Giving clients accurate, real-time visibility into the supply chain. Analyzing the cost-to-serve for a range of customers. Investigating new markets for growth opportunities, while accounting for existing resource constraints. Wrangling complex supply lines to optimize manufacturing and distribution.
These are some of the toughest challenges facing companies today. This fall, WashU Olin’s Boeing Center for Supply Chain Innovation (BCSCI) brings together the center’s brightest student minds to solve them for real-world clients.
It’s a benefit of corporate membership with the Boeing Center—the ability to assign a mini-consulting project to a student team, said Evan Dalton, digital marketing coordinator for the Boeing Center. The students are typically pursuing specialized master’s degrees in supply chain management and business analytics.
“Clients know they’re getting high-quality students who will do a good job for them,” Dalton said. “Member companies have attributed millions of dollars of savings after implementing recommendations and decision support tools resultant from these projects.”
For their part, the students not only get to work on meaty projects to sharpen their skills, they also connect with companies that may potentially be hiring once they graduate. “I’ve heard from some students that this program is the reason they decided to come here,” Dalton said.
A growing support team
BCSCI Director Panos Kouvelis carefully screens all client projects to ensure they fit with students’ skills and faculty expertise.
The student consultants are backed by experienced support teams provided by the Boeing Center: a faculty advisor, a project manager (usually Dalton or BCSCI Operations Manager Andy Sample), a PhD student who can lead the team through any unfamiliar skills required and an MBA student who serves as an “ambassador” to the company.
New this year: “We’re including technical advisors, students we hire from the engineering school who have a background in coding, database design and searching techniques, and software development,” Dalton said. The technical support allows student teams to further integrate company data into decision support tools that they build for clients.
He said Kouvelis and other expert faculty leading the student teams do a final vetting of the analyses and recommendations.
This year’s lineup of clients includes German-based pharma and biotech company Bayer, global agri-business firm Bunge, life science supplier MilliporeSigma, and St. Louis-based pharmacy giant Express Scripts. Previous clients have included Anheuser-Busch, Boeing, Belden, Emerson, Hunter Engineering, West Pharma and Edward Jones.
These firms support the Boeing Center as member institutions, contributing funding to the center’s operations. One of this year’s clients is the nonprofit Unity Foundation; Dalton said the center occasionally tackles projects for nonprofits at a reduced rate to provide challenging learning opportunities for students.
‘Win-win proposition’
At the end of the semester, the consulting teams present their solutions to the companies. Student teams from both semesters make presentations at an end-of-year symposium in the spring. They compete for most impactful project and a share of a $5,000 prize.
Dalton said the event draws many member clients, even those without a project in the running. “Seeing the types of projects we do for other companies helps them better utilize us in the future,” he said.
He said the school appreciates the opportunities the clients provide Boeing Center students. “We are hoping that the student skills and legwork, combined with faculty expertise, generate productive solutions for them. A win-win proposition across the board.”
Photo: Participants at the Boeing Center’s May 2023 Project of the Year Symposium. Five teams of students presented the results of their mini-consulting projects from the previous school year, competing for a share of a $5,000 award pool.
It’s common knowledge that holiday shopping is going to be challenging this year due to the broken supply chain. Many favorite items — like game consoles, toys, clothing and shoes — will be in short supply. And if you’re lucky enough to find the hottest toy on your child’s wish list, you will likely pay more for it. But what does the new year hold? Will 2022 be better?
Kouvelis
The answer is maybe, but not right away, according to Panos Kouvelis, director of The Boeing Center for Supply Chain Innovation at Washington University in St. Louis.
His most recent prediction is a little more optimistic. According to Kouvelis, supply chain issues — including product scarcity and logistical bottlenecks — will continue through mid-2022. The automotive industry will not fully recover before 2023. His prediction is based on several factors, including:
Corporate hoarding: Kouvelis believes that some of the orders currently bogging down systems are the result of corporate hoarding. Faced with long shipping times and fears of rationing, companies place extra orders in hope they’ll get the product and materials they need. Many larger companies with more resources have built up warehouses stocked with excess inventory, and some of their incoming inventory is waiting on large vessels trying to clear ports. These phantom and excess orders add pressure to an already vulnerable system, but he believes buyers will ease up in the coming months as logistical delays improve. “After a while, we realized our basement had a limit on how much toilet paper it can hold. The same is true for warehouse space,” Kouvelis said.
The Chinese New Year: Chinese factories and ports will slow down for two weeks in early February, adding extra pressure on the supply chain.
Los Angeles and Long Beach, California, ports have moved to 24/7 operations: In October, President Joe Biden, along with business, port and union leaders, announced a plan to strengthen the resiliency of supply chains by moving toward 24/7 operations at these ports. Increased port operations, along with increased trucking and rail capacity, will help reduce the load that has built up at the ports. However, the shortage of truckers will delay the port recovery.
Return to normal factory operations in Vietnam, Malaysia and Thailand: These countries, which produce the majority of garments, shoes and toys in the U.S., were hit especially hard by the delta variant this summer, causing factories to reduce or even stop operations. The situation is improving, but the increase in production will not reach the U.S. until after the holidays.
“We’re hoping that within the first six months of 2022, the port situation and efforts to increase capacity, both on the railroad and trucking, will improve substantially. If that happens and the demand on the system lessens, things will look better by summer,” Kouvelis said
Could trouble be lurking?
There’s one factor that could derail Kouvelis’ prediction, though: China’s energy crisis. Currently, rising costs have forced Chinese energy companies — that until recently could not raise energy prices due to government-enforced caps — to place restrictions on heavy manufacturing customers. As a result, manufacturers were forced to cut operations by as much as 40%. It doesn’t take long for these shutdowns to impact the quantity of products coming to the U.S. Now, the government has removed energy price caps for manufacturers — especially those that produce cement, steel and paper — but that means the cost will be passed on to consumers, Kouvelis explained.
“The story that I’m not sure how it’s going to play out is the energy crisis in China,” Kouvelis said. “The energy crisis could resolve itself in the next month or two. But if China has an especially cold winter and energy demands remain high, they’ll have to cut capacity further.
“If that happens, 2022 will be driven by that crisis and the constraints that it creates.”
According to Kouvelis, the effects of China’s energy crisis have not yet made its way to the U.S. due to the backup of products on ships outside the U.S. However, within the next month, American consumers will notice greater product shortages and higher prices.
What is the U.S. government doing to address these challenges?
“The government policies will be very important in addressing the long-term misuses of supply chain,” said Kouvelis. who also is the Emerson Distinguished Professor of Operations and Manufacturing Management at Olin Business School. “The government is on the right track, but these problems cannot be resolved within a month or even six months.”
In addition to opening ports for 24/7 operations, Congress recently approved the $1 trillion infrastructure plan that will fund improvements for the nation’s roads, bridges, ports, rail transit, power grid and more, which will ultimately help the supply chain for years to come.
According to Kouvelis, the government also is rethinking trade policies and tariffs with Europe that have created flow constraints. The trade situation with China has more political risks and could continue to impact trade in the future, though.
“Among the risks to consider is the role that climate change and carbon emissions negotiations might play out between the U.S. and China, with the potential that quotas and tariffs be later tied with emission reduction requests,” Kouvelis said. “The Xinjiang forced Uyghur labor situation is a sensitive point, and so far had negative sales implications for Western companies that took a position on it, like H&M and Adidas. And Taiwan’s sovereignty, with its tremendous importance for semiconductor capacity, will remain a ghost in all future trade talks.”
How will this crisis shape future supply chains, U.S. policy?
“The tremendous dependency of critical U.S. supply chains like drugs, batteries and semiconductors to long Asian-based producers and suppliers has become a vulnerability visible to all after the recent pandemic-related supply chain mess. This has been brewing for decades,” Kouvelis said.
Since the ’90s, the U.S. and other developed countries have become increasingly reliant on global supply chains to source cheap labor and materials and keep prices down. When the World Trade Organization accepted China in early 2000 into the organization, the expectation was that the free flow of goods coming from Asia would benefit all economies, he said.
“That story held up to an extent until the pandemic, when the logistics broke down and the Chinese government was controlling what products left the country and we didn’t have access to critical PPE,” Kouvelis said.
That’s led to the realization that more regional supply chains are needed, especially for critical items. While not everything will be produced in the U.S., American companies will increasingly look to source materials from neighboring countries such as Canada and Mexico, he said.
“Some of the microprocessors — probably the low-end microprocessors — will come from Asia, but the more critical components will either be made in Europe or the U.S.,” Kouvelis said.
“The same is true for pharmaceuticals. Right now, most of the critical components are coming from China and India. Expect the government to invest in our pharmaceutical manufacturing capacity.”
Of course, the U.S. is not alone in its supply chain struggles. Europe, parts of Asia and Australia are all experiencing similar supply chain disruptions. The situation is even worse in the U.K. because of Brexit, Kouvelis said.
While no one knows for sure how or when supply chains will be fully operational, Kouvelis said this is for certain: The experience of the last two years will shape supply chain planning and operations for years to come.
Prescription drug consumers confounded by the cost of their medications can get a peek behind the curtain thanks to new Olin research into the complex “co-opetition” — cooperation and competition — among drug makers in the middleman-controlled US drug supply chain.
But, as Olin’s Panos Kouvelis explains, the system is so complex and opaque, it may be headed for government regulation.
Kouvelis’s research describes the complicated dynamics between drug manufacturers and “pharmacy benefit management” firms — massive companies like St. Louis’s Express Scripts or CVS Caremark that manage drug benefits and dispense medications for millions of patients as part of their employer-supplied healthcare coverage.
Kouvelis says his research shows that on one hand, drug makers compete with each other to build their brands and increase sales for similar medications. On the other hand, in the complicated world of PBMs, drug makers unwittingly cooperate. That’s because their price competition and volume-leveraged negotiations with the PBMs lower costs to PBM clients — employers — which increases the market for PBMs and the patients they serve, thus benefitting all drug manufacturers.
Deciphering a Complicated System
In fact, Kouvelis says the industry is destined to end up regulated by the government because the system is more opaque than almost any other supply chain. Consumers can pretty easily discern how automobile manufacturers and their suppliers make money, for example. But fewer understand how their $20 copay for anti-cholesterol medication gets split between the drug maker, the insurance company, and the pharmacy benefit manager.
“In a complex environment, we have to figure out how the prices are set when drug manufacturers work with PBMs,” said Kouvelis, director of The Boeing Center for Supply Chain Innovation and Emerson Distinguished Professor of Operations and Manufacturing Management.
“This is exactly the time that the government has to decide,” Kouvelis said, in light of the planned acquisition of Express Scripts by Cigna and the considered acquisition of Aetna by CVS. “The PBM is controlling three things: The price its clients pay, the copay patients pay, and the negotiated wholesale price charged by the manufacturer. What we’re finding out is that for a profit maximizing PBM it does make sense for some drugs, the drug cost to be actually lower than the copay.”
The research paper, entitled “Drug Pricing for Competing Pharmaceutical Manufacturers Distributing Through a Common PBM,” Kouvelis and his coauthors created a mathematical model of strategic interactions of the drug makers with the PBM. They use that model to measure the effect of the many variables at play in the system, including drug prices, tiered formularies (the list of drugs the PBM provides) with different copay levels, rebates to PBMs, demand, price sensitivity among patients, and market size.
The researchers — who included Yixuan Xiao at the City University of Hong Kong and Nan Yang at the University of Miami — used data from publicly accessible sources to test the mathematical model as much as possible. The paper has been published in the Production and Operations Management journal.
“The only thing we can calculate here are the profits of everyone in the game,” Kouvelis said. “From a competitive perspective, what is going to happen when we have rational players in it? How will drug manufacturers set prices? How will PBMs leverage their formularies for rebates and controlling costs to clients? To what extent is everyone benefitting? And who finally pays most of the drug costs?”
Turmoil in the Industry
The research is particularly timely: Express Scripts — No. 22 on the Fortune 500 with 2016 revenues of more than $100 billion — is now a merger target by insurance company Cigna. It’s the latest sign of turmoil in the industry. Express Scripts’s stock has been buffeted since its largest client, Anthem Inc., announced it would drop Express Scripts in 2020 in favor of launching its own PBM called IngenioRx.
Express Scripts is one of the three major players in the PBM industry, including OptumRx, owned by UnitedHealthcare, and CVS Caremark, which is in the process of acquiring insurer Aetna Inc.
One thing is clear from the research, Kouvelis says: PBMs seem to have very good returns on their invested capital. For one thing, they have sizable leverage over drug manufacturers through their decisions about which drugs are available through their services — the PBM’s “formulary.”
Drug makers with competing medications must therefore “play ball” with the PBMs in order to be included on the preferred tiers of the formulary, which means lower copays and a tendency to be used more often by the corporate employees who are served. Typically, PBMs have a three-tiered formulary allowing patients to pay a lower copay for generic drugs, for example, a middle-tier copay for certain “preferred” branded drugs, and a higher out-of-pocket cost for “non-preferred” medications.
The Middlemen Win
Meanwhile, PBMs earn revenues from two sides of the equation: First, from the fees their clients pay to manage their employee prescription drug plans. Second, drug manufacturers rebate a portion of their sales revenue to the PBMs for the business they receive. The PBMs often pocket much of those rebates, sharing a portion with their clients to help keep costs down for employers.
His paper describing the “co-opetition” among drug makers is Kouvelis’s second in a series of papers on pharmacy benefit managers. His first looked at how PBM clients make decisions about which middlemen to select and how that selection process drives formulary decisions and the fees competing PBMs charge for their plans.
As PBMs now merge with insurance companies, he is embarking on research to examine what that will mean for consumers and clients. His previous research substantiated why vertical integration of drug manufacturers and PBMs — which ended in the late 1980s — was not increasing social welfare.
That research also offered insights on conditions under which mergers of competing PBMs might not always translate into lower drug costs. Now, with the PBM ownership model focused on insurance companies or pharmacy chains, it is time to decipher their implications for drug prices and social welfare.
“The role of the PBM and how its ownership aligns with the overall drug supply chain is not very well understood. Other supply chains are a little more linear, a little more transparent,” Kouvelis said. “That’s what we were trying to understand in this paper — the role of the PBM in this process, how these negotiations happen among PBMs, drug manufacturers, and clients.
“Who makes most of that money in the drug supply chain? Hard to always say, but the middlemen in the industry — wholesalers, PBMs, and insurance companies — appropriate quite a lot for the investments they make in it,” Kouvelis said. “The benefits of further merging of such middlemen in an opaque supply chain are far from a no-brainer.”
A day hardly passes without an urgent headline focused on the economic transformation underway wrought by blockchain technology. The software is the power behind bitcoin and other cryptocurrencies, but Olin experts have been plumbing the deeper implications of the technology.
Here are five things business leaders should know right now about blockchain from Panos Kouvelis, director of Olin’s Boeing Center for Supply Chain Innovation, and Ohad Kadan, H. Frederick Hagemann, Jr. Professor of Finance and Associate Dean for Global Degree Programs. Then, watch for a way to learn more.
Peer-to-Peer Transactions—Like Cash
Blockchain technology has been developed as an efficient method for completing financial transactions, based on the principle of peer-to-peer involvement and fully decentralized and shared networks. It functions as a distributed ledger that provides visibility of all transactions to all parties in the chain, and it is built on an immutable database.
Early Applications
Beyond cryptocurrencies such as bitcoin, etherium, and litecoin, the blockchain has been used in supply chain finance in areas such as clearing financial payments, using digital ledgers, and executing “smart” contracts.
Digital Inventory Tracking
Key inventory and asset resources can take on a digital footprint, which provides additional security and tracking capabilities. Applications have been built, relying on the blockchain, to track and trace goods involved in the supply chain for industries such as the diamond trade, food, and pharmaceuticals.
Applications Still Being Conceived
Blockchain has the potential to revolutionize supply chains and it requires the immediate attention of supply chain managers. Many are scrambling to understand how a technology developed to support cryptocurrencies might be applicable to supply chains and, in particular, to the supply chains of their companies. Experts say the technology will reduce friction in global shipping operations and complex supply chains that involve goods flowing across borders, through ports, and involving governmental agencies, manufacturing, and retail firms.
The workshop is structured as a forum to learn more about the technology and equip attendees to know what questions to ask as they explore the implications of blockchain for their business. Coming out of the workshop, attendees should better understand the potential application of the technology in their supply chains, gain inspiration about possible immediate benefits the technology can provide, and confront obstacles and challenges in implementing it.
Imagine you and your significant other finally carved out some time for a vacation getaway. You did your research—booked flights, picked a few promising restaurants, dug up your favorite fanny pack—and now it’s time to find a place to stay.
You’ve heard a lot about Airbnb, so you decide to give it a try. After some deliberation, you’ve both agreed on a place within walking distance of all the local attractions, so you send a request to the owner.
But after a couple hours, you get a message from Airbnb saying that your request has been denied without explanation. For a significant number of Airbnb users, this scenario is all too real.
Dennis Zhang
In the Boeing Center for Supply Chain Innovation’s latest video, Dennis Zhang, Olin assistant professor of operations and manufacturing management, discusses the topic of racial discrimination on peer-to-peer platforms.
According to Zhang, Airbnb requests made by accounts with distinctly African American names were 19 percent less likely to be accepted compared to other accounts. However, if those accounts have additional review data (i.e., at least one positive or negative review), all accounts are equally likely to be accepted.
Zhang believes that people require a bit more information to nudge them in a non-discriminatory direction. He thinks that if Airbnb offered more information within the platform, it would reduce the likelihood of discrimination by those looking to rent out their space.
Zhang goes on to mention that platforms conducting business via peer-to-peer transactions face a higher likelihood of discrimination. He says that discovering how discrimination happens on those platforms is a critical step to ensuring equal consumer treatment. Zhang’s research emphasizes the importance of information, and hopes it will be effective in the fight against discrimination.
