Supply Chain Management and Managing Inventories in Healthcare

Supply chain management is the process of efficiently integrating manufacturers, suppliers and distributors to accurately meet customer demand. It can be divided into two parts: inventory management and distribution. In healthcare, the three major participants are Product Manufacturers, Purchasers like GPO’s and Healthcare providers like hospitals. It is represented by the figure below:

Manufacturers make products, GPO’s act as third-party negotiators on behalf of healthcare providers but are funded by the administration fees paid by the manufacturer, based on a percent of sales. This is the traditional way of a supply chain in healthcare. Many hospitals are now coming up with different methods to save costs as described in an example below.

Hospital care and healthcare services account for almost half of nation’s expenditures. According to another research study, supply chain management may account up to 40% of the cost of providing care and therefore it is essential that inventory is managed in a better way which can save about 14% of the entire healthcare cost. (1)

Adding to the complexity is that hospitals cannot make purchasing decisions solely based on cost. They must align with physicians and staff preferences to identify products for best outcomes. It is necessary for supply chain managers at hospitals to take physician preferences into consideration, with new medical devices coming into the market every year, physicians and staff may prefer certain devices that would allow them to be most productive. So to get real-time feedback from staff will be helpful to ensure that supply chain managers order the necessary devices and maintain the appropriate inventory level.

An example of a hospital that used non-traditional method to save costs was Mercy Health System. They streamlined their inventory and distribution process and created a new supply chain management division called Resource Optimization and Innovation (ROi). They reduced their dependence on GPO’s and created their own GPO that would purchase directly from suppliers. They also shipped products from their supplier warehouses directly to hospitals thus removing distributors from their chain. This resulted in having $153M revenue in excess. (2)

This example gives rise to various thoughts like will hospitals now have to come up with their own GPO’s to save costs? What advanced methods can be used to better manage inventory without affecting patient care?

References:

1.   1.Better inventory management systems can reduce operating room costs –www.sciencedaily.com

2.   2.  http://cavern.uark.edu/~rossetti/reports/healthcare_supply_chain_rep.pdf