CBC S1 E4: Minneapolis- The Supply Chain

Nov 15, 2020

Credit frostriver.com

Mistakes were made in keeping PPE and other essential medical supplies available for health care and emergency workers during the pandemic. Are we ready for the second wave, or not?

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If you follow the news, you know that 3M’s N95 masks can save lives. If you follow the news in Kentucky, you know that Governor Beshear appealed to 3M to release their patent to allow for increased mask production.

With a good pair of binoculars, 3M is visible from my house. So how is it I can see 3M, but I can’t buy an N95 mask at the Target directly across the street? To answer that, we go back to the place the virus started.

Global supply chain, global pandemic

Robert Hanfield is a professor at the Poole School of Economics at North Carolina State University. His colleague and fellow supply-chain guru, Eugene Schneller, teaches at the W. P. Carey School of business at Arizona State University. Think of them like a CSI team – for medical supply chains.

Hanfield says, "Wuhan, coincidentally, is the epicenter of the PPE manufacturing base for the world.” So the place the virus started was also the place the majority of these medical supplies were being produced.

Schneller said, "You know, when you’re sourcing components globally, a global disaster really stands in the way of global production. Hospitals also fell in love with some management practices such as 'just in time' and 'low unit of measures.' They didn’t want to carry a lot of inventory."

How did healthcare--taking my kid to the ER on a Friday night--become global?

Schneller continued, "Price became a huge issue in the U.S. So we went off-shore and we found lots of companies that could make things cheaper. You could get masks and gowns and all those things sewn cheaper in China and Vietnam and Cambodia and Thailand. And so we off-shored a lot of that."

And hospitals need thousands and thousands of products: the drug for the syringe, the syringe itself, the push-pull mechanism that makes it work, the needle, the cotton ball to swab the area...

Hanfield said, "And hospitals are also really, really bad at managing supply chains."

Schneller added, "You’ve got distributors, you’ve got GPOs, you’ve got middlemen all over there, right?"

Rube Goldberg

Credit Wikipedia

Imagine one of those old black and white Rube Goldberg cartoons in which an inventor would invent a fantastically complex machine-- based on increasingly ridiculous chain reactions—to do something simple.

If we took one of Goldberg's cartoons, like the Automatic Back Scratcher as a visual map of our healthcare, it would look like this:

A fire hose shoots water through an open window (that would be a manufacturer, like 3M); inside, a man (a distributor, like Cardinal, with a warehouse full of supplies) opens an umbrella to stay dry. That triggers a series of pulleys (we’ll call those Group Purchasing Organizations). The pulleys tip the five-pound ball (the FDA) which breaks a pane of glass  (private insurance companies and Medicare). The sound makes a baby cry (that’s the  hospital); a dog (we’ll call him the doctor) rocks the cradle, trying to soothe the baby, and finally that rocking moves the back scratcher up and down and voila!  You have healthcare.

But let’s back up and talk about that series of pullies – the Group Purchasing Organizations or GPOs.

Schneller described the GPOs. "They’re a group of people who go out and say, ‘Okay we’re gonna do gloves; let’s find all the suppliers for gloves, and we’re gonna send out a request for proposals. We’re going to get those proposals back, we’re going to evaluate those, and then we’re going to decide who to give contracts to'."

Contracts. MMCAP Infuse is a relatively tiny GPO and operates officially as part the Minnesota State Office of Procurement. How tiny is it? About 13,000 member institutions across all 50 states.  There are hundreds of GPOs across the county, many much larger, serving over 96 percent of hospitals – most of which, by the way, belong to more than one GPO. That is a lot of middle folks.  In economic terms, this volume purchase gives the GPO leverage on price, saving hospitals, according to the GPOs, millions of dollars a year. A GPO makes money by charging the vendor up to three percent of the contract price, but that contract price can be hard to know.

Schneller said, "Another differentiator in the health care supply chain has been a lack of transparency so that when a hospital signs a contract, frequently in that contract there have been non-disclosure clauses…which means that if I went to five hospitals, they may all have different prices and they’ve signed non-disclosure clauses so they can’t talk to each other about what they’re paying."

GPO business practices, like the non-disclosures, are protected by something called “GPO Safe Harbor.” Enacted in 1986, it shelters GPOs from anti-kickback laws. Critics, like Iowa Senator Chuck Grassley, have repeatedly argued that “safe harbor” allows GPOs to manipulate the market unfairly. According to the Association of American Physicians and Surgeons, common GPO practices (like exclusionary contracts, vendor rebates and price-bundling to favor one manufacturer over another) have caused medical shortages long before COVID. When unprecedented demand went up world-wide, GPOs may have been hampered by their own contracts.

Wendy Savakes is Managing Director of MMCAP Infuse.

She said, "I’d say even in January and February things that were going to be in high demand from those wholesalers started to go on something called allocation. So, what that means is the wholesaler or distributor doesn’t have enough product to meet the demand. So, if you regularly ordered a thousand pairs of nitro gloves a month, then you might receive a percentage of that in your most recent order based on what supply they had. If you were new to that contract and you were suddenly signed up and you wanted to purchase something so you entered a purchase order, because of the pandemic and you’d had no history of purchase with them, you’d be last on the list to receive any of that allocated supply they were able to distribute.

COVID-19 testing kits
Credit Steve Burger

GPOs are good at getting things cheap. And fast. That’s part of the double whammy; just-in-time shelf-stocking and a cheap-as-possible can create an inflexible supply chain, one that is often based in something called “single sourcing”--one factory making one thing and making it cheap. And that can cause problems when a lot of people suddenly buy something.

When a supply chain works, information moves back and forth from the consumers downstream to the manufacturers upstream: Who’s buying what? Where are we getting it? How much do we need? And most importantly, why is everyone buying it right now?

When this information isn’t shared or understood, manufacturers and consumers end up with an over-supply or an under-supply and vastly fluctuating prices. In pandemic terms, having ample PPE today would have required supply chains to study demand during past not-quite pandemics like H1N1 and SARS and to have made adjustments, like finding alternative manufacturers for just-in-case scenarios.

It’s not necessarily about off-shore or re-shore; it’s about risk management. And when that analysis and adjustment are missing, what happened in the past can come back and smack you in the face. Enter the bullwhip effect.

Schneller described it. "Was that a one-time event? Is it going to continue to happen? How do I begin to adjust my manufacturing given what I see happening at the point of sale?  Okay?  And so, if you have bad signals, and you don’t understand the signals happening downstream at the point of sales, you really don’t know how to behave upstream."

Savakes says it’s not that GPOs don’t understand their downstream signals. It's how to use them that is difficult to determine.

"How much supply is reasonable to be stockpiled? How much is reasonable, and how do you turn over that stock so that it doesn’t go to waste, and long term, what is reasonable? That’s not a simple Algebra II calculation."

So, if the complexity and inherent financial risk of stockpiling is not something the private sector can do, where do we go?

Again, Professor Hanfield. "It’s funny, I wrote a paper in 2010 about Federal Supply Chain Preparedness. This was around the time of H1N1 with all of these guidelines. I don’t think anybody read it."

It was called “Planning for the Inevitable: The Role of the Federal Supply Chain in Preparing for National Emergencies." 

Suzanne Sellman is a Public Affairs Specialist at the Department of Health and Human Services.  And if there’s one thing she’d like us all to know, it is that the National Stockpile was never supposed to be part of the medical supply chain.

Sellman said, "Just so you have a background: The stockpile is basically to address any CBRN threats. So chemical, biological, radiological, nuclear threats. That’s what it’s funded to do.The U.S. Department of Homeland Security has a threat list, and we use that threat list as a basis for what we’re going to procure for the stockpile. Like okay, we get hit by a bomb, —Anthrax, anything like that. We have the antidotes and the stockpiles to push out for the short term."

Short term is defined as ninety days. That should be enough time for hurricane winds to stop blowing, flood waters to recede, to clean up after an explosion--one-time events happening in one location that temporarily wipe out one supply.

Sellman said, "You know, we can’t stockpile everything in the world for an indefinite amount of time. I mean there’s just no way any place could have that much capability and that much at hand to respond to something that lasts that long, I mean – you can’t. "

And even if you could have a 90-day supply of N95 masks for every American, if it were a different type of pandemic, maybe that would have been a different set of supplies.

Schneller said, "You know, when we had the Ebola scare, every hospital in the United States wanted Ebola suits."

So how do you stockpile for new threats? Remember when we were washing our meat? Turns out COVID is more of an airborne threat. But what if it had been water-borne or bacterial? There are five main types of pathogens, including fungi and worms. Right now, what PPE would we stock for a worm-based pandemic?

The National Stockpile actually worked as it was designed to do, despite political pressure and claims to the contrary.

Sellman chuckled as she said, "We did a much better job than what’s in the media."

Going forward, pandemics will be one of the prepared-for threats. Sellman calls it “the National Stockpile 2.0.”  But we are not at next time; we are still at this time, facing these shortages. And when supply chain breaks down, a new one arises—not exactly a black market, but a gray one

Credit Steve Burger

Schneller said, "A week doesn’t go by, including this morning, when I don’t get five to ten emails from someone who’s got x-hundred thousand masks. And so there is a huge, huge stockpile sitting around this country that we don’t know a lot about.  We don’t know how much is in it. We don’t’ know the quality of it. And we do know the costs being asked are very high."

Hanfield added, "In one case I heard a physician in a hospital in the Northeast was getting supplies brought over the border because he actually knew the customs people and they were letting it through from Canada."

We are at the hoarding and gouging stage. Turns out, there’s also a business school term for this.

Hanfield described it. “Okay, the tragedy of the commons--it’s kind of an old story where if you have a bunch of villagers and they have sheep [and] they leave the sheep in the commons and they allow their sheep to graze willy-nilly, pretty soon the sheep will graze all the grass, and you’ll have no grass left on the commons."

Schneller added, "One of the things we’ve seen is that having common good is believed to be someone else’s problem.  And therefore, I think public health was tremendously underfunded. Public health has just not been at the forefront of what we’ve done."

Mike Boeselager is the type of supply chain manager that Professor Schneller would love. He’s also the vice president of St. Luke’s hospital in Duluth, Minnesota.

Boeselager said, "We established through SARS and N1 experience that we need to have an emergency cache on hand, and that was a back-up supply that we relied on."

Until it ran dry. Already on allocation with his GPO, he did dabble in some successful grey market purchasing, but it wasn’t a solution. Neither was waiting for his regular supply chain to self-correct. He began to talk about it to anyone who would listen.

Boeselager said, "You know it’s not a huge city, so there’s a lot of people that have connections and know each other and know of those capabilities. Having locally-based manufacturers that are willing to do something right?  Willing to take action.  And coming forward and saying what can we do?"

Boeselager was thrilled they were coming forward, but wasn’t sure what they could do either. Duluth is a manufacturing town, not a medical supply hub. But they kept talking and finally three companies emerged with a plan to make face shields.

Boeselager remembered the discussions. "Frost River was one of them. They’re a local sewing manufacturer [producing] high-end canvas duffle bags and leather products like backpacks and briefcases and such. Ah, Cirrus Design, they’re a local aircraft manufacturer and have a national market based here in Duluth. They make prop planes and recently started producing small private jets as well. And then Charter Films. They’re here in Superior, Wisconsin, which is right on the border of Wisconsin/Minnesota, and they’re a local manufacturer of shrink wrap and similar products."

Charter Films got the plastic, Frost River cut the product out and Cirrus Design did the assembly, and suddenly Boeselager went from zero face shields to a lot more than zero.

Boeselager said, "As a result, then we reached out to other health systems here, locally, within the region...International Falls, Cloquet, Two Harbors, Cook, Big Fork, Grand Marais.  Sowe reached out to them and said 'How can we help?'"

The same trio collaborated again to produce an N95-esque mask when nothing was coming from China and once again suddenly had enough PPE to share with the area. As the shortages continued, so did the innovations. Next up was the Papr hood. Looking like a cross between a space helmet and a vintage deep-sea diving get-up, a Papr hood covers the entire head, neck and shoulders and, critically, blows purified air from a compressor to the wearer.

Boeselager said, "Cirrus Design actually manufactured the blower. They took one apart, reverse engineered it."

And then they called in the National Guard. "The 148th Fighter wing here in Duluth, the Air National Guard, to get their 3D printer and have help from them,” Boeselager continued, “and they manufactured that blower unit and produced about 300 of those locally that we could share again within the region. So another really neat story to tell, I think."

It is, and why on earth am I only hearing it now?

"Well, we were busy."

Schneller had the last word. "I mean, I was always the guy at a cocktail party and people would say, ‘What do you do?' I would say 'health care supply chain,' and their eyes would sort of roll over. That’s changed a bit. If people didn’t hear the word 'health care supply chain' before this pandemic, they sure have now."