Buyers weigh ‘Made in America’ against greater global diversification
COVID-19 and attendant supply chain difficulties have shaken up healthcare providers, manufacturers and distributors. Trust in overseas sourcing, domestic trucking and railroad carriers, and low-unit-of-measure systems has eroded. Certainty that Product A would arrive at Point B in a timely manner and in good shape was replaced with uncertainty.
Providers, suppliers and manufacturers are wondering if they can regain some certainty by increasingly turning to U.S.-based suppliers or whether they should hedge their bets by diversifying even further among global ones.
“During times of disruption, healthcare organizations must prioritize certainty of supply,” says Cristina Indiveri, associate vice president, strategic programs and contract services, Vizient. “They want the confidence to know they have access to essential medical supplies, back-up manufacturing sources and diversified product availability. Organizations are requesting complementary relationships with secondary domestic suppliers to ensure product and product category stability. The objective is balance.”
A question of national security?
The consumer press has reported that fervor among healthcare providers and suppliers for the “Made in the USA” brand has diminished along with the threat of COVID-19. For example, an April 2022 article from the Associated Press reported that many U.S. companies that began producing personal protective equipment “with patriotic optimism have scaled back, shut down or given up.” Another article, in Newsweek, reported that most of the 30 small U.S. mask manufacturers in the American Mask Manufacturers’ Association were in jeopardy as demand declined.
“While the demand for domestically manufactured products has fluctuated during the past 12 months, Vizient members are still prioritizing American-made personal protective equipment, facial protection and other critical items,” says Indiveri. “Members are asking for supply assurance via increased supplier and product options. They want diversification and incremental product availability, a balance between just-in-time delivery and stockpile inventory, including domestic products, to create an increased number of products in the supply chain.
According to Vizient Senior President Bryan Grossman, “Members know that the global supply chain fluctuates in ways we cannot control. So while they’re focused on supply assurance, they still prioritize domestic manufacturing as part of a diversified sourcing strategy. … Those medical device suppliers who have been able to stand up additional facilities and source raw materials from a broader supply chain have been more successful in maintaining inventory levels and reducing supply disruptions.”
True north
Many players in the healthcare supply chain – including the Biden administration – believe “Made in the USA” must remain a true north if the country is to survive the next pandemic or geopolitical conflict.
In a July 2021 document, “National Strategy for a Resilient Public Health Supply Chain,” the government declared that a resilient supply chain – which would include domestically manufactured medical products and equipment – “is essential to maintaining the national health security of the United States.” The document was a collaborative effort of the departments of Health and Human Services, Defense, Homeland Security, Commerce, State, and Veterans Affairs.
Scale and cart manufacturer DETECTO has been a believer in U.S. sourcing and production for years. “From our founder’s ethos and our general company perspective, DETECTO has always tried to produce as many of our products in-house under one roof,” says Vice President Jonathan Sabo. “We try to outsource our products, parts and components outside the U.S. as little as possible. We are a vertically integrated manufacturer by nature, so this allows us to control our own destiny. I won’t say that our focus has shifted since the pandemic as much as we’ve been rewarded by it … by being able to produce stock for orders where other manufacturers bringing products in from overseas couldn’t.”
No overnight solutions
A wholesale, impactful shift toward domestic sourcing and production won’t happen overnight. “Thus far, we’ve seen a more industrial approach to domestic manufacturing via direct grants and/or Defense Production Act investments,” says Soumi Saha, senior vice president of government affairs for Premier. “While these actions represent important and meaningful progress, scaling domestic and diverse manufacturing isn’t going to come easy. It will require a continued and massive effort on behalf of the U.S. manufacturing industry and the federal government to generate the additional necessary public policy support (i.e., tax incentives and other affordable financing options) for U.S. manufacturers to truly compete in the cost-competitive global marketplace.
“Committed purchasing volume is also important to provide domestic manufacturers the assurances they need to increase supply, invest in redundancies and enter or re-enter the market,” she says. “To that end, and as an example in the private sector, hundreds of Premier member health systems have co-invested alongside Premier and/or have made long-term purchasing commitments with U.S. manufacturers, including Prestige Ameritech for N95 respirators and face masks, DeRoyal Industries for isolation gowns, Honeywell for nitrile exam gloves and Exela Pharma Sciences for pharmaceuticals, including some critical shortage drugs. Through these initiatives, participating Premier members can diversify their supply sources at a price point competitive with overseas manufacturing. The suppliers have also increased their production to protect providers from ongoing shortages.
“Lastly, while we appreciate [the Centers for Medicare & Medicaid Services] looking at differential reimbursement for domestically made N95 masks for 2023, Premier would like to see that expanded to all domestically manufactured critical medical supplies and drugs.”
COVID-19 as the mother of invention
The call for “Made in America” medical products and equipment preceded COVID-19, but the pandemic raised its voice.
“COVID was a wakeup call that rang the alarm bell on issues with the globalization, overseas overreliance and fragility of our supply chains,” says Kyle MacKinnon, senior director of operational excellence for Premier. “Now and for the future, healthcare providers want more products made here in America – and they are taking a holistic view of the whole value chain, from design production to delivery, and how to make it more reliable and dependable.
“Together with our members, we believe our strategy, including diversification and domestic manufacturing investments, intentional design, automation and lower shipping costs can help mitigate disruptions and is an innovative model for long-term resiliency. This requires thinking beyond ‘moments-in-time’ and to long-term solutions, as the last few years have clearly shown us that disease outbreaks, natural disasters and other disruptions or emergencies can and do happen unexpectedly and seemingly at a moment’s notice.”
Says Jonathan Sabo, “We are seeing overseas shipping costs and raw material costs coming back down, but only a little bit. We’ll probably never return to the pricing we had pre-COVID. U.S. components suppliers we use that might have been shut down at times due to COVID infection rates are also now fully back up with little chance of closing again due to infection rates escalating. Container shipping from overseas during 2020-2021 was brutal, but we are seeing the congestion easing this year in 2022 and returning closer to normal speeds. All these overseas issues cause everyone to drive the focus back to American medical products and keeping supply chains as close in proximity as possible.”
Beyond the finished goods
“Healthcare organizations need the ability to predict product availability and adjust early in the supply chain process to ensure supply delivery,” says Indiveri. “They are requesting improved visibility into raw materials and other manufacturing factors. Hospitals are asking for notification when a variable will affect their primary supply so they can purchase from other suppliers or implement conservation strategies. Healthcare organizations continue to request domestically manufactured products not only to meet their short-term needs, but also to ensure a resilient and sustainable supply chain in the years to come.”
Indiveri believes that buying American-made products will continue to bolster supply assurance based on a variety of factors, including:
- Reinforcement of the nation’s supply chain operations to better withstand disruptions, generating greater independence and stability amid global turmoil.
- The ability to decrease product shipping times and expedited lead times.
- Spurring of the U.S. economy.
- Creation of American jobs.
- Increased innovation, as manufacturing and invention are intrinsically linked.
Sidebar:
For semiconductor shortage, no quick solution
Taiwan dominates the market, but new law could help U.S. producers
Among the many deficiencies in the U.S. healthcare supply chain exposed by the pandemic was the precariousness of obtaining the semiconductors and advanced chips needed in today’s medical technologies. In July 2022, a Deloitte survey of medical device manufacturers found semiconductor disruptions were continuing and that medical companies were facing depleted inventories, reduced manufacturing and extended lead times. Globalization was a factor.
Taiwan makes 65% of the world’s semiconductors and almost 90% of advanced chips, according to Voice of America. By comparison, the U.S. produces approximately 10% of the world’s supply of semiconductors and none of the most advanced chips.
“Healthcare has many supplies where semiconductors are used – MRI machines, pacemakers, blood pressure monitors, chemistry and blood gas analyzers, and bedside and wireless patient monitors,” says Soumi Saha, senior vice president of government affairs for Premier. “Over the last few months, we have not seen direct shortages of semiconductors in healthcare resulting in impacts to patient care, yet a proactive approach is warranted to mitigate potential disruptions.”
DETECTO Vice President Jonathan Sabo says, “While we populate our own printed circuit boards in-house at DETECTO’s factory in Webb City, Missouri, we aren’t immune to chip shortages, and our management team has had to work with overseas vendors in some cases to keep our inventory up throughout the past 2 ½ years. In some cases, we had to switch chips in products since the older chip had grown astronomically expensive, which wasn’t in line with our competitive market pricing. In some isolated cases, a few products were on backorder for several months, but by this point those backorders have released and we’re offering stock again.”
CHIPS Act
The CHIPS and Science Act, signed into law in August, is intended to encourage domestic development and production of semiconductors and advanced chips. The law provides $52.7 billion for American semiconductor research, development, manufacturing, and workforce development. It also provides a 25% investment tax credit for capital expenses for the manufacturing of semiconductors and related equipment.
“[Premier believes] the CHIPS and Science Act of 2022 represents a critical step forward to boost domestic production, diversify the supply chain and increase competition with China and other overseas manufacturers – strategies critical to not only help prevent shortages of semiconductors, but also other at-risk healthcare products,” says Saha. Premier also believes that semiconductors should be prioritized for healthcare supplies. “Unlike the consumer tech and automotive industries, healthcare has smaller volumes of chips comparatively (less than 1% of the overall market), yet the need exceeds that of other industries given the potential for patient harm.”
Says Bryan Grossman, senior vice president, strategic supplier performance & category management for Vizient, “The prioritization of the healthcare sector with chip manufacturers is critically important. Medical device corporations are at a severe disadvantage competing against large electronic companies and automaker volumes. … Unfortunately, there is no simple solution. The investments into the U.S. semiconductor manufacturing afforded by the CHIPS Act will not provide immediate relief. It will take time to increase production and expand or open new manufacturing facilities with the impact anticipated over the next 5 to 10 years.”