Best of 2012: Last in Wins –Airline Industry Supply Chain Relevant to Healthcare?

I was reminded of the debatable nature of certain analogies I am prone to use given a dialogue I had with a reader this morning. He/Mark thought I “whiffed” on the use of an analogy I used in a story posted earlier this week. He might have been right. It reminded me of yet another analogy that I used in a previous post (below) that does a better job of making some similar points –and that I remain confident is not only relevant to healthcare, but is instructive to SCM professionals of all stripes.

It’s not always about “first mover advantage,” sometimes, being the last entrant into a marketplace can be the winning formula. The airline industry provides the quintessential example of what the phrase “last in wins” means in a supply chain management context. Legacy carriers are at an extreme disadvantage when compared to newcomers because they have the added expense and responsibility of managing maintenance and repair for too many different types (manufacturers and models) of various  (aging) aircraft they have acquired over time.

Not only does each aircraft model have its own replacement part program, but each program requires a different set of maintenance and engineering skills, wear-parts are inspected and validated differently and the maintenance certifications required to even qualify to work on a particular aircraft are unique from model to model, sometimes from year to year. From a SCM perspective, it’s a disaster to manage, which is one significant reason (among others) why the big players in the airline industry file for bankruptcy protection with conspicuous frequency. Their supply chain management expenses get so far out of whack that they can’t get competitive regardless of their load factor.

They need a fresh start –a do over.

The newcomers hit the ground with aircraft selected based on a business model that optimizes load capacity while minimizing supply chain expense. The new carriers would ideally like to feature one aircraft, one parts stream, one type of maintenance program executed by one qualified type of maintenance engineer. This allows them to get very tight with one manufacturer with which it can collaborate to further reduce maintenance and replacement costs over time. As said, that’s the ideal, but from a risk management perspective, it’s not always practical. Based on how routes get allocated and how historically dependable passenger demand across those routes generally are, newcomers can almost back their way into an optimized business model — loaded with competitive advantage relative to the established guard.

Are there lessons to be learned here? Is this analogy relevant to the healthcare industry?

Hospitals have fairly steep capital expense requirements, but nothing resembling the airline industry. Hospitals also have fairly predictable demand. Like the airline industry, healthcare demand has seasonality and general economic factors must be considered, but patient load has never been the killer problem. Whether we’re talking revenue per seat or revenue per bed, does it matter?  What matters is getting to strategic relationships with as few vendors as your tolerance for risk will allow, standardize on as few products as possible without impacting your ability to satisfy your best paying customers and slowly but surely hire and/or train pilots that are able and willing to execute in accordance with what you know works best. Put another way, product standardization and the elimination of as much variance in supply utilization and physician practice as possible is not only a winning recipe, but it’s essential to environments where third parties are paying the bill. It’s not a compromise; it’s a sound strategy.

Whether or not the Act or some other form of reform succeeds in establishing an economy class that is better than the “standby” system it’s meant to replace remains to be seen. But if that’s the goal, then folks are going to have to stop confusing the term rationing with efficiency. Regardless, those who can afford to fly first class will not be affected. Ironically, they’re the ones who will gain a choice. Healthcare providers that are geared to provide a first class level of service will continue to promote it and charge through the nose for it. There will always be those who insist on first class and there will always be many more of us who either can’t afford it or simply can’t justify it.

In the Airline industry, first class travelers subsidize the economy class fare passengers and no one on either side of the curtain seems to mind.

—Tom Finn

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