Supply Chain Management In Healthcare

Published by MBA Skool Team, Published on August 23, 2012

Healthcare spending accounts for substantial share in GDP and has increased rapidly over the years. Rising healthcare costs has become a major concern not only for individual patients or families but also for companies and for governments all over the world. This is primarily because companies have to provide allowances for healthcare expenditures of their employees and governments have to fund healthcare programs, trainings, infrastructure and research and development.

This rapidly increasing healthcare costs can be contained by identifying and eliminating the vast amount of inefficiencies existing in healthcare supply chain. Supply chain strategies are important to realize the competitive capabilities.As long as supply chain remains disorganized or incompetents, costs are bound to rise and that too in-exorbitantly.

Considerable amount of costs savings can be made through filling the gaps in healthcare supply chain and the savings made can then be transferred to patients in form of reduced bills. This article identifies three major areas in healthcare supply chain which needs substantial improvement: -[1] Misalignment or conflict of interests of healthcare agents and lack of incentives or motivation for alignment [2] Supply intensive healthcare procedures and lack of collaboration among multiple healthcare providers and [3] Lack of automation in various healthcare transactions , purchase order placements , monitoring inventory level etc.

This article also suggests the models that can be implemented in order to resolve these issues. The requirements and challenges associated with implementation of each of these models have also been discussed. Throughout this article, an equally important concept that has been emphasized upon is ingraining the concept of sustainability in all these models.

The article draws references from number of studies, surveys, publications and other works made in the field of healthcare sector and the challenges facing the sector. The aim of this article is to highlight the gross inefficiencies and to help implement sustainable practice models that can eliminate these inefficiencies.

Supply Chain Management in Healthcare

Supply chain efficiencies and performance are common and important denominators in all hospital admissions as virtually everything one touches in a hospital has a supply chain linkage

(“Repositioning Supply Chain in Health Care Systems”, 2010). When supply chain practice is significantly associated with competitive capability, and when competitive capability is supported by such supply chain management practice, it will have a significant influence on performance improvement (Kim, op. cit., p.330).

In the present day environment marked by resource constraints, hospitals work under the pressure of limited investment budgets and compressed between two-sided wall of quality and cost. Healthcare costs are rapidly increasing and have become unsustainable .One area that has tremendous potential to arrest the rapid increase in healthcare costs is Healthcare Supply chain.

Facing a multitude of challenges among those, cost and quality as well as the need for reform, the healthcare industry is actively seeking to implement supply chain management practices by partnering with customers, suppliers, and many other strategic service partners (Naidu, Parvatiyar, Sheth, and Westgate, 1999). It is recognized that an efficient and user-friendly supply chain can produce positive financial outcomes for providers and improve service to patients (McKone-Sweet, et. al., 2005). The patient is obviously the ultimate client or beneficiary of the healthcare supply chain (Schneller and Smeltzer, 2006)

Figure 1.  Healthcare Supply Chain

This article identifies following primary reasons for inefficiencies in Healthcare Supply chain and analyzes the possible resolutions or models that can be incorporated in order to resolve these issues:

  • Agency Theory: Misaligned interests of multiple healthcare agents such as hospitals, doctors, insurance companies and regulatory bodies.
  • Supply-intensive Procedures and Insulated Silos: Like joints or hip replacement etc where supplies constitute 50 to 80 percent of the total cost of the surgical procedure.Multiple players in healthcare sector work in their separate silos under intense lack of collaboration.
  • Paper Records: Still to a large extent purchase orders and transactions are monitored manually through on-paper records. This results in inefficient monitoring of inventory levels due to increased errors between actual numbers of medicines, equipments etc and numbers in book. Eventually the result is either excess inventory carrying costs or stock-outs. On one hand, high level of inventory carries risks of expiry and on the other hand stock-outs in healthcare sector imply immediate loss of customers or patients.

Agency Theory and Gain-sharing Model

Most of the times,the interests of healthcare agents are misaligned and may come in conflict with each other. A doctor who has been trained to use a particular product or equipment would not find any personal incentive or motivation to undergo a re-training in order to switch to a low cost equal functionality substitute. This results in prolonged use of old technologies and products and is also sometimes referred to as ever increasing “legacy tail”.

Many healthcare supply chains exist as highly fragmented systems in which manufacturers, distributors, wholesalers, group purchasing organizations, and providers operate independently from one another (Byrnes, 2004).The gain sharing model handles such alignment issues by sharing of gains among healthcare agents through incentivizing cost reduction techniques employed by any of its agents. The implementation of such a model has following basic requirements:

  • Transparency of the model among the concerned healthcare agents
  • Establish Cost and Quality thresholds

Cost and quality outcomes are among the key factors constituting a ―[…] burning platform for elevating the contribution of efficient and effective supply chain management [in healthcare],(Schneller and Smeltzer, 2006)

  • Identification of actions that can result in cost savings
  • Development of framework or measures of incentive models based on quality metrics , resource utilization and cost information
  • Mapping of cost saving actions quantitatively to incentive models
  • Smooth transitions from old to new approach or techniques
  • Sustainability of the model so that gain sharing model does not collapse within a short timeframe

However the implementation of such gain sharing and incentive models has its own challenges in terms of monitoring the quality of patients’ care and delegation of power and responsibilities. “In these arrangements, there must be a ‘leap of faith’ by hospitals and physicians. Hospitals must be willing to relinquish total control. The finance department must step into the world of clinical medicine. The physicians must learn how they impact variable cost.” (Goodroe, Joane and Murphy,Douglas. “Global Pricing for Cardiac Care: Hard Lessons for Physicians and Hospitals”, Nov/Dec 1993).

Supply-intensive Procedures, Insulated Silos and Economies of scale

The supplies required for procedures like joints or hip replacements are basically of two types: [1] those that are common to all such types of procedures and [2] those that may vary depending upon type of patients being treated. These supplies are extremely expensive in terms of equipment cost, sourcing, procurement and storage. Also most of these procedures require revisions after a certain timeframe which are even more costly. This article prescribes the use of Collaborative Procurement, Transportation and Storage Model to reduce costs of supplies of first type; since this type of supplies can be forecasted to a high degree of certainty.

Under this model, the foremost requirement is the standardization of equipments required across different surgeries.Once this is achieved, healthcare providers within a fixed geographical distance can forecast and pool in their requirements of such equipments. In collaboration they can also go for vendor analysis based on multiple parameters like quality, quantity, price offered, reliability, lead time, process capacity etc. They can then go for collective purchase order placements and procurement. Procuring volumes from a common vendor would help draw benefits of volume discounts and would also provide easier access to new technologies.

Similarly a common transportation vendor can help transport the equipments to mega-distribution centers (DCs) from where it can be distributed to different healthcare providers. Thus this model can help achieve economies of scale and can also bring down the total number of intermediaries substantially. Cost savings thus accrued can be passed on to final consumers or patients.

Paper Records and Automation

A single paper-based purchase order may cost anywhere from $75 to $140 to process.Process that transaction online and across the Internet, and it can be as low as $6 to $10. (“Hospital Web Operations Gear Up,” 1999).

Employment of techniques like computer-based patient record systems (CPR), electronic medical records (EMR),computerized physician order entry (CPOE), picture archiving and communication systems (PACS) etc  has the potential of substantially reducing duplication as well as the manual effort required for handling such records.

This will free up healthcare professionals for more important activities like frontline patients’ care. The transactions done online will automatically keep the database updated corresponding to each and every issue of material or medicine etc; thus monitoring inventory levels efficiently.Automatic product replacement mechanisms will completely eliminate the need of manual counting and manual placement of the order.

Automation of records brings in data integrity. Multiple healthcare agents access a single, standardized database; thus accurately mapping their forecasts to present requirements. Projecting demand is the key i.e utilizing all automated systems to create realistic bill of materials for procedures from the preparation phase through recovery and follow up (Callahan et al., 2004)


The article has identified three major areas of concern for healthcare supply chain i.e. Agency Theory, Supply-intensive Procedures and Insulated Silos and Paper Records. It has tried to provide solutions on these areas by means of suggesting implementation of Gain-sharing model, achieving Economies of scale and Automation. The article has attempted to demonstrate that today’s healthcare sector has a vast scope of improvement in terms of refining its supply chain practices and thus a huge potential still remains untapped. The challenge is to meet future challenges and to converge it into a successful sustainable practice model.

This article has been authored by Trisha Pandey from SJSOM.

Image Source: Chain

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