General Hospital Has Been Cancelled! – A Need for Renewed Emphasis on Healthcare Supply Chain Management
A Supply Chain Matters Guest Contribution from Rich Sherman
So you think that Obamacare is changing the healthcare industry in the United States? Think again.
It’s just the tip of the iceberg. The healthcare industry is undergoing a fundamental transformation from delivering patient treatments to delivering patient outcomes. And, it’s turning the industry upside down. The television series General Hospital may have celebrated its 50th anniversary last year; but, in real life General Hospital is about to be cancelled.
With the transformation to patient outcomes, healthcare providers simply can’t afford to treat anything generally. Specialty patient outcome centers (SPOC) are emerging throughout the healthcare industry. With nurse practitioners having expanded diagnostic and treatment licensing, general health clinics are appearing in every corner drugstore, 24/7. Emergency treatment and diagnostic centers are emerging in every strip mall. SPOCs, such as oncological, cardiac, ophthalmic, orthopedic, cosmetic, etc. for every ailment are emerging in every city. Quite simply, patient care centers are appearing and proliferating across the country increasing the cost and complexity of healthcare supply chain management as well as operations management in general.
Consider that it is not unusual for supply chain costs to consume 35% or more of the operating budget of a healthcare facility.
Supply chain management is a new term to most hospital and healthcare administrators. Haven’t they got enough on their plate with compliance, reimbursement, Electronic Medical and Healthcare Records (EMR/EHR)? Yet, with the transformation in the industry, administrators have to be more focused on revenue and cost. Effective supply chain management addresses both and healthcare providers have to consider bringing on a new breed of supply chain professionals to their leadership team even to the extent of hiring a Chief Supply Chain Officer. Most other industries are recognizing the significant contribution supply chain excellence makes to the financial health of the organization.
Transforming from materials and procurement management to supply chain management requires a more holistic view of the organization’s operations. Beginning with demand generation, acquiring patients to generate revenue, through demand fulfilment, delivering a successful patient outcome, supply chain management is the support system that enables cost effective, high quality delivery. And, it’s not optional. With the proliferation of patient delivery locations, competition for revenue is heating up. We’re finding more and more of our clients are seeking help in attracting patients just to maintain occupancy and revenue. But, that’s just treating the symptom.
The cure is to be found through providing a successful outcome for operations excellence. Operations excellence requires professional operations management. Medical professionals have to focus on patient outcomes not operational outcomes. This will create a transformation in the leadership structure of many healthcare providers from medical leadership to management leadership. The days of doctor controlled operations are waning. Healthcare providers that are restructuring their organizations for effective supply chain management will lead the way as the industry transformation continues.
General Hospital may be cancelled; but, the requirement for delivering successful patient outcomes will never end.
About the Author: Rich Sherman is an internationally recognized researcher and author on trends and issues across supply chain management. He currently serves as a Principal Essentialist at Trissential LLC in their supply chain consulting practice. His book Supply Chain Transformation: Practical Roadmap for Best Practice Results (Wiley, 2012) has received praise by practitioners, academics, and non-supply chain executives as a great read on business transformation. Rich has been a previous guest contributor to Supply Chain Matters.
Yesterday, President Obama continued in his intentions to make 2014 a year of action, in spite of political stalemate in the United States, by announcing two new public-private manufacturing innovation institutes.
According to the White House Blog, one will be located in Chicago and the other in Detroit. The goal is to have each of these institutes to serve as a regional hub for bringing together efforts from universities, government and private industry for applied research and product development. The White House terms these institutes as a “teaching factory” where manufacturers, large and small, students and workers of all levels can access advanced manufacturing processes and equipment.
The Lightweight and Modern Metals Manufacturing Innovation Institute headquartered near Detroit will pair 34 aluminum, titanium and high strength steel manufacturers with universities and laboratories pioneering technology development and research. The Digital Manufacturing and Design Institute headquartered in Chicago will spearhead a consortium of 73 companies, along with universities and other research labs in areas of enhanced digital product lifecycle management capabilities including additive manufacturing and 3D printing techniques.
The President’s goal is to eventually create 15 Manufacturing Innovation Institutes across the United States.
The President further announced a new competition for an Advanced Composites Manufacturing Innovation Institute, to be led by the Department of Energy, which will award $70 million over five years to improve U.S. manufacturing abilities in advanced fiber-reinforced polymer composites for use in clean energy products.
In the lens of Supply Chain Matters, each of these new institutes are examples for the potential of positive partnerships among private industry, government and universities. They can serve as added impetus for the ongoing renaissance of U.S. manufacturing. While President Obama addressed these ongoing initiatives in the context of manufacturing jobs, our community knows darn well that manufacturing is supported by vibrant value-chains and ecosystems of suppliers and services providers. It is all about re-building a competitive and vibrant collection of industry supply chains that can compete on a global scale.
While on the topic of supply chain, U.S. Transportation Secretary Anthony Foxx, in a recent speech before the U.S. Chamber of Commerce, again urged Congress to refrain from past practices for funding short-term transportation and infrastructure projects and move toward a longer-term window of strategic investment in U.S. transportation infrastructure needs. The Secretary reminded the audience that The American Society of Civil Engineers estimates that the overall infrastructure renewal needs for the United States are $3.6 trillion by 2020. That addresses needs other than bridges, roads and transit. The Secretary urged Congress to think out of the box on methods to fund infrastructure needs, other than the traditional fuels tax. It seems obvious that current trends of greater fuel economy among trucks and automobiles leads to less fuel consumption, hence there needs to alternative forms of funding for these needs. Perhaps this is another area for potential private industry and government partnerships. With the current resurgence in U.S. manufacturing and energy products export activities, logistics and infrastructure needs cannot be ignored.
We say amen to all of these efforts, they are all long overdue.
What’s your viewpoint?
Over the weekend and again this week, business media has provided amplification of the labor union representation vote held at the Volkswagen manufacturing facility located in Chattanooga, Tennessee. It was obviously a significant development concerning labor organizing efforts across the U.S. and the implications for management and labor relationships.
For readers who are not familiar with the events leading up to this election, they involve Volkswagen’s sanctioning of a union representation vote. Many of Germany’s large and small manufacturing and services enterprises embrace the concept of a “Works Council”, where direct representation from labor at the highest levels of management incorporates labor’s input on policies and practices related to work conditions, employee grievances or other matters related to compensation and benefits. Enterprise software provider SAP AG, incorporates the Works Council structure along with many other German firms. They are very much the fabric of encouragement of management and labor collaboration and shared benefits for companies.
The Chattanooga production facility was one of a very few Volkswagen global based facilities not having a formal Works Council and thus the German based IG Metall labor union advocated to Volkswagen’s senior management to encourage the formation of such a structure in the U.S. It so happens that this same facility is located in the heart of the U.S. Southeast region where multiple automotive OEM’s have located their facilities because of the “right-to-work” non-union environment fostered across this region. Certain politicians across the South were not that pleased with the concept of a foreign based manufacturer actively supporting a unionization election. Thus, a large-scale lobbying effort began to unfold for fears that a union vote in Chattanooga would lead to other organizing efforts in this region.
The ultimate vote concerning the United Auto Workers (UAW) union attempts to represent Volkswagen’s Chattanooga’s workers failed to win a majority, but the vote was close, with a final reported tally of 712 to 626 indicating rejection of labor union organization.
Prior to the vote, the highly conservative leaning Wall Street Journal featured an Editorial striking fear for workers and other automotive manufacturers if the UAW was successful in its recruiting efforts. Elements of Republican Party led conservatives including anti-everything activist Grover Norquist, Tennessee U.S. Senator Bob Corker and Tennessee Governor Bill Haslam mounted a strong anti-union campaign including fears that future work at the plant would be suspended or at-risk if the plant voted for UAW representation. Vocal factions among Volkswagen’s production workforce added their own voices as well, mostly anti-union, with accusations that these factions were supported by outside interests.
With the election results now recorded, Supply Chain Matters wanted to weigh-in in an argument for civility and objectivity on both sides. First and foremost, our intent is not to take bias to either side, but rather to point out some observations that we believe need reflection and consideration.
On the anti-union side, it seems that we all tend to suffer from long-term memory loss. Reflect back to 2008-2009 when two of the largest automotive OEM’s in the United States, General Motors and Chrysler, were forced into bankruptcy. The situation was dire and there was a need for significant business re-structuring, to include finding an alternative to a significant industry burden of high direct labor, pension and healthcare costs. During that crisis, the UAW worked with both OEM’s and U.S. government re-structuring teams to grant tiered wage concessions, reform pension programs and develop the creative solution for forming and funding a separate Healthcare Trust entity under the umbrella of the UAW, which allowed the industry to shift its legacy burdens to this trust. The trust itself was funded by one-time payments from individual OEM’s and from granted OEM stock ownership to the UAW which has its own value for the Trust. Today, both GM and Chrysler are again competitive and better able to compete in global and domestic markets.
During the same global economic crisis that severely impacted the Eurozone region, Works Councils across Germany collaborated with manufacturers large and specialized to avoid outright layoffs by agreeing to modify compensation structures and allow workers to keep their jobs. The solution was for labor to work somewhat less hours, with additional subsidies from the government of Germany provided to maintain adequate wage levels. It is a recognized fact that these same German manufacturers were able to bounce back from the recession much more quickly because workers were not permanently displaced and skill levels were maintained. That by our lens, was evidence that Works Councils can be a positive force in business and labor collaboration and mutual gain sharing.
Certain labor unions are obviously not without fault. Polls continue to indicate that non-unionized workers across the southern region of the U.S. generally are not favorable to unionization because workers do not perceive some of the value outlined above. Workers have also voiced displeasure on being burdened with union dues that do not provide perceived continuous value. Thus, U.S. labor unions need to continue with efforts to target the needs of workers and substantiate their value. Yet, across the U.S., there is mounting evidence that the income gap among the wealthiest and the rest of the working population grows ever wider.
When either of these factions begins what are perceived as heavy-handed tactics or threats, the other faction cries fowl. Some manufacturers threaten to withdraw, suspend or not source work to a unionized facility. Local politicians provide manufacturers incentives to locate in specific U.S. states that will foster right-to-work laws. National politicians advocate for less regulation, particularly when it concerns rights to organize and card check campaigns. Certain labor unions evangelize the evils of management, top-heavy management and the declared rights of workers to maintain a living wage.
What is missing is a level playing field where workers can determine in their own wisdom and judgment, whether their rights and welfare are being well served or whether they desire to be more represented directly at the management table.
The need for skilled manufacturing talent remains critical across multiple industry supply chains yet candidates are not attracted by perceived low current compensation levels for entry-level workers. Securing experienced talent that incorporates the voice and collaboration of direct labor workers remains a critical need for innovative, industry leading manufacturers. Whether that voice is obtained by small work groups, Works Councils or a unionized work force should be the purview of both parties, and without the need for threats and heavy-handed tactics.
In either case, supply chain leaders should have the leadership and collaboration skills to be able to manage in either environment.
In what we would characterize as a significant development, a posting on the Wall Street Journal Digits Technology blog quotes informed sources as indicating that global-wide contract manufacturer Foxconn, also known as Hon Hai Precision Industry, has been quietly working with Andy Rubin of Google on developing advanced robotics that can be deployed within Foxconn factories. The posting further indicates that Foxconn has dispatch engineers to the campus of the Massachusetts Institute of Technology (MIT) to learn the latest in manufacturing automation technology.
Google has acquired eight robotics companies in the last year and has established a robotics development group. The WSJ posting makes note of the recent acquisition of Boston Dynamics, a company that has designed mobile research robots for the U.S. Defense Department. Speculation is that Google’s interests are in building a new robotics operating system for manufacturers, similar to its Android mobile operating system.
What makes this revelation more interesting is that Foxconn is the major contract manufacturing services provider to Apple and other high tech and consumer electronics providers. In essence, Google may be assisting these OEM’s in assuring a considerable manufacturing presence in China and other lower-cost manufacturing regions.
A number of major players are vying for control of the next iteration of automation and/or operating systems associated with the “Internet of Things”. In addition to Google, Amazon, General Electric, Siemens, Qualcomm and others are investing large amounts to be on the forefront of the next iteration technologies that leverage combinations of robotics, additive manufacturing and predictive analytics techniques.
Supply Chain Matters has previously brought attention to Foxconn’s aggressive goals to automate its factories with a million robots to counter increasing direct labor costs in China. This revelation comes after other announcements that Foxconn had established a joint engineering development effort with Carnegie Mellon University in the U.S.
This revelation comes in the throes of a recent revelation that Google’s Chairmen Eric Schmidt was the recent recipient of a $100 million compensation package, and the release of a former Yahoo senior executive with an exit package in excess of $100 million. There have been public protests in the San Francisco area concerning the growing wealth disparity among Silicon Valley companies, which gets continually reinforced by these revelations.
One can trust that Google will share intellect and collaborate with other manufacturers located across global regions including the Eurozone, North America and other regions. It would indeed be unfortunate that a future headline declares that other manufacturing regions are placed within a strategic competitive disadvantage because of the actions of a Silicon Valley giant with a singular goal.
Last November, Supply Chain Matters alerted our readers among consumer product goods supply chains that the Kellogg Company announced a billion dollar cost-cutting plan termed Project K, a significant initiative that would extend into the next four years. The plan calls for a goal to produce a run rate of cash savings between $425 and $475 million by 2018. It unfortunately outlines headcount reductions amounting to upwards of 7 percent of the global workforce in that same time period.
At the time of the announcement, business media had reported that the motivation for this initiative stemmed from increased competition in the breakfast and snack food industry segments along with softer demand from economically distressed consumers. From our lens, the Project K program appeared to be more of acknowledgement of permanently shifting consumer demand patterns along with an effort to generate cash to reduce the company’s excessive debt burden. The sum total objective is to drive greater global supply chain wide efficiencies and create more integrated supply chain business processes and services across global product lines.
There is now additional evidence unfolding regarding the scope of Project K.
In early December, Kellogg announced the closure of production facilities in Australia and Ontario Canada, while expanding operations at an existing cereal and snacks production facility in Thailand. Both the Australian and Canadian based plant are schedule to close by the end of this year. In January, the company announced that it was investing in a new snacks manufacturing facility in Malaysia to expand the production of Pringles potato chips for Asia-Pacific markets. The Malaysia facility is expected to be operational by mid-2015 and produce 300 jobs locally. Keep in-mind that at the time of the Kellogg acquisition of the Pringles brand from Procter & Gamble, the firm inherited all existing production facilities and existing supporting systems.
This week featured further evidence for the strategies surrounding Project K. This morning Kellogg reported both Q4-2013 and full year 2013 financial results. In the final quarter net sales were reported as a negative 1.7 percent while operating profits increased 10 percent. Gross margin was essentially flat with the year-ago period. For the full year, net sales and operating profits increased 4.2 percent. Long-term debt remains at $6 billion. North America operations reflected negative growth. All the warning signs remain.
The company further announced the closure of a cookie and snacks plant in Charlotte North Carolina and elimination of two snacks production lines in Cincinnati Ohio, also scheduled to close by the end of this year. A posting from the Charlotte Business Journal indicates that the local plant was acquired by Keebler in 1998, and assumed by Kellogg in the 2001 acquisition of Keebler. The plant currently produces Famous Amos and Austin Sandwich Cremes products.
Presentations from senior management regarding Project K indicate a strategy for closing or reducing capacity among facilities servicing developed markets while increasing investments in emerging markets including India, Poland and Southeast Asia. Information further alludes to a global shared services model related to value-chain business process service needs. We strongly suspect that the common shared services effort will include adoption of standardized information technology applications.
As we noted in our original commentary, Kellogg is responding to realities of today’s CPG market forces and investor climate. Market growth, profitability and more timely shareholder return trump all other strategies and supply chains are caught in the middle of this ever shifting backdrop.
Certain industry analysts provide industry supply chain teams provide a plethora of multiple ratios and trending of financial metrics and key performance indicators as benchmarks for determining needed performance improvements. That can often be the rear-view mirror approach, allowing past performance to chart the future. In certain industry environments such as today’s consumer product goods industry, corporate strategy, business objectives and external forces trump historic ratios and unfortunately call for significant global value chain realignment in production, sourcing of capacity and service needs.
The Kellogg Project K initiative provides such an ongoing example.
If you have been a loyal follower of our Supply Chain Matters commentaries and predictions concerning Aerospace supply chains, you would be aware of the difficult position these value-chain ecosystems currently find themselves in. Once more, you would have had awareness to these challenges three year ago.
Thus we were somewhat amused to stumble upon this week’s Bloomberg Businessweek article, With Epic Backlogs at Boeing and Airbus, Can Business Be Too Good?
The article poses a fundamental question. With over 10,600 of firm orders for new aircraft among both Airbus and Boeing- When is order backlog too big?
In a July 2011 commentary, Aerospace Supply Chain Are Now Stressed, we observed that the building multi-year backlog comes amid an industry track record of not so stellar performance in operational consistency, two-way communication and predictability. Over two years later, although some progress has been made, many of the same challenges remain.
The question posed by Bloomberg, and indeed the Wall Street investor community, is indeed the appropriate question. As the article points out, if a wait for a new airplane stretches out over too many years, it can fundamentally impact the business model strategies of airline customers. Some of those dynamics are already occurring surrounding the continued undelivered backlog of Boeing’s new 787 aircraft. It further can motivate these same customers to consider alternative aircraft deployment or procurement strategies.
Another important consideration are the quickly changing economic environments that often drive demand for airline travel. Airlines from emerging markets are estimated to make-up at least a third of the current order backlog. Current concerns surrounding former booming developing markets are becoming evident in global equity markets as foreign currency tensions, devaluation and and other local economic factors impact business growth within these markets. There will certainly be increased airline travel within emerging economies but this demand needs to be balanced with economic up and down cycles.
In a meeting with Wall Street analysts this week, the CEO of Boeing reported strong earnings for the recent fical quarter but raised some warning signs for 2014 regarding earnings growth. Investors responded by driving Boeing stock down by over 5 percent.
Boeing’s 2014 operational plans call for increasing aircraft deliveries by 10 percent, roughly 715-725 aircraft amid a backlog of 5100 aircraft orders. By the end of the year, Boeing expects to be delivering two new 737 aircraft every day, yet only 10 new 787 Dreamliners monthly. Airbus remains operationally upbeat, empowering localized operational decision-making, yet the realities of a near decade of backlog is hauting.
The new reality is that investors are now becoming aware of the flip side of euphoria- you have to deliver the goods according to customer desires and expectations, and you have to be able to assure required operational on-time performance at customer ship time.
In our most recent commentary regarding Aerospace supply chains, we opined that agility and responsiveness are indeed going to be very important industry differentiators along with on-time and consistent performance for new product development milestones.
An enviable industry position awash with order backlog does not condone business-as-usual. Rather dynamic and responsive capacity management, end-to-end value chain visibility, enhanced supplier collaboration and goal-sharing all come into play.
Each of the major aerospace OEM’s can certainly boast of record performance in 2013, but the real challenges remain as each supply chain ecosystem responds to unprecedented requirements for development and execution. They will each put to the test the real meaning for agile and resilient supply chains.