Supply Chain Management in healthcare


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Supply Chain Management in healthcare

  1. 1. www.iims-conquest.inSupply ChainManagement in HealthcareAnurag Gupta and Anurag Singh , IIM L ConQuest Online March 2012 Edition
  2. 2. ConQuest, IIM Shillong Consulting ClubSupply Chain Management in Healthcare Anurag Gupta and Anurag Singh, IIM LIntroductionThe global healthcare industry is one of the worlds largest and fastest growing industries,comprising various sectors: medical equipment and supplies, pharmaceutical, healthcareservices, biotechnology, and alternative medicine sectors. With extreme pricing pressures ontoday’s healthcare providers, delivering high-quality medical care while reducing costs is atop strategic priority. To achieve this objective, healthcare service providers’ efforts havebeen focused primarily on eliminating waste in clinical operations. While these are valid andimportant ways to reduce healthcare costs, one area that consumes nearly one-third of allhospital operating budgets often remains overlooked - the healthcare supply chain. When itcomes to expenses, supplies are second only to labor, with millions of products moving alongthe supply chain every day through manufacturers, distributors, Group PurchaseOrganizations (GPOs) and healthcare providers to patients.Figure 1: Breakup of annual operating expense used to support healthcare supply chain costs Sample size = 204; Source: 2009, Nachtman and PohlWhile the adoption of SCM practices has been successful in many sectors, the healthcareindustry has not seen major improvements from these practices (McKone-Sweet et al., 2005).Today, healthcare managers and industry experts understand that the efficient management
  3. 3. ConQuest, IIM Shillong Consulting Clubmaterials can not only reduce operating cost, but increase the quality of care (Schneller et al.,2006).Healthcare Supply ChainThe healthcare supply chain involves the flow of many different product types and theparticipation of various stakeholders. The main purpose of the healthcare supply chain is todeliver products in a timely manner in order to fulfill the needs of providers. Based on theirfunctions, stakeholders in the healthcare supply chain can be divided into three major groups:producers, purchasers, and providers. Figure 2: A healthcare supply chain configuration. Source: Burns, 2002The role of producers is to manufacture medical products such as surgical supplies, medicaldevices and pharmaceuticals. Purchasers include distributors, wholesalers and GroupPurchase Organizations (GPOs). Distributors and wholesalers hold inventory for producersto facilitate delivery of products. GPOs sign purchasing contracts with producers in order toachieve economies of scale by aggregating the volume of member providers. Healthcareproviders represent those at the end of the supply chain with the function to serve patientsand include, among others, hospitals, integrated delivery networks (IDNs), physicians,clinics, nursing homes and pharmacies (Burns, 2002)
  4. 4. ConQuest, IIM Shillong Consulting ClubIn the past, a hospital that managed its purchasing costs well could operate efficiently. Today,the cost of materials management can exceed 45% of a hospital’s operating budget, withnearly 30-35% attributable to supply costs alone. Recent studies show that a significantportion of the costs associated with supply chains in the health care sector can be reduced byimplementing effective supply chains.The application of supply chain management practices in the health care sector not onlyrelates to physical goods like drugs, pharmaceuticals, medical devices and health aids butalso to the flow of patients (Beier, 1995).Integrated Supply Chain in HealthcareIn hospitals, integrated supply chain strategy should be consistent to maximize patient care.The hospital supply chain enables this strategy by ensuring product availability, minimizingstorage space, maximizing patient care space, reducing material handling time and costs forall medical staff and minimizing inventory. Hospital supply chain has to ensure properlinkages to clinical systems, revenue cycle, IT and clinical operations. The supply chain oftenis viewed as a “back dock” support service that provides the products and servicesrequired by clinical departments. To be fully effective, it must be an integrated link in thechain of clinical and non-clinical operations (Achryulu et al., 2012).Health supply chains can be characterized by different modes of integration: 1. Integration and co-ordination of processes 2. Integration and co-ordination of information flows 3. Integration and co-ordination of planning processes. 4. Integration of intra- and inter-organizational processes. 5. Integration of market-approach. 6. Integration of
  5. 5. ConQuest, IIM Shillong Consulting Club Figure 3: Different stages of supply chain integrationConsidering health service providers, supply chain management often refers to theinformation, supplies and finances involved with the movement and acquisition of goods andservices from the supplier side to the end user with major emphasis on two aspects, firstly, toenhance clinical outcomes and secondly to optimize costs. In doing so supply chainmanagement puts a strong emphasis on the integration of processes. Considering thehealthcare sector, these processes refer to physical products like pharmaceuticals, medicaldevices & health aids and processes associated with the flow of patients. In both these cases,an intensive co-ordination and integration between operational processes might lead to abetter health supply chain performance. Information technology and the deployment of e-business are closely linked to the co-ordination and integration of operational processes.Different studies have advocated the importance of information technology in healthcaresector (Breen and Crawford, 2005; Harland and Caldwell, 2007) and it is not a matter ofsurprise that many studies on health care supply chains focus on the role of e-businesstechnologies across hospital supply chains (Siau et al., 2002). Similar to the co-ordination andintegration of operational processes, information technology in the healthcare sector is relatedto both physical products as well as to the flow of patients within and between health serviceorganizations (Lowell and Celler, 1998). The use of information technology-orientedapplications can be found in the areas of procurement, inventory control and materialsplanning. One of the well-known examples of an IT application being used in Health sector isElectronic Patient Record Systems which has significantly contributed in improving
  6. 6. ConQuest, IIM Shillong Consulting Clubintegration and smoothening of processes within and between health service deliveryorganizations.The application of supply chain management practices in healthcare setting is almost bydefinition related to organizational aspects like building relationships, allocating authoritiesand responsibilities, and organizing interface processes. Different studies have highlightedthe importance of organizational processes when applying supply chain managementpractices. Moreover, recent studies reveal that elements like organisational culture, theabsence of strong leadership and mandating authority, as well as power and interestrelationships between stakeholders might severely hinder the integration and co-ordination ofprocesses along the health care supply chain (McCutcheon and Stuart, 2000). Healthcaresupply chain integration is not only related to the integration and co-ordination of planningprocesses but this can also be linked to joint “market development” and offering new “care-products”. Product co-development is a recognized phenomenon in the field of supply chainmanagement and within industrial supply chains many joint efforts are made to develop newproducts across suppliers, customers and organisational units. Additionally, healthcareservice providers have taken the initiative in different countries to develop new care-productsin close collaboration with each other. Clearly, the above mentioned modes of integrationcannot be considered in isolation. Studies in the field of industrial companies indicate thatorganizations often go through several stages of integration, starting with a transparencystage via a commitment/ coordination stage to a full integrated stage encompassing all thedifferent modes of integration addressed above (Ballou et al., 2000; van der Vaart and vanDonk, 2008). The ongoing transformation within the health care sector towards greaterintegration and more process-oriented health care chains requires a shift in strategy, structureand control mechanisms. As such, the supply chain orientation within the health care sectorcan be regarded as a complex social change process.Best practices of Healthcare Supply ChainThe best practices of Healthcare Supply Chain are summarized in the following table:Table 1: Best practices of Healthcare Supply
  7. 7. ConQuest, IIM Shillong Consulting Club Areas Recommended Best Practices  Increase training on SCM principles such as executive support, Education communication within internal departments, information systems and measurement systems  Use of cold storage infrastructure for storage and transportation in Transportation & Logistics pharmaceutical industry, a major player in healthcare  Use computer software applications for calculating reorder points and Inventory Management quantities based on demand forecast and safety stock levels  Increase inventory turns to hold less capital at a given time  Increase automated ordering process by using electronic means (EDI, Internet) Procurement and Contracting  Comply with GPO contracts to achieve cost savings  Standardize products to reduce number of contracts and transactions  Apply total quality management in hospitals and integrate a smooth running strategy for their supply chain management. Hospital Quality Management integration with internal and external customers is realized as important factors in implementing and empowering the overall integration process in quality management system in hospitals  Use of Radio Frequency Identification (RFID) technology, which will continue to make inroads thru track-and-trace solutions, first, as asset Using RFID technology and inventory management tools, then gravitating towards personnel, patient and clinical monitoring devices  Use of RFID technology can also help in keeping the track of such Recalling drugs products along the entire chin  Use technology solutions and healthcare consulting services to cover the full spectrum of a healthcare service providers revenue cycle needs from improving patient access processes to reducing claims Revenue-Cycle Management denials. System and Decision Support  Use decision support system to integrate financial, clinical and System administrative information and distribute that data enterprise-wide for timely analysis and decision-making that might positively impact future performance  Share inventory related information with vendors for better planning. Information should include: sales data, backorders, and on-hand Information Sharing & inventory; it should also be accurate and accessible in a timely Collaboration/Cooperation manner  Involve physicians and other providers in the product selection process through collaboration and cooperationConclusionThis article provides insight about supply chain management practices in the healthcaresector. Although many health care organizations have recognized the importance of adoptingsupply chain management practices, the application of techniques, methods and best practicesoriginally developed in an industrial setting clearly is often problematic. Improvements havebeen made in the healthcare supply chain, primarily in the area of education but areassuch as inventory control, procurement processes, and information sharing require moreattention from supply chain managers. Improvements in all these areas can becomepossible with the aid of information technology, along with collaboration andcooperation of stakeholders. The supply chain management best practices can greatly helpmaterial managers with their continuous improvement efforts, while maintaining qualityof care. Finally, the adoption of new emerging technologies, such as radio
  8. 8. ConQuest, IIM Shillong Consulting Clubidentification (RFID) and its benefits to the healthcare industry are also explored to identifyinnovative alternatives to material management in the healthcare sector.REFERENCESNachtman, H. and Pohl, E.A. (2009), “The State of Healthcare Logistics: Cost and Quality improvement Opportunities,”Center for innovation in Healthcare Logistics, University of
  9. 9. The Team ConQuest, IIM Shillong Consulting Club Conquest Online is the online edition of ConQuest which is a student driven Consulting club of 2. McKone-Sweet, Kathleen E., Hamilton, P. and Willis, S.B. (Winter 2005), “The Ailing IIM Shillong. Healthcare Supply Chain: Prescription for Change,” The Journal of Supply Chain Management: A Global Review of Purchasing and Supply, pp. 4-17. The ConQuest Team includes 3. Schneller, E.S., Schmeltzer, L.R. and Burns, L.R. (2006), Strategic Management of the Anurag Prasad | Health Care Supply Chain, Jossey-Bass, San Francisco, CA. 4. Burns, L.R. (2002), The Healthcare Value Chain: Producers, Purchasers, and Providers, Jossey Bass, San Francisco, CA. Hemant Bhargava | 5. Jan de Vries, Huijsman, R. (2011) "Supply chain management in health services: an overview", Supply Chain Management: An International Journal, Vol. 16 Iss: 3, pp.159 – 165 Manbir Singh Tandon | 6. Beier, F.J. (1995), “The management of the supply chain for hospital pharmacies: a focus on inventory management practices”, Journal of Business Logistics, Vol. 16 No. 2, pp. 153- 173. Partha Mitra | 7. Acharyulu, G.V.R.K. and Shekhar, B.R. (2012), “Role of Value Chain Strategy in Healthcare Supply Chain Management: An Empirical Study in India”, International Journal of Priyansh Modi | Management Vol. 29 No. 1 Part 1, pp. 93-94 8. Breen, L. and Crawford, H . (2005), “Improving the pharmaceutical supply chain: assessing the reality of e -quality through e-commerce application in hospital pharmacy”, International Ritika Parasrampuria | Journal of Quality & Reliability Management, Vol. 22 No. 6, pp. 572-590. 9. Harland, C.M. and Caldwell, N.D. (2007), “Barriers to supply chain information integration Siddharth Jaidev | : SMEs adrift of e-Lands”, Journal of Operations Management , Vol. 26 No. 6, pp. 1234-54. 10. Siau, K., Southard, P.B. and Hong, S. (2002), “E-healthcare strategies and Aritra Nayak | implementation,” International Journal of Healthcare Technology and Management, Vol. 4 Nos 1/2, pp. 118-131. 11. Lowell, N. H. and Celler, B. G. (1998 ), “Information technology in primary health care”, Arpit V Tripathi | International Journal of Medical Informatics , Vol. 55 No. 1, pp. 9-22. 12. McCutcheon, D. and Stuart, F.I. (2000), “Issues in the choice of supplier alliance Nimesh Nair | partners”, Journal of Operations Management, Vol. 18 No. 3, pp. 279-303. 13. Ballou, R.H., Gilbert, S.M. and Mukherjee, A. (2000), “New managerial challenges from Pochineni Shalini | supply chain opportunities”, Industrial Marketing Management, Vol. 29 No. 1, pp. 7-18. 14. van der Vaart, T. and van Donk, D.P. (2008), “A critical review of survey-based research Rishi Gupta | in supply chain integration”, International Journal of Production Economics, Vol. 111 No. 1, pp. 42-55. Shirish Prakash Jain | 15. Callender, C. and Grasman, S.E. (2010), “Barriers and Best Practices for Material Management in Healthcare Sector”, Engineering Management Journal, Vol. 22 No. 4, pp. 11- 17 Sunayna Agarwal | Tarun Gupta |©ConQuest, Consulting Club of IIM ShillongComments/feedback, please mail to