The Bottom Line: Johnson & Johnson, one of the world’s foremost healthcare companies, is No. 1 in the AMR Research Healthcare Top 25 for 2009, followed by Sisters of Mercy, a hospital system that is leading the way for supply chain transformation at the patient level.

AMR Research’s annual, cross-industry Supply Chain Top 25 identifies the global companies that have best demonstrated leadership in building supply chain excellence and innovation. Specifically, these companies have focused on applying demand-driven principles to their operations to drive significant business results.

Why a Healthcare Top 25?

Over the years relatively few life sciences and healthcare companies have made the Supply Chain Top 25. The reason for this, as we explain in more detail below, is that the supply chain has not been considered a strategic function in many healthcare companies. As a result, supply chain process innovation in healthcare has lagged other industries.

Today the industry is facing unprecedented pressures. Life sciences companies must revitalize sluggish new product pipelines, reach emerging markets in corners of the globe they have not yet entered, manage global pricing pressures, and increase their focus on the bottom line. Healthcare companies, meanwhile, must stem the cost of incoming supplies and deal with decreasing reimbursement for their products and services.

As a result, the healthcare industry’s attitude toward supply chain innovation is changing. Supply chain is gaining recognition as a key enabler of the core mission in healthcare organizations. With the cross-industry Supply Chain Top 25, AMR Research aims to elevate the supply chain profession, shine a light on best practices, and foster discussions that share those best practices across companies.

Our goal with this Report is to apply the same principles to the healthcare value chain and ultimately raise the bar on supply chain and operations performance. We developed the Healthcare Top 25 to recognize those life sciences and healthcare companies that have demonstrated leadership in developing and leveraging supply chain capabilities. Specifically, we recognize those companies that collaboratively identify and drive real value across the healthcare value chain.

Where is supply chain in healthcare?

Supply chain is a professional discipline that has taken a long time to reach the top of executive agendas in life sciences and healthcare. There are a number of good reasons for this relatively slow adoption. The core mission of life sciences companies has been to develop and commercialize novel therapies for the welfare of patients. Healthy margins have buffered the industry’s bottom line from its inherent regulatory and process challenges. As a result, supply chain has long been considered a tactical function, not a strategic weapon.

Similarly, the core mission of healthcare organizations has been to further the assessment and treatment of disease through revolutionary advancements in clinical study, diagnostics, and delivery systems. Until the last two decades, there seemed to be sufficient public and private funding to support a generally acceptable and sufficiently wide level of patient care. So again, supply chain has been considered a back-office function in healthcare, if it has been considered a function at all.

Driving excellence across the value chain

AMR Research uses the term “value” a lot. We refer to value in terms of top-line revenue, bottom-line profitability, shareholder return, and becoming demand driven. But what is value in the context of the healthcare value chain? In our assessment of excellence across the healthcare value chain, we won’t abandon the traditional measures of financial and supply chain excellence, such as return on assets (ROA) or inventory turns. Rather, we accept that those traditional measures alone don’t create a complete picture, so our focus is on joint value in healthcare.

There can be only one definition of value in healthcare: delivery of high-quality care to the patient at optimal cost. If companies are to succeed in the future healthcare environment, they will need to strengthen their ability to deliver on this singular moment of truth. A big part of achieving this success is establishing supply chain leadership through a deep connection with trading partners and customers.

Why focus on a seemingly intangible notion of value? The rationale is simple. A singular, exclusive focus on cash flow, profitability, or even inventory turns at one node of the healthcare value chain only serves to push inefficiencies, wastes, or costs to the other nodes. Sure, we might be satisfied as shareholders, but would we really be satisfied as patients?

The time has come for supply chain to take center stage in the healthcare industry in order to drive real, sustainable value across the network. In fact, we believe leaders will embrace specific supply chain capabilities and pave the way for industry-led reform of a bloated and inefficient healthcare value chain.

Let’s set the bar before we raise it

The interconnected and interdependent nature of the healthcare value chain requires a focus on identifying and realizing joint value across the entire chain. From all of our research and interactions, we see six strategic leadership capabilities that companies must demonstrate in order to identify and realize joint value (see Figure 1):

• Bidirectional visibility—Critical product supply information, such as demand and inventory, must be widely and routinely shared with upstream and downstream trading partners.
• Enabling technologies—Leaders across the value chain recognize that technology must enable and support business process innovation, not the other way around.
• Collaboration—Companies must forge collaborative relationships with upstream and downstream trading partners that are process-based and guided by a focus on creating joint value.
• Business process innovation—Beyond product innovation, the healthcare value chain is sorely in need of business process innovations that streamline transactions, reduce inefficiencies, and decrease the cost of doing business.
• Alignment—We must dismantle the tall and wide silos that preclude a bidirectional understanding of trading partners’ requirements for products and services and create a level of trust required to establish mutual goals and vision.
• Integrated demand-driven supply networks—Companies must develop capabilities to sense demand as far downstream as possible, in as near-real time as possible, and optimize internal processes to drive excellence in product or service supply.

The AMR Research Healthcare Top 25 for 2009

With the bar set to define value across the healthcare value chain, we turn our focus to evaluating life sciences and healthcare companies against this standard.

Our approach

The Healthcare Top 25 methodology is explained in detail in Appendix A. Those familiar with the Supply Chain Top 25 methodology will recognize many similarities to the Healthcare Top 25 methodology.

To summarize, we included life sciences manufacturers, distributors, pharmacies, and hospitals in the initial Healthcare Top 25 pool. We decreased the annual revenue threshold that we normally employ for the Supply Chain Top 25 so that we would include a more representative sample of life sciences and healthcare companies (e.g., $750M to include both large and small biotech companies). Then we gathered data from publicly available annual reports to calculate a three-year weighted average for ROA as a proxy for overall productivity and efficiency, and an ending 2008 assessment of inventory turns as an indicator of supply chain cost.

To augment this quantitative assessment, we also polled over 50 industry and AMR Research analyst experts. We used the definition of value in healthcare and the six capabilities outlined in Figure 1 as a guide for the voters. The financial assessment is intended to provide a picture of each company’s internal efficiency. The opinion piece gives us a view of how extensively each company is engaged in creating joint value across the healthcare ecosystem.

In comparison to the Supply Chain Top 25 methodology, there are a few differences in the Healthcare Top 25 methodology to note. In the Supply Chain Top 25, we weight the ranking by assigning 60% of the potential score to publicly available financial data, and 40% of the potential score to the opinion portion. However, consistent with our emphasis on joint value creation across the healthcare value chain, we assigned only 40% of the potential score for the Healthcare Top 25 ranking to the quantitative financial data. The remaining 60% of the score was assigned to the results of peer and AMR Research analyst opinion votes.

The other major difference is the treatment of hospitals in the methodology. For the financial data, we rely on publicly available, audited data from each company’s financial statements to ensure consistency and reliability across companies in the analysis. However, this data is not available for most hospitals. Therefore, we ranked hospitals solely on the basis of the opinion portion, with a 50% weighting given to each of the AMR Research and peer votes.

Inside the numbers

Healthcare Top 25: 1–5

It was extremely encouraging, but not altogether surprising, that the top two spots were filled by entities representing the extreme ends of the healthcare value chain. Johnson & Johnson (No. 1) is one of the world’s most recognized brands in consumer healthcare, branded pharmaceuticals, and medical devices. Supply chain’s prominence is growing within the ranks of Johnson & Johnson through a series of targeted, enterprise-wide initiatives that focus both on the customer and operational efficiencies. The company strengthens these internal initiatives by actively participating in industry forums and engaging key hospital customers in supply chain pilots aimed at identifying and unlocking joint value.

One such key hospital customer is Sisters of Mercy (No. 2), a Midwest integrated delivery network (IDN) of hospitals transforming, and in the process defining, supply chain at the patient level. Sisters of Mercy created its own consolidated supply chain service center in an entity known as ROi, hired talent from outside of healthcare to lead this service center, and has redefined and redesigned its supply chain processes from incoming receipt of supplies to delivery at the patient’s bedside. It’s important to note the impact that Sisters of Mercy’s achievements have had on its reputation across the healthcare value chain. Consistent with our methodology, it was ranked No. 2 based solely on peer opinion.

Rounding out the top five are three of the Big Four healthcare distributors. Cardinal Health (No. 3), Owens & Minor (No. 4), and McKesson (No. 5) all play a pivotal role in the distribution of upstream products and services to downstream pharmacy and hospital customers. Their position in the value chain—in between manufacturers and the end users of their goods and services—requires these distributors to focus on visibility across the value chain. The relatively thinner margins they operate under require them to focus on business process innovations and support those innovations with enabling technologies. Their financial and supply chain results are unequivocally impressive, and not just relative to their healthcare value chain peers: ROA and inventory turns for these distributors were as good in 2008 as the average company ranked in the Supply Chain Top 25.

Healthcare Top 25: 6–10

The companies in the 6 through 10 slots are pharmacies, large pharmaceutical companies with consumer healthcare divisions, and medical device companies. CVS Caremark (No. 6) is a leader in the effective use of data, not only at the pharmacy level but across the entire value chain. Like their distributor peers, pharmacies play a key role in capturing and sharing invaluable inventory and demand data across the healthcare value chain. Beyond visibility to key data, CVS Caremark is one of the pharmacies changing the face of the traditional retail environment by providing healthcare services for primary care and vaccinations, for example.

Abbott (No. 7) employs leading programs to capture voice-of-the-customer insights into supply chain processes. This focus on the customer is evident from its branded pharmaceuticals to its consumer healthcare businesses. Novartis (No. 8) has an intense focus on the development of lean operations and demand-driven supply chain capabilities, employs a robust global sales and operations planning (S&OP) process, and leverages enterprise technology to streamline communications with upstream contract manufacturers.

BD (Becton, Dickinson—No. 9) provides hospitals and providers with a broad range of medical devices. It is taking a leading role in deploying standards for item and location tracking across the value chain. The company leverages a complex, global portfolio of product offerings into a healthy and impressive ROA. Wyeth (No. 10) will bring some of the industry’s best demand-driven supply chain capabilities to its new business partner, Pfizer. The company conquered portfolio complexity through a combination of organizational design and robust business processes, leveraged enterprise systems to drive visibility to key manufacturing and quality data for efficient release of products, and is a leader in developing relationships with upstream contract manufacturers.

Healthcare Top 25: 11–15

The next five slots on the Healthcare Top 25 are occupied by companies similar to those in the five slots above. GlaxoSmithKline (No. 11) offers patients and consumers a broad range of branded and consumer healthcare products. GSK has formed R&D partnerships with Pfizer to treat diseases such as HIV and is one of the leaders in forming logistics partnerships to distribute its products in a truly global manner. AstraZeneca (No. 12) has an aggressive strategy for forming partnerships with contract manufacturers for both new and existing products, and will look to this new level of collaboration to accelerate its efficient supply capabilities.

AmerisourceBergen, the fourth distributor of the Big Four in healthcare, was ranked No. 13 with impressive inventory turns and solid recognition in the peer opinion. Like CVS Caremark, Walgreens (No. 14) is leveraging its capabilities to share key data such as inventory and demand with value chain partners, and offering new patient-centric services with in-store health clinic and vaccination services. We have repeatedly heard Covidien (No. 15) associated with two key offerings to hospital customers: a broad range of innovative medical devices, and innovative supply chain education and services aimed at increasing supply chain capabilities and identifying sources of joint value at the hospital level.

Healthcare Top 25: 16–20

Positions No. 16 through No. 20 on the Healthcare Top 25 are led by our second hospital included in the ranking, the Cleveland Clinic (No. 16). This hospital system is not only focused on identifying and pursuing opportunities for efficiency in its supply chain and with upstream partners, but, as covered recently in the news, is also considered one of the leaders in development and use of electronic medical record (EMR) technologies. Next is Merck (No. 17), a company that is also developing partnerships with contract manufacturers and third-party logistics providers to reshape its supply chain. Merck has also been donating medicines free of charge to treat and eradicate disease in developing corners of the world for decades.

Genentech (No. 18) has long been known for its innovative and productive R&D capabilities, as well as its proactive work with patient advocates in the design and execution of clinical trials for new therapies. Alcon Laboratories (No. 19), which has leveraged its supply chain capabilities to deliver eye care products to patients, has the highest ROA on the Top 25 ranking (more than 25%), an impressive financial performance for its investors.

Rounding out this tier is Medtronic (No. 20), a company that has built robust S&OP processes to conduct tradeoffs within highly diverse business units. It is widely recognized by hospitals for the supply chain services it extends to its downstream customers.

Healthcare Top 25: 21–25

Past acquisitions may still be impacting Boston Scientific’s (No. 21) ROA, but peers and hospital customers alike recognize this company’s willingness to collaborate with hospitals to provide valuable supply chain services downstream. Two more hospitals made the fifth tier of our Healthcare Top 25. BJC HealthCare (No. 22) and Mayo Clinic (No. 25) are great examples of hospital systems that are utilizing supply chain capabilities to understand and manage the rising costs of supplies. BJC in particular has connected with a number of its suppliers to investigate joint value creation opportunities that will lower costs in the long run.

Two of life sciences’ powerhouses complete the list. Roche (No. 23) and Amgen (No. 24) are developing supply chain capabilities and an ability to deliver R&D innovations to patients, respectively.

Looking ahead

Healthcare in the United States is at a historic turning point, with significant changes ahead. It is widely accepted that healthcare spending is on an unsustainable path, representing 16% of GDP, the second highest percentage among United Nations member countries. According to World Health Statistics 2009, only East Timor spends more.

Supply chain leadership and best practices can play a major role in helping to transform the industry, and in guiding the value chain along the journey toward its ultimate goal of delivering high-quality patient care at optimal cost. We look forward to the role of the Healthcare Top 25 in helping to highlight supply chain leadership and catalyze positive change.

Appendix A: Healthcare Top 25 Methodology

The Healthcare Top 25 ranking comprises two main components: financial and peer opinion assessments. Publicly available financial data gives us a view into how companies have performed in the past, while the opinion component provides an eye to future potential and reflects future expected leadership, a crucial characteristic. These two components were combined into a total composite score, with the financials accounting for 40% and the opinion piece for 60% of the total score, respectively.

For the financial data, we rely on publicly available, audited data from each company’s financial statements to ensure consistency and reliability across companies in the analysis. However, this data is not available for most of the hospitals. Therefore, hospitals were ranked solely on the basis of the opinion portion, with a 50% weighting given to each of the AMR Research and peer votes.

We derived the master list of life sciences companies, distributors, and pharmacies from the latest publication of Fortune’s Global 500 list, and augmented it with internet searches of industry sub-segments. Some individual companies were eliminated because of unavailable financial data. To compile a representative list of hospitals, we solicited names of hospitals from industry experts and consulted lists of top hospitals from a variety of rankings and perspectives. We also met with executives from across the healthcare value chain to solicit feedback on the initial pool of companies to ensure that we started with a healthy foundation. During these discussions we also vetted the framework for the methodology, our definition of value in healthcare, and the six key capabilities identified in Figure 1.

 

Financial component

Two financial metrics were used in the ranking:

• ROA—Net income / total assets
• Inventory turns—Cost of goods sold / inventory

We used a three-year weighted average for the ROA. The yearly weightings were as follows: 50% for 2008, 30% for 2007 and 20% for 2006. The use of a three-year weighted average accomplishes our goal of smoothing the spikes and valleys in annual metrics that are often not reflective of supply chain health. This also accomplishes a second, equally important goal: to better capture the lag between when a supply chain initiative is put in place—e.g., a network redesign or a new demand planning and forecasting system—and when the impact can be expected to appear in financial statement metrics such as ROA.

Unlike with ROA, companies should be expected to adjust their inventory levels annually to meet changing market conditions. As such, we employed an annual number rather than a three-year weighted average for inventory.

These financial metrics were chosen with specific intent. Inventory gave us some indication of cost, and ROA provided a general proxy for overall operational efficiency and productivity. ROA and inventory turns were weighted at 20% each. Financial data was taken primarily from a company’s individual annual reports, with Hoover’s online financials as a secondary source. For all the metrics, where 2008 calendar year data was unavailable, we used the latest available full-year fiscal or calendar data.

Opinion component

The opinion component of the ranking constitutes 60% of the total score, and is designed to provide a forward-looking view that reflects the progress organizations are making toward identifying and unleashing real value across the healthcare value chain. The opinion component is made up of two pieces, each equally weighted at 30%: a panel of 17 AMR Research experts, and a peer panel of 35 senior executives from across the various industry segments in the healthcare value chain.

The goal of the peer panel was to draw on the extensive knowledge of the professionals that, as customers and/or suppliers, interact and have direct experiences with the companies under evaluation (see Appendix B for a complete demographic breakdown of peer opinion panelists).

Polling procedure

Opinion polling was conducted during September via a web-based, structured voting process. The process was identical to that employed for the Supply Chain Top 25. Panelists were led through a detailed system that reviewed our definition of value in healthcare, and then prompted them to select their list of leaders across the healthcare value chain. Individual votes were tallied across the entire panel, with 25 points earned for a No. 1 ranking, 24 points for a No. 2 ranking, and so on. The AMR Research panel and the peer panel used the exact same polling procedure. By definition, each person’s expertise is deep in some areas and limited in others. Despite that, panelists were not expected to conduct external research to place their votes. The polling system was designed to accommodate differences in knowledge, relying on what author James Surowiecki calls the “wisdom of crowds” to provide the mechanism that taps into each person’s core kernel of knowledge and aggregates it into a larger whole.

Composite score

All the information previously discussed—the two financials and two opinion votes—were normalized onto a 10-point scale, and then aggregated using the aforementioned weighting into a total composite score. The composite scores were then sorted in descending order to arrive at the final Healthcare Top 25 ranking.

Appendix B: Peer opinion panel composition

Appendix C: Related research

The AMR Research Supply Chain Top 25 for 2009

Changes to the Supply Chain Top 25 Methodology: Our Ideas

What’s the “Value” in the Healthcare Value Chain?

Mr. President, Who’s Looking After the Healthcare Value Chain?

The Hierarchy of Supply Chain Metrics: Diagnosing Your Supply Chain Health