Smith & Nephew, plc has thrown down an interesting and probably misunderstood gauntlet to the orthopedic industry. It’s called Syncera. In the words of Smith & Nephew CEO Olivier Bohoun, it is going to be “disruptive” to the orthopedics business model. While Bohoun cautions “We are kind of pre-launch-phase” the implications of Syncera caught our attention.
Smith & Nephew launched Syncera in the U.S. about a year ago and said that its goal is to provide a different orthopedic service model and, in the process, cut hip and knee replacement device prices by 40% to 50%.
By using advanced logistics.
Brief History of Logistics in Business
The economic recession of 1958 is largely credited with raising logistics to prominence in U.S. business. The need to cut costs pushed many firms to dust off lessons from World War II and find innovative approaches to transportation, inventory and storage.
In 1958 F.W. Woolworth, Ben Franklin, Family Dollar, W.T. Grant, Kresge’s and Butler Bros were the dominant discount stores (then known as “dime stores”). In 1962 the three horsemen of their apocalypse (Wal-Mart, Target and Kmart) were founded. Yes, they all started the same year. In fact, Walton’s five and dime in Rogers, Arkansas, was part of Ben Franklin. But Ben Franklin’s management wouldn’t adopt Sam Walton’s innovative approaches. So he founded Wal-Mart.
Arguably, inattention to logistics killed Woolworth, Butler Bros, relegated Ben Franklin to the periphery of retail and pushed Kresge to reinvent itself as Kmart.
And what is the key to logistics in retail? Inventory.
What is the key to logistics in orthopedic? Same thing.
It’s not about the sales reps. It’s about the seven rights of logistics.
The 7 Rights
The goal of logistics is to get the right product at the right time in the right quantity in the right condition at the right place for the right customer at the right cost.
And the enemy of logistics is shrinking product life cycles and product variety. Exponentially higher numbers of SKUs (stock keeping units) to accommodate a growing variety of implant or instrument configurations undermine the seven rights of logistics. More implants and instruments mean more parts to be manufactured, stored, transported, and generally kept track of. At the hospital level the problem is compounded.
If orthopedic manufacturer A introduces a new instrument, thereby increasing its product line by one, its four competitors may respond and the hospital is now dealing with five new SKUs.
The Rep-Less Criticism Is a Red Herring
“Arthroplasty surgery can involve the use of as many as 20 trays holding a total of 200 or more instruments, all of which need be counted, cleaned, inspected, assembled and sterilized before every surgery. In practice, however, a surgeon may only use a small number of these instruments during the surgery. By using the learning management modules within these new applications, a nurse or scrub technician setting up for surgery can quickly train themselves on each surgeon’s preferences, identify the instrument sequence and quickly locate every instrument within the tray.” — Syncera Press Release
Great orthopedic sales reps are really logistics experts. They can be essential to helping the entire operating team organize the instrument trays, the OR equipment and to attend to the surgeon’s style of operating so the right instrument or implant is ready at the right time.
But those functions are, arguably, the same as an old Ben Franklin store manager. Great Ben Franklin store managers, like Sam Walton, were also logistics experts—for a single store.
Wal-Mart did not rely on each store manager’s ability to learn and apply logistics within the four cement walls of a store. Wal-Mart imposed innovative logistics up and down the supply chain squeezing costs out before that manager received goods in, say, Rogers, Arkansas.
To equate the logistics innovation of big box retail (and later Amazon) stores to the capabilities of an individual manager is to miss the entire revolution.
Bohoun hopes that Syncera will give Smith & Nephew a sustainable competitive advantage by giving hospitals faster, more accurate, and more consistent instrument tray management, order filling and delivery through its technology, automation and process improvement.
Bohoun told investors at the most recent J.P. Morgan Healthcare Conference that for hospitals performing 700 procedures a year, Syncera could cut their cash costs by $4 million over three years.
The Dynamic Between Hospital Cost Management and Manufacturer Logistics
As we and others have written recently, hospitals are measuring and managing costs in more and more sophisticated ways (see our May 19 OTW article about McAllen, Texas). It would follow that their power relative to orthopedic manufacturers would grow. Hospitals are already reducing complexity by cutting vendors or pushing the costs of inventory and transportation back on the manufacturers.
One of Syncera’s more interesting moves is to forge partnerships with hospitals to streamline logistics systems and processes. For example, one of Syncera’s goals is to cut implant and instrument SKU’s for large joint arthroplasty from 32, 000 to less than 1, 000.
In May, Syncera announced the acquisition of two software applications, Virtual Backtable and TrayTouch, which allow hospitals and ambulatory surgery centers (ASCs) to analyze and manage instrument utilization during surgery as well as a surgeon preference driven learning management system for OR staff.
Syncera also offers an error checking systems which is linked into the hospital EMR and ERP system.
It is a data-capture system like an early point of sale (POS) data capture systems for retailers. POS systems are the core of every retail logistics system. Wal-Mart’s POS system, for example, gives them (according to industry estimates) a 2-3% cost advantage over Kmart. Every individual product sale in any Wal-Mart store anywhere in the world is communicated instantaneously to the manufacturer, the transportation system and the warehousing system.
But what if these operating room and hospital logistics innovations are only the beginning? Could there be logistics innovations that disrupt even Syncera’s model?
Technologies Which Could Transform Orthopedic Logistics
The 13th Annual survey of industry logisticians conducted by eft (eyefortransport) identified the following major logistics innovations:
- 40%+ of manufacturers and retailers expect their logistics providers to have some understanding of driverless vehicles
- 19.2% of manufacturers are already using 3D printing in their businesses
- 94% of industry executives think drone delivery is inevitable
- 43% of industry executives think the Internet of Things (IoT) will have a huge impact on supply chain and logistics.
Source: Mr. Haley Garner, Research Director, eft. eft’s 2015 3PL Report
3D printing, which has been around for many years, appears to be reaching critical mass. Today’s systems have the ability to print exact working parts and products from metals, plastic, composite materials and even human tissue. As 3D printing technologies migrate from the manufacturer to the hospital or clinic, they have the potential to shrink the supply chain.
If 3D printing could be combined with the Internet of Things, then the impact grows exponentially.
The Internet of Things refers to devices which communicate with each other within an existing Internet infrastructure and without human intervention.
Using, for example, the instrument utilization patterns in the OR, smart instruments would communicate with sterilizers, manufacturer’s production equipment and warehouse computers at the moment of use—without human data input. Parts would be talking to the logistics system autonomously.
The eft study found that 26.25% of logistics companies are currently using machine-to-machine (M2M) technology and 46.62% plan to deploy them in the future. When asked about the impact of IoT on logistics and supply chain management, 47% said they believe it will have a tremendous impact while 49% said that it would have some impact. Only 3% said that it would have no impact.
Changing Healthcare Driving New Logistics Solutions
If it is true that hospitals spend $55, 000, on average, and five months training one surgical technician to manage operating room instrument trays (as Syncera stated in one of the their press releases), then the Internet of Things could be immensely disruptive.
U.S. healthcare is clearly changing and all of the factors—from accountable care organizations to individual hospital initiatives—put the focus on logistics systems in a way that is different from any time in the past.
Could a Wal-Mart/Target/Amazon style logistics network actually change the orthopedic business model?
With hundreds of millions of dollars tied up in implant and instrument set inventories, the financial incentives are available.
Perhaps someday RFID (radio frequency identification) instrument sets will be in constant communication with hospital ORs, drones in the sky, sterilizers, GPS systems and the manufacturer’s production equipment. All without human intervention. And transportation will be electronic, not over the road, and warehousing will be an artifact of the past.
