even more than before the pandemic. Providers already track supply chain performance metrics such as shortages, backorders, on-time delivery, and recalls, but the importance of such metrics will increase. At the same time, many providers will likely favor supply chain partners that can demonstrably flex up production, shift their own suppliers, and move product quickly in the event of a demand surge or supply shock. The importance of price isn’t going away, but a supplier’s transparency, flexibility, and reliability will factor into customers’ “total cost” equations.

At the same time, providers must use a new supply chain playbook to mitigate future risks. But the Covid-19 crisis leaves most providers scrambling to make up significant revenue shortfalls while anticipating a deteriorating payer mix, both of which will constrain their ability to absorb increased costs of added supply chain resiliency. Providers walk a tightrope as they attempt to:

• Revisit established supply chain strategies
• Invest in stockpiles and expanded vendor relationships for critical supplies
• Ferret out savings in other categories or purchasing processes

To manage new procurement realities, provider supply chain leaders must make tough tradeoffs, largely guided by their answers to the four key questions.

Purchasing optimization

Provider supply chain executives have to consider which categories warrant increased investment to ensure adequate stockpiles and contingency plans, and which categories can withstand greater standardization in SKUs or vendors in order to reduce costs.

Spending on PPE and other supplies critical to pandemic-related care delivery will almost certainly increase, leaving providers with rapidly declining funds from which to purchase all other supplies. We anticipate that many health systems will accelerate efforts to standardize physician preference items, such as implantable devices, in order to offset spending growth in other areas.

Product evaluation

No value analysis or purchasing committees will willingly sacrifice clinical quality. Instead, progressive providers will likely expand their definitions of value to include key supply chain logistical and reliability metrics, such as shipment accuracy, on-time delivery, percentage of shipments with damaged goods, and percent of backorders; these metrics will be particularly important for emergencyessential categories such as PPE, respiratory products, IV equipment, and dialysis supplies.

Progressive providers and suppliers will also likely seek out trading partners open to more transparent, collaborative arrangements. When managed well, such partnerships can significantly mitigate risk for both parties – guaranteeing prices or product for the purchaser, while guaranteeing volumes for the supplier. Such agreements – which often involve shared investments, shared data, and/or shared risk – require a level of trust, transparency, and effort that fundamentally limits the number of partnerships any one party can successfully manage. As a result, providers and suppliers must choose their strategic partners carefully, while managing their transactional relationships as efficiently as possible.

There is no single right answer for providers seeking to gain resiliency without breaking their budgets. When deciding what to purchase, from whom, in what quantities, and where to store it all – providers must understand the full range of choices available and then navigate tradeoffs based on organizational priorities and local market conditions.

Finally, effective supply chain risk mitigation requires greater upstream and downstream visibility. Health care leaders will fail to build a resilient supply chain without investments in tools enabling greater data visibility and analytics; those tools must function both within organizations and across stakeholders.

If supply chain executives had greater upstream and downstream visibility, they could have identified alternative sources, they could have predicted shortages by monitoring demand spikes, and they could have proactively re-allocate resources to mitigate, or even avoid, catastrophic storages.

Internally, provider organizations should build clear lines of communication between supply chain and IT departments. This enables both groups to understand current capabilities and determine new analytic requirements.

Stakeholders also need visibility into other parties’ supply and demand in order to effectively balance flexibility and efficiency. Providers need access to a wider range of suppliers; suppliers and distributors need real-time insight into providers’ demand and use rates in order to appropriately allocate goods.

Increasingly, supply chain stakeholders are likely to rely on third parties to create objective sources of truth about supply, demand, and even quality. Platforms such as GHX or IBM’s Rapid Supplier Connect can help purchasers find and vet suppliers. Value and evidence assessment services, such as Lumere and ECRI, can help supply chain teams compare similar products in order to identify appropriate alternatives.

A more transparent supply chain will optimize both flexibility and efficiency by providing stakeholders with broad insight into available sources of goods and services, the locations of those goods and services, the buyers with the greatest need for those goods and services, and viable alternatives to those goods and services before interruptions occur. For providers and purchasing coalitions alike, including GPOs, enhanced data visibility fundamentally increases the likelihood that supply efficiently meets demand– even during a natural disaster or global crisis.

Achieving such transparency in the U.S. will not be easy. Competing health systems may not be eager to share data on available equipment or anticipated need; competing suppliers may be hesitant to disclose the locations of their manufacturing sites and intricate product sourcing networks. In the absence of self-disclosure, purchasers and manufacturers will find no shortage of third-party exchange platforms and analytics vendors offering enhanced data visibility. The market is ripe for disruptive innovators and creative collaborations that aggregate and illuminate manufacturing, distribution, and purchasing data across the health care supply chain.

Case in point: New York teamed up with six other states to form a Northeast regional purchasing consortium, outside the bounds of any GPO, that is committed to pooling information on both supply and demand. It represents hundreds of hospitals and over $5B in purchasing power.

While initially focused on PPE, respiratory equipment, and testing supplies, the consortium plans to expand the range of supplies it purchases over time. They also plan to pool their information on supplier quality, reliability and integrity.

State leaders developed this model in response to the Covid-19 crisis. With greater purchasing power and enhanced supplier vetting, participating providers have added security that they will have the supplies they need to care for patients during Covid-19 surges or other unforeseen medical shocks.

The size, scope, and ambition of this regional purchasing consortium raises interesting questions about the value of systemness and the role of third party intermediaries during national crises. Will former competitors continue sharing data post-Covid-19? Will the partnership extend deeply into non-Covid-19 related products? Will the coalition’s massive scale afford participants greater inventory visibility, volume guarantees, or prices than large systems could achieve on their own? And, perhaps most critically, will such regional coalitions and data exchanges threaten the currently stable position of GPOs? Only time will tell.