Imagine throwing a rock in a pool of water and watching the ripple effect. The action creates multiple waves in the water, diminishing in size. Jay Forrester first promoted the concept of increasingly larger waves of inventory (the opposite of the ripple effect) in his book, Industrial Dynamics, in 1961 and it became known as the Forrester effect.
In the hospital supply chain world, the supply users initiate the demand curves and create little movements in demand, which travel up the supply chain in increasing fluctuations.
This Forrester effect is a concept for explaining inventory fluctuations as a result of demand changes as you move further up the supply chain, as displayed below. As such, upstream manufacturers often experience a decrease in forecast accuracy as the distance increases between the customer and the manufacturer.In the example above, the increasing wave pattern can be mitigated by the customer sharing the reason for the increase in demand. Assuming the same communication or forecasted demand information is shared with each upstream supplier, inventory forecasts can be adjusted in a way that flattens the amplitude of the supply and demand waves. Better demand projection information by the end users provides better visibility upstream that will help prevent overreaction to the demand signals.
Pandemic adds complexity to inventory planning
COVID-19 has increased uncertain demand patterns at the hospital level for personal protective equipment (PPE) supplies. As the number of COVID-19 cases increase, the demand for supplies and equipment has risen proportionately. Because of the 2019-2020 flu season, some supplies were already in short supply and/or allocation, so the increased demand for COVID-19 treatment resulted in panic ordering. Upstream, manufacturers have ramped up production to maximum capacity since they can sell all the PPE supplies they can make.
Inventory planners across the continuum try to optimize inventory levels, balancing the cost of holding stock against the cost of lost sales or stock-outs. They rely on stable or predictable demand patterns for planning production and inventory levels, but the unpredictable nature of COVID-19 PPE demand has proven to be independent of any available inventory planning tools.
Improving supply chain visibility and communication
As some parts of the country move into the recovery phase from the pandemic while others experience resurgences, the reaction time to demand changes across the supply chain must be compressed. Following are two approaches to consider.
The control tower
One approach is the use the supply chain continuum control tower concept, which provides visibility to on-hand and days-on-hand supplies to all links in the supply chain, from the hospital to the manufacturer. Having real-time and accurate stock level data provides the information inventory planners need to make data-driven decisions. Using a control tower tool can provide better visibility into this data.
This increased collaboration across the supply chain can prevent supply shortages. When demand signals change based on COVID-19 patient level curves, predictive analytics modeling allows for early visibility into demand changes. Visibility to shifts in demand signals at the hospital level can help health care manufacturers move from a push strategy (pushing product to a customer based on long-term demand) to a pull strategy (replacing product based on actual customer usage or demand).
Another way to mitigate the Forrester effect is to increase communications with strategic manufacturer representatives through more frequent business reviews. These reviews should focus on COVID-19 patient projections and the resulting product demand. Hospitals have been tracking PPE burn rates and patient data recently and this data should be shared with vendors. Improved communication to explain and get ahead of demand signals will help inventory planners and control the gaps between supply and demand.
Preparing for normal operations
The cancellation of elective procedures during the early stages of the pandemic decreased demand for many procedural supplies. Many hospitals are now returning to normal operations and beginning to schedule elective procedures. To avoid the Forrester effect for procedural supplies, hospital supply chain staff must share the hospital planning data along with any demand planning data being developed for implant, device, supply and tray requirements.
We don’t have to allow the health care supply chain to perpetuate the Forrester effect as the COVID-19 PPE demand curves change over the coming months. To better respond to these changes, we need improve demand certainty for inventory planners by quantifying data across the supply chain and sharing that data with our trading partners.
To learn more about how Vizient can help improve the effectiveness, efficiency and financial performance of your supply chain operations, contact us today.
About the author. A senior consultant on the supply chain operations advisory solutions team, Ric Esarey possesses extensive experience in multiple facets of supply chain operations, including strategic sourcing, inventory and distribution management, clinical quality value analysis, system implementation and upgrade, and supply chain process optimization. Prior to joining Vizient, he served for nearly two decades as a supply chain executive with a national HMO and an additional two years as an independent health care supply chain consultant. Esarey is a member of the Association for Health Care Resource and Materials Management.