www.iims-conquest.

in

Supply Chain Management in Healthcare

Anurag Gupta and Anurag Singh , IIM L

ConQuest Online March 2012 Edition

ConQuest, IIM Shillong Consulting Club

Supply Chain Management in Healthcare

Anurag Gupta and Anurag Singh, IIM L

Introduction
The global healthcare industry is one of the world's largest and fastest growing industries, comprising various sectors: medical equipment and supplies, pharmaceutical, healthcare services, biotechnology, and alternative medicine sectors. With extreme pricing pressures on todays healthcare providers, delivering high-quality medical care while reducing costs is a top strategic priority. To achieve this objective, healthcare service providers efforts have been focused primarily on eliminating waste in clinical operations. While these are valid and important ways to reduce healthcare costs, one area that consumes nearly one-third of all hospital operating budgets often remains overlooked - the healthcare supply chain. When it comes to expenses, supplies are second only to labor, with millions of products moving along the supply chain every day through manufacturers, distributors, Group Purchase Organizations (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 Pohl While the adoption of SCM practices has been successful in many sectors, the healthcare industry has not seen major improvements from these practices (McKone-Sweet et al., 2005). Today, healthcare managers and industry experts understand that the efficient management of

www.iims-conquest.in

ConQuest, IIM Shillong Consulting Club

materials can not only reduce operating cost, but increase the quality of care (Schneller et al., 2006).

Healthcare Supply Chain

The healthcare supply chain involves the flow of many different product types and the participation of various stakeholders. The main purpose of the healthcare supply chain is to deliver products in a timely manner in order to fulfill the needs of providers. Based on their functions, 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, 2002 The role of producers is to manufacture medical products such as surgical supplies, medical devices and pharmaceuticals. Purchasers include distributors, wholesalers and Group Purchase Organizations (GPOs). Distributors and wholesalers hold inventory for producers to facilitate delivery of products. GPOs sign purchasing contracts with producers in order to achieve economies of scale by aggregating the volume of member providers. Healthcare providers represent those at the end of the supply chain with the function to serve patients and include, among others, hospitals, integrated delivery networks (IDNs), physicians, clinics, nursing homes and pharmacies (Burns, 2002).

www.iims-conquest.in

ConQuest, IIM Shillong Consulting Club

In the past, a hospital that managed its purchasing costs well could operate efficiently. Today, the cost of materials management can exceed 45% of a hospitals operating budget, with nearly 30-35% attributable to supply costs alone. Recent studies show that a significant portion of the costs associated with supply chains in the health care sector can be reduced by implementing effective supply chains. The application of supply chain management practices in the health care sector not only relates to physical goods like drugs, pharmaceuticals, medical devices and health aids but also to the flow of patients (Beier, 1995).

Integrated Supply Chain in Healthcare

In hospitals, integrated supply chain strategy should be consistent to maximize patient care. The hospital supply chain enables this strategy by ensuring product availability, minimizing storage space, maximizing patient care space, reducing material handling time and costs for all medical staff and minimizing inventory. Hospital supply chain has to ensure proper linkages to clinical systems, revenue cycle, IT and clinical operations. The supply chain often is viewed as a back dock support service that provides the products and services required by clinical departments. To be fully effective, it must be an integrated link in the chain 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 market-development.

www.iims-conquest.in

ConQuest, IIM Shillong Consulting Club

Figure 3: Different stages of supply chain integration

Considering health service providers, supply chain management often refers to the information, supplies and finances involved with the movement and acquisition of goods and services from the supplier side to the end user with major emphasis on two aspects, firstly, to enhance clinical outcomes and secondly to optimize costs. In doing so supply chain management puts a strong emphasis on the integration of processes. Considering the healthcare sector, these processes refer to physical products like pharmaceuticals, medical devices & 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 a better health supply chain performance. Information technology and the deployment of ebusiness are closely linked to the co-ordination and integration of operational processes. Different studies have advocated the importance of information technology in healthcare sector (Breen and Crawford, 2005; Harland and Caldwell, 2007) and it is not a matter of surprise that many studies on health care supply chains focus on the role of e-business technologies across hospital supply chains (Siau et al., 2002). Similar to the co-ordination and integration of operational processes, information technology in the healthcare sector is related to both physical products as well as to the flow of patients within and between health service organizations (Lowell and Celler, 1998). The use of information technology-oriented applications can be found in the areas of procurement, inventory control and materials planning. One of the well-known examples of an IT application being used in Health sector is Electronic Patient Record Systems which has significantly contributed in improving the

www.iims-conquest.in

ConQuest, IIM Shillong Consulting Club

integration and smoothening of processes within and between health service delivery organizations.

The application of supply chain management practices in healthcare setting is almost by definition related to organizational aspects like building relationships, allocating authorities and responsibilities, and organizing interface processes. Different studies have highlighted the importance of organizational processes when applying supply chain management practices. Moreover, recent studies reveal that elements like organisational culture, the absence of strong leadership and mandating authority, as well as power and interest relationships between stakeholders might severely hinder the integration and co-ordination of processes along the health care supply chain (McCutcheon and Stuart, 2000). Healthcare supply chain integration is not only related to the integration and co-ordination of planning processes but this can also be linked to joint market development and offering new careproducts. Product co-development is a recognized phenomenon in the field of supply chain management and within industrial supply chains many joint efforts are made to develop new products across suppliers, customers and organisational units. Additionally, healthcare service providers have taken the initiative in different countries to develop new care-products in close collaboration with each other. Clearly, the above mentioned modes of integration cannot be considered in isolation. Studies in the field of industrial companies indicate that organizations often go through several stages of integration, starting with a transparency stage via a commitment/ coordination stage to a full integrated stage encompassing all the different modes of integration addressed above (Ballou et al., 2000; van der Vaart and van Donk, 2008). The ongoing transformation within the health care sector towards greater integration and more process-oriented health care chains requires a shift in strategy, structure and control mechanisms. As such, the supply chain orientation within the health care sector can be regarded as a complex social change process.

Best practices of Healthcare Supply Chain

The best practices of Healthcare Supply Chain are summarized in the following table: Table 1: Best practices of Healthcare Supply Chain

www.iims-conquest.in

Areas Education Transportation & Logistics Inventory Management

Procurement and Contracting

Quality Management Using RFID technology Revenue-Cycle Management System and Decision Support System

Recalling drugs

Information Sharing & Collaboration/Cooperation

Recommended Best Practices Increase training on SCM principles such as executive support, communication within internal departments, information systems and measurement systems Use of cold storage infrastructure for storage and transportation in pharmaceutical industry, a major player in healthcare Use computer software applications for calculating reorder points and 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) 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 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 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 products along the entire chin Use technology solutions and healthcare consulting services to cover the full spectrum of a healthcare service provider's revenue cycle needs from improving patient access processes to reducing claims denials. Use decision support system to integrate financial, clinical and 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 inventory; it should also be accurate and accessible in a timely manner Involve physicians and other providers in the product selection process through collaboration and cooperation

ConQuest, IIM Shillong Consulting Club

Conclusion
This article provides insight about supply chain management practices in the healthcare sector. Although many health care organizations have recognized the importance of adopting supply chain management practices, the application of techniques, methods and best practices originally developed in an industrial setting clearly is often problematic. Improvements have been made in the healthcare supply chain, primarily in the area of education but areas such as inventory control, procurement processes, and information sharing require more attention from supply chain managers. Improvements in all these areas can become possible with the aid of information technology, along with collaboration and cooperation of stakeholders. The supply chain management best practices can greatly help material managers with their continuous improvement efforts, while maintaining quality of care. Finally, the adoption of new emerging technologies, such as radio frequency
www.iims-conquest.in

ConQuest, IIM Shillong Consulting Club

identification (RFID) and its benefits to the healthcare industry are also explored to identify innovative alternatives to material management in the healthcare sector.

REFERENCES
Nachtman, H. and Pohl, E.A. (2009), The State of Healthcare Logistics: Cost and Quality improvement Opportunities, Center for innovation in Healthcare Logistics, University of Arkansas.

www.iims-conquest.in

ConQuest, IIM Shillong Consulting Club

The Team

2. McKone-Sweet, Kathleen E., Hamilton, P. and Willis, S.B. (Winter 2005), The Ailing Healthcare Supply Chain: Prescription for Change, The Journal of Supply Chain Management: A Global Review of Purchasing and Supply, pp. 4-17. 3. Schneller, E.S., Schmeltzer, L.R. and Burns, L.R. (2006), Strategic Management of the 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. 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 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. 153173. 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 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 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 : 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 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, 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 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 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 in supply chain integration, International Journal of Production Economics, Vol. 111 No. 1, pp. 42-55. 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. 1117

Conquest Online is the online edition of ConQuest which is a student driven Consulting club of IIM Shillong. The ConQuest Team includes Anurag Prasad | [email protected] Hemant Bhargava | [email protected] Manbir Singh Tandon | [email protected] Partha Mitra | [email protected] Priyansh Modi | [email protected] Ritika Parasrampuria | [email protected] Siddharth Jaidev | [email protected] Aritra Nayak | [email protected] Arpit V Tripathi | [email protected] Nimesh Nair | [email protected] Pochineni Shalini | [email protected] Rishi Gupta | [email protected] Shirish Prakash Jain | [email protected] Sunayna Agarwal | [email protected] Tarun Gupta | [email protected]

ConQuest, Consulting Club of IIM Shillong Comments/feedback, please mail to [email protected] www.iims-conquest.in