Thick around the middle

Q: How is a supply chain like an exercise routine?

A: When it’s disrupted you end up thick around the middle.

I’ve been told that you never have to explain a good joke—so let me explain the above joke.  

Hopefully we all understand the part about the exercise. The current pandemic has disrupted all of our daily routines and with kids at home and gyms closed (not to mention the 3:30 Zoom cocktail hour) most of us simply have to look down to understand that part. It’s happening because our inputs continue, and in many cases have increased, but our ability to burn the calories and consume the energy has decreased. The difference gets stored and we get thicker around the middle. Hopefully we can adjust our routines and adopt new forms of exercise and reverse the course, making this a minor change to our shape and not a major health concern. The same thing is happening to the world's supply chains.

You may have seen that a futures contract for oil went negative last month or that India is intentionally storing oil on the water and that billions of dollars of oil on the water have nowhere to land. This is a real world example of broken supply chains getting thick around the middle. Production and consumption patterns are completely out of whack. Inputs and outputs aren’t matched and the market forces that drive a well functioning supply chain break down. This impacts prices in a number of ways and the long term implications of these processes on the healthcare supply chain will be dire. Oil is a market that has developed futures contracts, and hedging and all types of mechanics to manage the volatility of price and the purchase and sale of oil throughout a “barrel’s” journey through the supply chain. Most other markets have not developed such a wealth of mechanisms to manage volatility and uncertainty, and in healthcare, with demand skyrocketing as a result of the response to COVID-19, the result is a dramatic increase in the final price of supplies and equipment called the fully landed cost. 

At Kountable we’ve been working with major government and hospital buyers in East Africa to improve the fully landed costs of healthcare equipment. Many global institutions and world leaders want to bring “marketplace technology” to the problem of matching the demand of healthcare buyers with the supply of healthcare manufacturers. This will address part of the problem as we’ve seen on our platform over the last 5 years, but it won’t solve the real problem. The real problem that drives successful outcomes in a global, industrial healthcare supply chain like the one needed to mount a successful, coordinated response to COVID-19, is managing fully landed costs.

Most marketplace models work really well inside of a single market like the US or China.  However, when you start managing international consignments, crossing borders, clearing customs, managing value added tax, last mile logistics and commercial terms, the savings that you can deliver through a digital price discovery platform (marketplace) can be eaten up multiple times over by the “thick middle” of fully landed costs.  Many suppliers in our current environment have simply stopped trying to handle this part of the process and have changed their sales practices to terms called “ex-works” or “free on board.”  This means their prices only reflect the cost of the goods inside their country — exporting them, shipping them, clearing, and delivering them is not their problem. This process governing export through delivery needs coordination. This is the part of the supply chain that needs a digital platform to deliver transparency, efficiency, governance, and compliance to prevent skyrocketing fully landed costs.  

When fully landed costs are too high, there is less money to buy supplies and equipment to protect healthcare workers and deliver care to patients. As we move through the pandemic response cycle and likely repeat parts of it when second or third waves occur, we need to use every tool we have at our disposal to manage fully landed costs and stretch every healthcare dollar and donor-funded procurement as far as it can possibly go. Unfortunately, costs will go up—competition makes that a certainty—and disrupted processes will need to be reconfigured and reassembled. This is why we need to deeply understand the costs of getting the right supplies and equipment to those most in need and use all of the technologies and tools at our disposal to coordinate efforts, create transparency, drive down pricing, and drive up the number of lives saved per healthcare dollar spent. This new distributed business process is like the new kind of exercise that we need to get good at to ensure we don’t stay thick around the middle.