The Coming Supply Chain Revolution

Medical Device & Diagnostic Industry Magazine MDDI Article Index Greg Freiherr The medical device supply chain is on the verge of a revolution, one that has as much to do with the way companies operate and what their customers are demanding as it does with technology and its implementation.

May 1, 1996

19 Min Read
The Coming Supply Chain Revolution

Greg Freiherr

The medical device supply chain is on the verge of a revolution, one that has as much to do with the way companies operate and what their customers are demanding as it does with technology and its implementation.

The trappings of this revolution include bar codes, scanners, and related technologies that have already become familiar elements in other commercial settings. Available for more than a decade, these technologies were first seized upon by consumer-based industries, particularly retail and grocery stores. But while a few health-care companies have applied some of these technologies and related business strategies, the health-care industry as a whole has not climbed on board. The reason, simply, is that there has been no need to do so. The drivers that would push corporate thought and investment have been lacking. But that is rapidly changing.

By July 1, 1996, all manufacturers and distributors of medical and surgical products that want to do business with the Department of Defense (DOD) and its network of military health-care facilities, including VA hospitals, will be required to bar code their products. These bar codes will contain universal product numbers (UPNs) that uniquely identify specific health-care products formatted to either of two approved standards, UCC/EAN (Uniform Code Council/European Article Number) or HIBCC LIC (Health Industry Business Communications Council Labeler Identification Code).

And that is only part of the boost that bar coding will receive this year. Shortly after DOD announced its interest in getting products with UPNs, several major health-care providers, including Columbia/HCA Healthcare Corp. (Nashville, TN), Kaiser Permanente (Oakland, CA), Tenet HealthSystem (Santa Monica, CA), and VHA, Inc. (Las Colinas, TX), adopted the same requirements for companies selling to their members, also effective July 1.

These are only a few of the most recent and obvious spurs to the supply chain revolution. Less publicly, some companies have quietly begun demanding that their suppliers get up to speed on bar coding. Baxter Healthcare (McGaw Park, IL) has informed its suppliers that unless they mark their products with an electronically readable shipping number, they will pay a 1% penalty. And the demand for other such identification will likely grow. "Baxter is expecting a bar code," says John Terwilliger, the company's manager for distribution technology/engineering. "We are using all the tools we have at our disposal to make that happen."

The growing interest in bar coding and other technologies that promise to cut waste and reduce expense in the supply chain was the trigger for a series of presentations at "IQ 1996: Intelligent Business Strategies," a conference held in Chicago last March. About a dozen speakers presented information and ideas designed to spur health-care manufacturers to develop strategies for integrating these technologies into their everyday work environment.

Apparently this prodding is needed. Whereas almost every product in the retail and food industry is bar coded or otherwise electronically marked, only about 40% of medical products carry bar codes, according to data gathered by the Health Industry Distributors Association (HIDA; Alexandria, VA). A recent study by Concepts in Healthcare (Cambridge, MA), a hospital consulting firm, estimated that the absence of product identification numbers on medical products accounts for 30% of processing time in a typical hospital purchasing office and for 25% of processing time in the accounts payable office.

In the United States, HIDA estimates that medical supplies and equipment account for $28 billion in health-care costs annually. According to the association, a significant portion of that health-care bill could be trimmed through better communications. Workable standards for implementing a broadly based electronic data system already exist, and the accompanying technologies have been tested and refined over a decade in the retail and food industries.

The UPN format that the defense department and other major health-care groups have decided to implement could become the vehicle for implementing these technologies in the health-care industry. "The absence of a standard universal numbering scheme for medical products has been a severe impediment to efficient electronic purchasing and contract administration and a constant cause of enormous, unnecessary cost associated with errors in product identification throughout the supply chain," says Garren Hagemeier, executive director of the Healthcare EDI Coalition (Little Rock, AR). "Now that the UPN data structure has been defined, our industry can move in concert to eliminate these problems."

Designed by the UPN product development group of HIBCC, the UPNs include both a human readable and machine readable bar code number to be used on packages and in the exchange of purchasing and logistics information. Their purpose is to facilitate automated processing of product information. Used correctly, UPNs could be the means for implementing an efficient electronic data interchange among manufacturers, distributors, and providers.

But in the rush to meet the tight July 1 deadline imposed by DOD and various other providers, manufacturers and distributors may miss an opportunity to develop an overall strategy that would enable them to improve their own efficiency and bolster that of the entire supply chain. "If you just respond to a mandate--just slap on a bar code at the end of the shipping line--the customer might benefit, but your company will not, because you haven't given any thought to what you might gain from bar coding," says Frederick Crawford, senior partner and consumer goods practice manager at the consulting firm of CSC (Cleveland).

Some device companies whose products already feature bar codes have done exactly this in order to meet regulatory requirements. By authority granted under the Safe Medical Devices Act of 1990, FDA requires that companies making implantable devices develop, document, and operate a tracking system that allows them to quickly contact distributors, providers, and patients in the event that a device must be recalled. Bar coding would seem the perfect solution, and in some instances it has been successful.

Zimmer, Inc. (Warsaw, IN), uses bar codes to track item and lot numbers for each hip and knee implant that it ships to a health-care institution. Each implant has a bar code that is peeled off at surgery and placed on the patient record, enabling the company to track the device down to its ultimate recipient. The item number and lot number are also noted on the invoice sent to the hospital. The company has been using bar codes for these purposes for more than four years. "Having lot traceability on an implanted medical device is an FDA requirement," says James Robinson, vice president for U.S. demand management at Zimmer. "Doing it easily and accurately is a requirement of the business. Everybody is looking to drive costs out of the system, and they need to do everything they can to make things more efficient and easier."

Unfortunately, the limitations of the technology are apparent when companies try to leverage bar codes to capture increasing quantities of data. Synthes U.S.A. (Paoli, PA), which ships about 6 million implantable screws and plates annually, would like to use bar coding to meet FDA requirements for tracing its product. But there is a problem. If the HIBCC guideline is followed, all of the data that Synthes would like to put in the codes will not fit. "We would require two bar codes, so instead of 6 million scans a year we would have to do 12 million scans," says Ken Dormond, Synthes product manager. The company has experimented with using two bar codes on each package and running a dual scanner to read the codes simultaneously--with no luck. It also tried putting the two bar codes end-to-end, but that configuration contained too many characters to be scanned. The company is now considering a modification of the HIBCC standard to remove characters such as unit of measure and expiration date, which do not apply, and using that space to input needed data.

The danger inherent in devising a unique coding format for a product is that the rest of the supply chain will not benefit from the data, except for those companies that have programmed the format into their computers. And that can hurt the manufacturer itself. "If we have one format and our competitor has another, it could cost us business because we won't be able to sell our product to that competitor's customers," Dormond says.

Industry experts encourage companies to look at automatic data recognition technologies not as solutions in themselves but as tools for achieving the greater goals of driving excess costs out of the supply chain and enhancing service. Recently the health-care community has come up with a strategy for accomplishing these goals, a strategy called efficient health-care consumer response (EHCR; see box on page 74). EHCR builds the various technologies into a system that provides for the timely, accurate--and paperless--flow of information among device manufacturers, distributors, and providers. Consumers are also built into the loop, because they represent a potentially large market based on the growth of home and alternate-site health care.

Significantly, EHCR is grounded in strategies and technologies that have proven successful in consumer-oriented businesses, namely the grocery and retail industries. The idea behind this grand strategy is to identify and drive the industry with the best practices and technology available. EHCR is still in its earliest stages of evolution. Representatives from manufacturers, distributors, and providers have formed a study group to develop this strategy further. One of the first releases from this group will be a list of the top 20 or so steps that offer the most bang for the buck. "We are hoping to create a case for action that will fit companies' own perspectives and capabilities--that will enable them to figure out which pieces to use and in what order," says CSC's Crawford. Unfortunately, that list and the accompanying data will not be available until late summer.

In the meantime, companies that want to--or must--get involved in the supply chain revolution may be tempted to jump into bar coding without preparing a long-term strategic plan. Consultant Crawford recommends that these companies at the very least organize their implementation of bar coding around the concept of electronic data interchange (EDI). "EDI provides a kind of bedrock; it provides the information flow that allows many of the other elements of an enhanced supply chain to be successful," Crawford says. An example is seen in the emerging practice of continuous replenishment (CRP), where a facility's use of products is automatically recorded as an order for replacements to inventory. "Without the ability to transfer information about orders and on-hand inventories back and forth between manufacturers and providers, it would not be practical to implement CRP," Crawford explains. "You could transfer that information manually, but the costs would go through the roof."

S. Wayne Kay, president and CEO of HIDA, notes that every company in the supply chain is today using some form of EDI--receiving orders by phone or fax, inputting order data into a computer database, and then printing out those data to provide manufacturers with a basis for scheduling production. "Inputting data several times is grossly inefficient and redundant," Kay says. "We need to look for a better way."

That better way, says Rachel Foerster, principal of Rachel Foerster & Associates (Beach Park, IL), is for the device company to develop strategic goals and then to apply the power inherent in bar code scanners and printers, computers, and other enabling technologies to achieving those goals. Applying these technologies in a coherent information network can reduce or eliminate the need for paper, fax, and voice telephone communications, cutting time and effort, she says.

But before adopting EDI, Foerster recommends that manufacturers perform a cost/benefit analysis of doing so. Among the costs, she says, will be the purchase of computer hardware and software, the time put in by support personnel, and expenses related to staff training. Among the chief benefits are reduced inventory, which is made possible by linking production more closely to market demand. Additional savings also occur through reduced paperwork, since information will flow electronically, and through reduced labor costs, since more efficient work processes require fewer staff.

Advance planning can be an important factor in enabling manufacturers to maximize their benefits. It is not enough for manufacturers simply to print and apply bar codes to their products. Bar code scanners must be installed at key locations throughout the supply chain. The computers and software for making use of the data scanned from labels must be compatible from one company to another. And warehouse staff must be trained to take advantage of the data to eliminate unnecessary steps in shipping and receiving products.

Even when a company takes all the right steps in implementing EDI, there is no guarantee that it will attain the savings it expects. "EDI will allow a company to put in place a foundation on which to build a competitive advantage, but in itself it will not provide one," Foerster says. And if one or more links in the supply chain are not up to speed, the companies pioneering EDI will fall short of achieving the potential of the technology. Continuous replenishment of product inventories, for example, will only work if production is geared according to supply data, which in a best-case scenario is provided by the customer. This makes the manufacturer's benefits heavily dependent on the ability of the customer to participate in the system. In short, the electronic supply chain is only as strong as its weakest link.

Unfortunately, at this early stage in the supply chain revolution, it is more common to have deficient links than not. That has put the burden of success on the groups that have decided to push forward even when others have chosen to remain behind. Baxter Healthcare has moved ahead, implementing EDI as a means of establishing CRP. Baxter executive John Terwilliger notes that the improved data flow is helping his company reduce inventory. The end result, he says, has been better service and reduced cost to providers.

Better exchange of information will also benefit manufacturers, especially those that sell directly to end-users. Exchanging data electronically has the potential for shortening the replenishment cycle in the field, says Zimmer's Robinson. That company is now looking at the possibility of installing data collection stations at hospitals, where bar codes would be scanned immediately following the implant of a Zimmer device. These remote stations would automatically upload the data into the company's network. "This would drive the invoicing and replenishment cycle," Robinson says. "Right now, that is done manually."

Joining the supply chain revolution means achieving mastery over what may initially appear to be a bewildering spectrum of technologies. For reading bar codes from product labeling, there are several types of scanning technologies, including charge-coupled devices (CCDs), lasers, and wands. Lasers, which are the most widely used, may be constructed in a variety of configurations, including handheld and fixed-mount models. They may use a moving or fixed beam, and their light source may be a helium-neon laser, an infrared laser diode, or a visible laser diode. And the technology does not stop there. Scanners need interfaces to feed data into computer terminals, and the choice of interface depends on both the scanner and the terminal to be used. Terminals may be desktop or battery-powered portables, some of which can be outfitted to send data by radio to a central system.

Then there are such fundamental considerations as which symbology or bar code language to use. The most common languages are the linear bar codes (such as the universal product codes seen on grocery items), Code 39, and UCC/EAN 128. The latter two hold the most potential for health-care applications. Code 39 allows alphanumeric coding in bar codes that can vary in length. But these bar codes tend to take up a lot of valuable real estate, which becomes an issue when individual and relatively small products must be labeled. By contrast, UCC/EAN 128 can interpret data in any ASCII character set, can employ bar codes of varying lengths, and is very efficient in terms of space usage. Neither of these codes, however, offers the potential for data content made possible by 2D symbologies.

In contrast to linear bar codes, which are read from left to right or vice versa, 2-D symbologies are read both horizontally and vertically. These symbologies, of which PDF417, Maxicode, and Data Matrix are the most common, may be ideal for health-care companies seeking to input data required by FDA alongside more common product information.

PDF417 is an edge-detection symbology. Each bar and space is significant. Data Matrix and Maxicode are absence-presence symbologies, which allow the system to read any type of character--for example, hearts or diamonds. "Both PDF417 and Data Matrix can hold a vast amount of data in a very small amount of space--something on the order of 50 to 100 characters in a half-inch-square area," says Christina Barkan, senior manager for industry relations at Symbol Technologies, Inc. (Bohemia, NY), which designed PDF417 about five years ago. "This language also addresses error-correction issues. Its symbols are always robust and will always be readable, whereas that is not so certain with linear symbologies."

Selection of a particular symbology may dictate the type of scanners and printers that a manufacturer must purchase. Contact wands, for example, are suited to linear codes, but cannot read 2-D bar codes. Lasers are also suited to linear bar codes, and many lasers on the market today can also read PDF417. However, only camera-based CCD technology is currently capable of reading PDF417 as well as Data Matrix and Maxicode. Laser technology may approach the capability of CCDs to read Data Matrix and Maxicode sometime in the near future.

Similarly, some printers are fine for printing linear bar codes but not 2-D codes. And even if the simplest linear bar code symbology is used, the choice of printers is anything but easy. There are dot matrix, thermal, thermal transfer, formed font, ink jet, and laser printers, each with its own advantages and disadvantages.

Computer systems and software must be compatible with equipment already installed, but they must also be up to the task of tracking supply chain data. Avecor Cardiovascular (Minneapolis), which makes disposable medical devices, including an oxygenator used in heart-lung bypass procedures, would like to bar code its products, then transfer the data to its network of PC-based computers. The problem is a dearth of PC-compatible software. "Everything we have seen ultimately requires a lot of customization," says Thomas Zacek, data processing manager for Avecor. "We are struggling to find an off-the-shelf package that will meet our needs."

These and other problems are occurring because there is at present no vision of how the supply chain of the future fits into the practice of health care today. The medical device industry has yet to define what benefits will be reaped, by whom, over what period of time, and how to achieve those benefits while avoiding mistakes. EDI proponents advise health-care executives to look for models in other industries--to examine how retailers such as Walmart, K-Mart, and Target have used bar coding and EDI to institute continuous replenishment systems that have reduced inventories and driven costs out of the supply chain.

While other industries may provide parallels, nothing exactly matches health care. The medical device industry has special requirements that do not apply to other fields, primarily because it is one of the few heavily regulated industries still operating in the United States. Taking advantage of the coming supply chain revolution will require a special vision unique to health care.

Recognizing this fact, several major device manufacturers, distributors, and providers, as well as key trade associations, have banded together to undertake a study of how EDI and its accompanying techniques and technologies might be integrated into the health-care supply chain. The focus of this study is EHCR, a high-level strategy that embraces the unique character of health care yet incorporates the quick-response strategies that have been applied successfully in the retail industry and the efficient consumer response (ECR) principles that have modernized the supply chain in the grocery industry.

"EHCR is not a project, program, or platform--it's a vision," says HIDA's Kay, who has been one of the major players in promoting the strategy's use in the medical device industry. "It is an umbrella under which EDI, bar coding, and other enabling technologies are brought together as part of an industry-wide initiative. Hopefully, EHCR will provide a focus for all the constituents of the health-care supply chain, enabling them to prioritize issues and decide which strategies will have the most cost-efficient impact. Agreeing on the priority needs of the supply chain will allow us to get on with better serving the end-user--the patient, the customer."


Right now, efficient health-care consumer response (EHCR) is little more than a concept at the leading edge of strategic thought in the medical product industry. But because of its potential for driving down health-care costs, EHCR is rapidly gaining the full attention of mainstream companies at all points of the supply chain.

EHCR is the health-care rendition of efficient consumer response (ECR), a concept implemented some three years ago by the grocery industry and since credited with saving billions of dollars through enhanced communications among sales outlets, distributors, and vendors. The concept makes use of bar coding and other information technologies to eliminate redundant and inefficient tasks in the supply chain--especially labor-intensive and mistake-prone tasks such as manually keystroking information into computers.

"EHCR is a broad-based, industry-wide effort aimed at streamlining the health-care supply chain--eliminating wastes at every stop," says Frederick Crawford, senior partner and consumer goods practice manager at CSC (Cleveland), a consulting firm that helped to develop ECR.

Hearing of ECR's success in the grocery industry, last year medical device manufacturers Johnson & Johnson, Becton Dickinson, and 3M Health Care, along with distributor Baxter Healthcare, approached CSC with the idea of applying the concept to the health-care industry. Since then, the original core of sponsors has grown to a coalition of some 18 manufacturers, distributors, and providers--6 of each type--as well as various trade associations. The group has commissioned CSC to conduct a study of how the successful principles of ECR could be integrated into the health-care supply chain.

By late summer, the coalition expects to have a report that provides a vision for the future of health-care distribution and identifies the practices most likely to enable industry to achieve that vision. The initial focus is on product information and cash flow from the end of the manufacturing line to actual usage of the products. The report is expected to include information for consumable medical and surgical devices, noncapital diagnostics, and pharmaceuticals. Other products, including capital equipment, might be a later focus.

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