Decision Analysis Multi- Criteria Decision Making

1. A project report on
SUPPLY CHAIN COMPARATIVE ANALYSIS IN CORPORATE HEALTHCARE
SYSTEM
SUPPLY CHAIN MANAGEMENT
PROJECT REPORT
GROUP NO. 3
MUKUL SHARMA
PUNEET VERMA
SIMRIT SHARMA
TOSIF MIR
Submitted to
Mr. Gaurav Goyal
Astt. Professor,
LMTSOM, Dera Bassi

2. INTRODUCTION
Neumann indicates (2003) that supplies constitute 25% to 30% of a hospital’s total operating
expense. In addition, 25% of those expenses are tied to administration, overhead, and logistics.
Factors like poor inventory and distribution management, ad hoc procurement systems, lack of
executive involvement and no process improvement culture do exist in India healthcare
industry.
MARKET OPPORTUNITY
Indian healthcare market is expected to grow at 15% CAGR to a market size of $400bn
by 2025. Private sector comprises 70% of the market share of the entire healthcare
delivery market. Hospitals accounting for 70% of the market.
1) Market Share of private Sector (70%) dominates the public sector (30%)
2) Beds available (units) in private sector (63%) and higher inpatients (days) in private
sector (60%) clearly indicates high ‘Inpatient Occupancy Rate’ in private hospitals.
3) ‘Outpatient Waiting Time’ in case of private hospitals (78%) indicates timely service
delivery.

3. 4) Figure shows it is easier to meet doctors (80%) in private sector. Clearly, it means lower
waiting time, higher availability of medicines and diagnostic facilities in private sector
avoiding demand supply mismatch.
HEALTHCARE VALUE CHAIN
UNDERSTANDING HEALTHCARE BUSINESS
Hospitals are capex heavy business and take time to establish track record, attract quality
doctors and get into deeper (tertiary care) which generate higher. It takes about 5 years to
establish a hospital, to generate good EBITDA margin and ROCE. Post 5 years’ operating
leverage kicks in and hospitals can increase EBITDA faster without any incremental increase
in cost.
Indicative numbers Less than 5 years Greater than 5 years
EBITDA margins 3-4% 15%
ROCE 0-3% 15-20%
Treatment Basic Tertiary
KEY TERMS IN HOSPITAL BUSINESS
1) ALOS: Average length of stay.
The shorter it is the better it is for the hospitals since hospitals make most of its money
in the first 2-3 days of the stay.
2) ARPOB : Average revenue per operating bed
= (Revenue – other income)/ (Beds*utilization rates)
3) ROIC = Return on Invested Capital

4. = (Sales/Invested capital) * (Profit/Sales)
4) Turnover =Sales/Invested capital
= ARPOB/Capital cost per operating bed
Max
Particulars India Apollo Fortis
No of operating beds 2400 8600 3400
ALOS days 3.24 4.04 3.56
Occupancy/Utilization 73% 64% 73%
Capital Cost per operating bed (lakh) 75 75 75
ROCE 6.8% 10.0% 3.9%
EBITDA margin % 11% 12% 15%-16%
EBITDA per operating bed (INR lakh) 18.5 18.8 22.30
ARPOB/p.a (INR Cr) 1.5 1.16 1.44
Turnover (ARPOB/capital cost per 2.00 1.55 1.92
bed)
Growth 20-21% 15%-16% 9%-10%
D/E 0.99x 0.3x
% mature hospital beds 46%
Health
Additional business insurance Diagnostic

5. KEY INSIGHTS:
1) Max is the fastest growing hospital chain amongst the listed hospital business with
growth rate of 20-21%.
2) Max India has superior operating parameters like higher ARPOB (1.5), lower ALOS
(3.24), highest occupancy (73%), and highest growth (20-21%).
3) Its turnover ratio of ARPOB/capital cost per bed (2.0) is amongst the highest in the
industry.
MAX INDIA
2015-16
Less than 5 years
Greater than 5
years
EBITDA 11% 3-4% 15%
ROCE 6.8% 0-3% 15-20%
Basic Tertiary
FINANCIAL PERFORMANCE

6. UPSTREAM AND DOWNSTREAM ACTIVITIES

7. DECISION ANALYSIS
PAYOFF TABLE
State of Nature Maximax Criterian Maximin Criterian
Alternatives
Quality
of care Utilization/Efficiency
Reported
Satisfaction
Financial
Performance
Max
Payoff Choice
Min
Payoff Choice
Fortis 3.3 3.5 2.1 3.1 3.5 2.1
Apollo 3.7 3.3 3.9 4.3 4.3 Select 3.3 Select
Max 3.1 3.4 3.8 2.4 3.8 2.4
State of Nature
Equally
Likely Criterian Hurwicz Criterian
Alternatives
Quality
of care Utilization/Efficiency
Reported
Satisfaction
Financial
Performance
Average
Payoff Choice
Realism
Payoff Choice
Fortis 3.3 3.5 2.1 3.1 3 2.52
Apollo 3.7 3.3 3.9 4.3 3.8 Select 3.6 Select
Max 3.1 3.4 3.8 2.4 3.175 2.82
Alpha 0.3

8. OPPORTUNITY LOSS TABLE
State of Nature Minimax Criterian
Alternatives
Quality
of care Utilization/Efficiency
Reported
Satisfaction
Financial
Performance
Max
Regret Choice
Fortis 0.4 0 1.8 1.2 1.8
Apollo 0 0.2 0 0 0.2 Select
Max 0.6 0.1 0.1 1.9 1.9
PAYOFF TABLE
State of Nature
Alternatives
Quality
of care Utilization/Efficiency
Reported
Satisfaction
Financial
Performance EMV Choice
Fortis 3.3 3.5 2.1 3.1 3.01
Apollo 3.7 3.3 3.9 4.3 3.77 Select
Max 3.1 3.4 3.8 2.4 3.21
Probability 0.3 0.25 0.25 0.2
OPPORTUNITY LOSS TABLE
State of Nature
Alternatives
Quality
of care Utilization/Efficiency
Reported
Satisfaction
Financial
Performance EOL Choice
Fortis 0.4 0 1.8 1.2 0.81
Apollo 0 0.2 0 0 0.05 Select
Max 0.6 0.1 0.1 1.9 0.61
Probability 0.3 0.25 0.25 0.2
EPC=
Expected Payoff Under
Certainty
Payoff Decision with
Perfect Info. 3.7 3.5 3.9 4.3 3.82
EVPI 0.05
SUPPLY CHAIN MANAGEMENT IN HOSPITALS:
“Worldwide surveys prove that hospitals that have implemented SCM successfully have
recorded a 50% inventory reduction, 40% increase in on-time delivery, doubling of inventory
returns coupled with nine-fold reduction in out of stock rates”.
A hospital, or any business for that matter, cannot operate in isolation. Right from the
procurement of raw material to providing the service and finally to the concluding transaction

9. where service/ goods delivery is completed and exchange of money takes place, it is a chain of
interconnected businesses and business processes. Every time a requirement is communicated,
order is placed and inventory is stocked, there is a potential opportunity of value addition,
waste reduction and process standardization.
According to the 2008 Health Care Executive Survey on Supply Chain Management, Clinical
Performance and Patient Safety is the No. 1 challenge faced by the hospitals and all the
executives agrees that the challenge No.2 was the overall operating costs possible. To achieve
this twin objective, a balance should be hit with At-par levels; inventory turns ratio, re-order
point and restocking playing the decisive role.
1) Clinical Performance and Patient Safety
2) Overall Operating Costs
Hospitals provide a unique problem in establishing and maintaining a supply chain process. Not
only, in most cases, individual departments in a hospital act as individual buying centers but
also there exist a mind boggling number of intermediaries.
The challenge lies in efficiently integrating suppliers, logistics, different hospital departments
(outpatient, emergency ward, radiology, pathology, supplies, stores and purchase) to ensure
optimum utilization of resources. The ultimate aim is to transform a sick patient to a healthy
person at a reasonable cost, in the shortest possible time and with superior patient satisfaction.

10. Consolidation of demands from all the departments and proper flow of information between
the departments and suppliers can remove a lot of bottlenecks and result in reduced cost of
all the parties involved.
Most of the times, orders are placed to the suppliers on an “as and when required basis”. The
problem of this approach is twofold:
1) There is a higher chance of stock-outs from the supplier’s end.
2) The transport and ordering cost incurred is also more, considering the fragmented
nature of the orders placed.
3) This approach also prevents the hospitals from entering into any long term contracts
with drug distributors. Hence, they are denied of optimal bulk order discounts from the
drug distributor/ manufacturers.
4) The hospitals lose out the preferential/priority supplies commitments in case there is a
shortage of some life saving drugs. So in all, there is incurring of greater cost and still
running a chance of lower customer service being offered.
From materials management point of view, having a centralized database and standardized
inventory control systems in place is of immense importance. As observed in the financial
reports of one of the India’s greatest hospital chains, the expense towards materials and
supplies amount to more than 45% of the total revenue generated (Apollo Hospitals, June 09).
According to a research published in a leading medicine journal, high volume drugs like
antibiotics and anti-ulcer drugs constitute more than 70% of the total drug consumption in a
typical hospital. Expensive, restricted drugs account for a mere 5% of general usage. This
suggests that a proper inventory control mechanism and order placing procedure can be
brought in place for these high volume drugs. Systematic measurement of drug utilization
patterns is the key element of drug cost control strategies.
Continuing the above point further, research also proves that majority of the cost is borne by
specialized departments like Oncology, Cardiology etc. It is unlikely that these specialized
departments will have a high degree of variation in their prescribing practice. In contrast,
routine drugs are used by a large number of hospital’s internal departments and practitioners
including specialists, surgeons, gynecologists and surgeons for different clinical conditions. In
such a case where the use spans different departments and wards, subject to individual
practice and policy, the usage experiences greater variation of demand.
Having an established supply chain mechanism helps in systematic ordering and consolidation
of the order quantities. Forward contracts can be entered into which would result in lowering
of medicine and supply cost. The risk of stock-out also reduces since, inventory records and
lead time for individual data can be accommodated in the central SCM database. Having lesser
number of suppliers also translates into lesser lead time variability of the ordered materials.
One of the biggest problems with medicines and supplies faced by hospitals is the risk of
expiration. Centralized procurement also yields significant power on the hands of the hospitals
and they can enter into contracts with manufacturers/distributors whereby they can return
the unused medicines when they near their usable life. This translates into direct waste
reduction and reflects hugely in the profit margin.

11. The costly life saving/ critical drugs are one of the most prized items of the hospitals and should
be stock all the time. But the high cost as well as the short expiry date of the medicines
prohibits stocking them up in large quantities. ABC classification of inventory, based on Pareto’s
80-20 rule, lays down simple ways to monitor inventories according to their relative importance
to a company.
Carrying the discussion about the volume and cost of medicines used in a typical hospital
scenario, we can safely recommend:
Class A: status to the critical/life saving drugs.
Class B: status to the important drugs that are used by different departments.
Class C: status to the routine drugs and medical supplies.
A perpetual inventory management system can be adopted for the “Class – A” items while
a simple reorder point and Economic Order Quantity/Period Order Quantity can be used
to determine the replenishment policy for “Class – C” items.
This way the hospitals can not only ensure they carry optimum stock but can also bargain for
quantity discounts, especially for Class – C items. The hospital, with the database about the
usage volume and demand pattern of medical supplies, is also in a position to enter into
forward contracts with drug manufacturers and can look forward to vendor consolidation as
the next step.

12. In the United States of America, an entity called Group Purchasing Organisation(GPO) has
already come up to leverage the collective purchasing power of some group of buyers
companies to obtain discounts from the vendors and manufacturers. Members participate
based on their purchasing needs and their level of confidence in what should be competitive
pricing negotiated by their GPOs. Group Purchasing is used in many industries for purchasing
raw materials and supplies and should be more intensely applied in the heavily fragmented
healthcare sector.
RFID technology is being used increasingly for Asset and package tracking both inside and
outside the hospitals. The precision medical instruments are of high cost and hence justify
investing in RFID to know their exact position while in transit from manufacturers to
the hospitals. Inside the hospital, this is used as a tool to restrict the movement of specific
medical instruments to individual departments. This brings in ownership and accountability in
the individual departments to which a particular asset is tagged. Though there has not been
much use of this technology till recent past, but surveys have come out showing the increasing
inclination of hospitals to adopt this in near future.
LOGISTICS MANAGEMENT IN HOSPITAL SUPPLY CHAINS:
Logistics is flow of goods/resources, information and people between the point of origin and
the point of consumption. Medicinal supplies have a limited shelf life and many drugs are
expensive. This call for a specific method of provisioning, storing and administering such
medicines which starts with storing them in a temperature/ humidity controlled atmosphere
and issued on a First Come First Served (FIFO) order.
FORTIS HEALTHCARE

13. FORTIS HEALTHCARE

14. APOLLO HEALTHCARE
Apollo falls under both broad divisions of the healthcare industry today:
a. Healthcare products manufacturing (healthcare equipments, drugs manufacturers)
b. Healthcare services (consultation, exercise centers, medical software, and medical insurance)

16. Apollo Hospitals holds extra inventory reasonably because of its own integrated chain of
Pharmacy including private players. Hence, more required to tradeoff between routine drugs
(need more frequent supply) and specialty drugs (less frequent in demand).
SUGGESTIONS
Fortis Healthcare may encounter problem in procuring the required inventory because of their
JIT Approach while Apollo can make optimal inventory management to avoid stock age crossing
their useful life.
Virtual centralization of the supply chain
Cooperation using virtually centralized supply chain management can set hospitals on
the path to controlling costs and improving service. Virtual centralization is integrating
operations from the perspective of the market rather than the health system. The most
developed example is a consolidated service centre (CSC) that is jointly owned and
managed by multiple hospitals and healthcare systems. A CSC brings together
geographically based groups of hospitals to form single entities that work together to
centralize contracting, procurement, distribution, and logistical operations. The CSC
serves as the focal point not only of distribution, hut also of centralized contracting,
procurement, and customer service. This innovative approach helps to solve critical
problems relating to staff, time, and budget shortages. And while saving money is the

17. top priority, a CSC also provides networking opportunities for participants. Being able to
share best practices, conflict resolution, and advice will help to improve the bottom line.
Hospitals would be empowered to have much more control over product selection and
distribution. Consolidation of supply services would result in significantly improved
visibility of a hospital's supply chain expenses, improved product pricing through
standardization and volume aggregation, reduced inventory, lower distribution costs,
and reduced inbound freight costs. Other benefits include elimination of distribution
mark-up costs and lower product prices, inventories, and inbound freight costs.