About one-quarter of health care costs are supply-related, so it's not surprising that the health care supply chain offers enormous opportunity for cost savings--up to $11 billion across the industry, according to one estimate. Inefficiencies in the supply chain are the result of complex processes, a lack of standardization and a lag in IT investment. These are the areas that are ripe for overhaul, experts say.
Unlike the commercial sector, which has long viewed the supply chain as a key strategic activity and used it as a way to differentiate itself, gain market share and generate profits, health care has lagged behind in supply chain management. In part this is because of the nature of health care: it is a cottage industry whose key players--clinicians--are independent contractors with considerable clout and specific preferences for supplies and where some variation in supplies and processes must be accommodated to ensure patient safety.
Health care is starting to engage in "cross-learning"--adapting the lessons of other industries, such as retail and automotive, to improve product flow. One example is the notion of an extended supply chain, where organizations take into account not only their own operations, but also all of their upstream and downstream partners to maximize efficiency. Hospitals also are making headway by investing in technologies such as enterprise resource planning software and radio frequency identification, using quality data to drive standardization and streamlining processes.
This foldout section explores myriad strategies hospitals can use to drive efficiency in their supply chain, including RFID technology and the challenges of retooling the process. A case study shows how one health system adapted a grocery store model for its supply chain. The article also offers resources for further reading.
The Basic Supply Process: The internal supply chain of health care organizations typically includes the following steps:
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| Evaluate | Identify a need, evaluate for clinical efficacy and cost, initiate standardization efforts, select a supplier. |
| Source/Contract | Negotiate and manage supply contracts, including price, volume, tiers, compliance, discounts and rebates. |
| Purchase | End-users requisition supplies, materials managers review and consolidate. |
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| Receive | Verify shipments against original purchase orders, process discrep-ancies, quarantine incorrect or damaged products, manage loading dock. |
| Inventory | Monitor and manage assets at appropriate levels, including those in warehouses, storerooms and critical care units. |
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| Distribute | Enable efficient and accurate flow of supplies between receiving/ inventory and end users. |
| Use | Manage supply utilization in clinical areas, including use of supply guidelines, physician order entry systems and charge capture standards. |
| Pay | Pay for supplies and manage payment for services by payers and patients. |
Sources: VHA, Taking Control of Your Supply Chain: The Buck Starts Here, 2004; H&HN research, 2005
The Three Evolutionary Stages of Supply Chain Management
Gaining efficiency in the supply chain is an incremental process. Efforts should first focus on optimizing the internal supply chain, such as adjusting processes in order to lower the cost of goods. Then, managers should work to improve activities across business functions. Finally, organizations should work to build an extended supply chain that creates benefits for all parties. This diagram illustrates that as supply chain efforts expand in scope, benefits increase as well.
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| Collaborative Supply Chain Synchronize the supply chain among all upstream and downstream partners to improve performance of all. |
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| Integrated Supply Chain Improve collaboration and control with vendors and customers. |
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| Traditional Supply Chain Integrate the functions of the existing supply chain. |
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Source: David Anderson and Hau.L. Lee, "The Internet-Enabled Supply Chair: From the First Click to the Last Mile," ASCET Vol. 4, May 16, 2002; VHA Research Services 2004; H&HN research, 2005
Targeting Improvement: The key areas of focus to increase supply chain efficiency
Train For Increased Complexity.
Complex, geographically scattered health care networks demand a new skill set from materials managers who are typically trained to manage a single-site facility. Materials managers require training and education in supply chain design, complex process management and change management.
Reduce Fragmentation By Adopting An Integrated 'Demand-Pull' Model.
The health care supply chain is very fragmented, where manufacturers, distributors, group purchasing organizations and providers operate largely independently; there is little upstream demand signaling; and parties engage in "forward buying" in anticipation of price increases. An integrated "demand-pull" mo-del allows manufacturers much earlier insight into actual consumption. Participants can align production and distribution more closely with actual demand and all the channel participants can see and understand what they need to do individually and together to successfully lower costs and increase service levels.
Use 'Disintermediation' If Appropriate.
Disintermediation--moving products directly from manufacturers to providers--can benefit some hospital networks by allowing them to avoid distributor markups. However, the process requires manufacturers and providers to develop new expertise and is appropriate only in certain situations.
Plan For Disaster Recovery.
Health care typically focuses on planning for short-duration events, but some of the most serious issues concern disasters with long-duration effects; for example, the destruction of a factory that makes a particular drug.
Recovery planning does not have to mean carrying large amounts of inventory. Instead, hospitals should have a systematic contingency plan, such as alternative production sites, manufacturing flexibility, factory-direct shipping capabilities, off-site distribution center capacity and critical safety stocks.
Ensure Supply Chain Integrity.
As products move through health care supply chains, quality assurance becomes increasingly difficult. Numerous individuals handle products and products are hard to identify once they've been removed from the packaging.
Gray market diversion is another problem. These are products that are not intended to be sold, such as drug samples given to physician offices, but are somehow repackaged and diverted to the marketplace.
New technologies, such as RFID, can better ensure supply chain integrity, but require pervasive and often costly changes throughout the supply chain, involving systems, procedures, facilities and management. These changes require early planning and careful management.
Sources: Jonathan Byrnes, Fixing the Healthcare Supply Chain, Harvard Business School Working Knowledge, 2004; H&HN research, 2005
RFID: Can it revolutionize the supply chain?
Radio frequency identification technology, known as RFID, holds a lot of promise for improving supply chain efficiency. Its applications include device and asset tracking, better inventory management and even improved patient safety. The Department of Defense and major retailers such as Wal-Mart have been using RFID for years, but its adoption among health care organizations has been limited. Barriers include high costs, the need to modify business practices and a delayed return on investment. In addition, without clear RFID standards and data ownership policies, investment in the technology is a difficult proposition. But RFID's robust capabilities as well as a changing environment may accelerate the adoption rate among hospitals.
Applications Include:
- Preventing drug counterfeiting
- Medical device and asset tracking
- Inventory management--increased inventory visibility could reduce buffer stocks by substituting knowledge for inventory, reducing total inventory costs; could also reduce the "unofficial" inventory that results from maverick purchasing and the lack of visibility in the supply chain
Bar coding is a mature and proven technology that works well in numerous applications such as inventory management. But RFID has some significant advantages that might compel hospitals to replace, or at least augment, bar coding technologies. These include:
- No "line of sight" requirements
- More automated reading
- Less labor involved
- Improved read rates
- Larger data capacity
- Ability to "write" information on a tag
- Effectiveness in harsh environments (e.g., temperature extremes, dusty and dirty conditions)
Dropping Costs
RFID costs are expected to drop significantly. Costs for passive RFID tags dropped from $1 in 2000, to $0.20 in 2004 and are expected to fall to $0.05 by 2006. In 2004, readers cost about $1,000 but are expected to fall to $200 by 2006.
How Low Will They Go?
Passive RFID tag costs have dropped steadily over the past few years making the technology more affordable.
| 2000 | $1.00 |
| 2004 | $0.20 |
| 2006 | $0.05 |
Sources: UPS Consulting, "RFID in Healthcare--A Panacea for the Regulation and Issues Affecting the Industry? 2003-2004"; H&HN research, 2005
Case Study
Cross-Learning From Other Industries:West Penn Allegheny Health System
Are hospitals like grocery stores? Dave Zimba, vice president, corporate contracting, at West Penn Allegheny Health System, Pittsburgh, thinks so. Both hospitals and grocery stores have a wide array of products, high product turnover, high new product introduction and diverse customers. But they differ in customer satisfaction--grocery stores boast high satisfaction rates, while most hospitals do not.
Grocery stores use a three-step process for their supply chain: distributors shelve items, customers select items, and cash registers automatically track inventory, reorder items and charge customers. In contrast, health care organizations have complex, multistep processes, often exceeding 20 distinct steps. "It's a cumbersome and unreliable process. There's a lot of manual intervention and lots of steps," Zimba says.
So when WPAHS, a six-hospital system with more than 10,000 employees and 4,000 medical staff members, decided in 2001 to restructure its $360 million supply chain, it chose the grocery store model to streamline processes, improve efficiency and save money. That meant a three-tiered strategy: offload distribution to partners, charge shelf fees and invest in technology. The cost: $8 million annually. The results: $3.5 million savings in pharmaceutical and product utilization, more than $5 million saved in med-surg supplies, a $2 million savings by converting to the products of business partners and a one-time, $11 million savings in inventory reduction.
West Penn Allegheny's New Supply Chain Model
This shows WPAHS' three-step model and the steps eliminated from its former process.
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New Process |
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Technology
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Technology
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Users
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Users
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Distributor
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Distributor
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Sources: West Penn Allegheny Health System, 2005; H&HN interviews, 2005
Resources
Association for Healthcare Resource & Materials Management, www.ahrmm.org
Jonathan Byrnes, Fixing the Healthcare Supply Chain, Harvard Business School Working Knowledge, April 5, 2004.
Center for Strategic Supply Research, www.capsresearch.org
Coalition for Healthcare eStandards, www.chestandards.org
Stanley E. Fawcett and Gregory M. Magnan, Achieving World-Class Supply Chain Alignment: Benefits, Barriers, and Bridges. Available at www.capsresearch.org.
UPS Consulting, "RFID in Healthcare--A panacea for the regulations and issues affecting the industry?, 2003-2004." Available at www.ups-consulting.com.
VHA Research Series, Taking Control of Your Supply Chain: The Buck Starts Here, 2004. Available at www.vha.com.
Tips for Success
Retooling the supply chain is a complex endeavor. Advice from West Penn Allegheny Health System includes:
BE PREPARED: This is foreign to health care providers and manufacturer sales divisions.
ENGAGE INTERNAL STAKEHOLDERS: Bring all data to the table, represent the opportunity and educate them about the process. Stakeholder involvement is sometimes challenging to maintain.
MAP THE INCENTIVES: Describe the change in the process, the change in the roles, product conversion requirements and the rules of engagement.
INVOLVE SUPPLIERS TO ENSURE THEIR PARTICIPATION: This includes initial outreach and supplier education, ongoing communication throughout the process (such as quarterly review meetings), and outlining issues and identifying plans.
RESET EXPECTATIONS INTERNALLY: This is a paradigm shift: manufacturers can do this for soda and bread, why can't we do this for implants? I need to worry only about product selection. If improving clinical outcomes is a result of reducing variation, why is it any different for the supply chain?
Source: H&HN interviews, 2005
HOW WE DID IT:
This article was produced by interviewing materials management experts and hospital leaders, as well as through online research, such as white papers.
Research: Dagmara Scalise (dscalise@healthforum.com)
Design: Chuck Lazar (clazar@healthforum.com)
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