This document summarizes supply chain management practices in the healthcare industry. It discusses that healthcare supply chains involve various stakeholders like producers, purchasers, and providers. It also outlines different modes of integration in healthcare supply chains like integration of processes, information, planning, and markets. Some best practices discussed are use of RFID technology, inventory management, procurement processes, information sharing, and revenue cycle management systems. The conclusion states that while improvements have been made, areas like inventory control, procurement, and information sharing require more focus from managers.

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Supply Chain
Management in
Healthcare
Anurag Gupta and Anurag Singh , IIM L
ConQuest Online
March 2012 Edition

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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
today’s 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
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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).
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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 hospital’s 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.
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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 e-
business 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
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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 “care-
products”. 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
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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 provider's 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 cooperation
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
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identification (RFID) and its benefits to the healthcare industry are also explored to identify
innovative alternatives to material management in the healthcare sector.
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edition of ConQuest which is a
student driven Consulting club of
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