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Supply chain management in the healthcare sector: a research agenda

Conference Paper · January 2014

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SUPPLY CHAIN MANAGEMENT IN THE HEALTHCARE

Bialas Christos, Alexander TEI of Thessaloniki, Department of Accounting and Finance

Manthou Vicky, University of Macedonia, Department of Applied Informatics

Stefanou J. Constantinos, Alexander TEI of Thessaloniki, Department of Accounting and Finance

Abstract

Competitive pressures and severe cuts in public healthcare spending force healthcare
organizations to reconsider their business strategies and management practices. In this
important industry, managers need not only lower costs but maintain at the same time a level of
quality services. Supply chain management is currently regarded as having an important impact
on reducing costs and improving performance in healthcare organizations. Supply chain
management is greatly enabled by information technology and enterprise resource planning
systems and specially developed supply chain management systems. In addition, a series of
related factors, such as regulation, globalization, and health insurance legislation is of the
utmost importance for the healthcare sector. This paper provides a literature review of the
impact of supply chain management on the healthcare organizations and proposes a research
agenda for supply chain management in the private and public regulated healthcare sectors.

Keywords: Supply Chain Management, SCM systems, Healthcare

1 INTRODUCTION
The term “Supply Chain Management” (SCM) was introduced in 1982, and according to the Council
of Supply Chain Management Professionals, it is described as an integrating function with primary
responsibility for linking major business functions and business processes, within and across
companies, into a cohesive and high-performing business model. It includes the planning and
management of all activities involved in sourcing and procurement, conversion, and all logistics
management activities as well as manufacturing operations and it drives coordination of processes and
activities with and across marketing, sales, product design, finance and information technology. SCM
also includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third-party service providers, and customers.
The relative importance of SCM is on the rise, as current global trends are moving it to the forefront of
business strategy and company executives realize its role in defining how a business can and should
operate (Medows, 2011). Especially for the global healthcare sector, which is one the world’s largest
and fastest growing industries, comprising various sectors such as pharmaceutical, medical equipment
and supplies and healthcare services, the management of its supply chain is as complex and important
as the industry’s size and velocity. Healthcare, among providers and payers in public and private
settings, is a very costly industry sector. The Economist Intelligence Unit (EIU) estimates that global
health care spending as a percentage of Gross Domestic Product (GDP) will average 10.5 percent in
2014 (unchanged from 2013), with regional percentages of 17.4 percent in North America, 10.7

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percent in Western Europe, 8.0 percent in Latin America, 6.6 percent in Asia/Australasia, and 6.4
percent in the Middle East/Africa. Among developed nations, health is the second-largest category of
government spending, after social protection(social assistance, health/unemployment insurance)
(World Healthcare Outlook, 2013).
Currently, the healthcare sector worldwide is affected by major changes arising from legislative and
regulatory obstacles as well as globalization and increasing operating costs. In many healthcare
organizations, executives endeavor to lower costs of incoming supplies and keeping the quality
standards at the same time. However, it has been argued that a large number of healthcare
organizations ignore the total delivered costs (Kumar et al, 2008). Various other problems in the
healthcare services, such as communication, patient safety, waiting times, and integration have been
also identified by extant research (Meijboom,et al., 2011). Currently, in almost every country of the
world, improving hospital supply chain performance has been seen by all healthcare organizations as
an enabler for improving operational efficiency and reducing costs (Chen, 2013).
Efficient logistics are increasingly becoming more important, even critical, in the performance of the
healthcare sector. In a broader context, Supply Chain Management (SCM) systems are gaining an
increasing importance due to globalization and strong competitive pressures. They represent a
paradigm shift in conducting business in the modern era, where collaboration rather than conflict
seems more important and rewarding among the firms operating in a networking environment.
Therefore, it seems that researching and analyzing SCM systems in the healthcare industry is a
promising and fruitful area of research today having major practical consequences. Regulation and
reform, cost management, global perspectives and technology investment are all important issues to be
considered in the evaluation of the performance of the supply chains in the healthcare industry.

2 LITERATURE REVIEW ON HEALTHCARE ORGANIZATIONS AND SUPPLY CHAIN

In this section a literature review on the impact of supply chain management on the healthcare sector
will be presented. The healthcare sector is a very complex and vast environment. As a consequence, in
order for research to be effective, it needs to be multidisciplinary (Vries and Huijsman, 2011) and
focused on the critical issues concerning the performance of the healthcare organizations and the
provision of quality services.
The healthcare sector in its broader context does not only include clinics and hospitals but wholesale
distributors, pharmaceuticals manufacturers, medical supplies’ enterprises, pharmacies, government
regulatory agencies, private health insurance companies, technology providers and information
technology vendors. Logistics, purchasing and supply chain management considerations apply and are
important for the whole industry, which is interconnected and mutually dependent. For example,
Ritchie et al (2010) focus on the concept of reverse logistics and especially the recycling of
pharmaceutical stock for later re-use, discussing supply chain management practices in the National
Health Service. They argue that by developing effective reverse logistics processes in the NHS, there
have been significant financial and operational advantages. The evaluation and improvement of the
recycling and disposal of pharmaceutical products in the Manchester Royal Infirmary (MRI) is the
objective of another study (Kumar et al., 2008). According to this study, in many healthcare systems,
executives focus not on lowering the total delivered cost, but on efforts to lower the acquisition price
of supplies, which is only a part of the total cost. To achieve cost reductions, hospitals need to review
their processes and the associated costs eliminating non value-added activities.
Meijboom, et al. (2011) identified four major problem categories in the healthcare organizations:
communication, patient safety, waiting times, and integration. The findings are based on literature
concerning country comparisons of patient experiences. The authors argue that the most important
problems and the weakest links occur between providers; therefore supply chain management can be
used effectively to minimize problems. A number of issues, such the availability of medical records of
individual patients and information on provider performance, need to be considered and improved.

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Poor data quality was also found to be the case in healthcare environments in other studies (e.g.
Bhakoo and Chan, 2011). Information technology in combination with cross-functional and cross-
organisational integration in a supply chain perspective can be very effective on patient care
(Meijboom, et al., 2011).
However, the implementation of effective SCM practices is not always straightforward. Lack of top
management support and performance measurement systems, conflicting incentives in an organization,
limited education on the performance and the function of a supply chain, inconsistent relationships
with group purchasing organizations have been identified, among others, as serious barriers in
implementing effective supply chain management systems (McKone-Sweet et al., 2006).
Cost reduction is always a goal which cannot be easily achieved due to the nature of the healthcare
industry. Despite governmental pressures to cut costs, this is not easily achieved due to the behavior of
purchasing managers in selecting suppliers, and preferring quality products or services over low prices
(Lambert, et al., 2006). It is interesting to see in future studies if this finding holds true for both the
private and the public healthcare sectors. It has been suggested that there are significant differences
between the public and the private sector at least as procurement practices are concerned (Lian and
Laing, 2005). Public sector organisations almost exclusively rely on transactional-based approaches.
The restrictions imposed by public policy on procurement practices results in sub-optimal outcomes
(Lian and Laing, 2005). The global nature of suppliers is also a key issue when considering to
implement a healthcare supply chain (Bhakoo and Chan, 2011). Collaboration and trust between
partners are required for a successful SCM system implementation.
Another key issue for effective supply chain management is the inventory management (Chen, 2013).
Hospitals need to maintain an efficient inventory of drugs and medical supplies in order to meet
emergency demand, but this policy, although necessary, may raise costs. A hospital-supplier
integration through information technology is expected to lower inventory costs allowing at the same
time the hospital to be able to meet patients’ requirements. Technology issues, in addition to
management and business issues is also regarded important by other researchers in the context of
supply chains (Lillrank, et al., 2011). The decomposition of business processes into service events,
which can be managed as part of a supply chain, is finally another important factor to consider when
implementing supply chain management.
Last but not least, shortcomings of the healthcare supply chain have severe impact on human health.
Drug shortages due to supply chain problems as an example are constantly increasing, leading to
additional costs for hospitals worldwide and creating opportunities for counterfeiters threatening
patient safety. Even in US, which is not facing developing world challenges, drug shortages have
nearly tripled in the last decade (McKinsey & Company, 2013).

3 RESEARCH AGENDA

Based on the literature review it has become evident that the various supply chain models, theories and
practices have not been adequately researched in the healthcare environment. One major reason being
the late recognition of the value of supply chain management for the healthcare sector and the
according late adoption of modern supply chain practices as compared to other sectors such as the
consumer goods industry, where supply chain management has been prevalent for decades. As
healthcare is a vastly growing business segment worldwide and a key aspect to quality of life, and
since it has been proven that strong supply chain management is essential to effective delivery of
healthcare in the public as well as the private sector, this paper highlights the limited research related
to this area and proposes a research agenda encompassing the following areas. As there has been
indications that significant differences exist between the public and private sectors in healthcare
regarding specific supply chain management aspects, the research areas could distinguish their
findings between those two sectors in order to verify this assumption.
1) Examination of the Critical Success Factors (CSFs) for the implementation and execution of
Supply Chain Management in Healthcare

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There have been numerous academic publications on the CSFs regarding the SCM field in general.
A recent comprehensive study conducted on those publications by Syazwan and Abu Bakar (2014)
identified four major CSFs: collaborative partnership, information technology, top management
support and human resources. The relevance, reliability and importance of these CSFs in regards
to optimum supply management in the healthcare sector needs to be researched, barriers need to
be identified and best practices need to be recommended .
2) Identification of appropriate Supply Chain Performance metrics and standards in Healthcare
Various studies and reports have pointed out the significant benefits of SCM in the healthcare
sector, such as the potential cost savings, the better healthcare access and the improved patient
safety (McKinsey & Company, 2013). Efforts to develop performance measurement methods,
such as using the balanced scorecard approach, have been made from healthcare institutions and
agencies in order to be able to identify whether these benefits are achieved and to what extent
(Ontario Ministry of Finance, 2006). However, no widely adopted ways of measuring the
efficiency and effectiveness of healthcare SCM in a transparent way have evolved. Thus, there is a
need to research and define metrics and standards for assessing and improving healthcare SCM
performance as well as for benchmarking and comparison purposes across healthcare institutions.
3) Identification and categorization of risk factors of SCM in Healthcare and development of
appropriate response strategies
Methodologies for identifying, categorizing and managing risks related to the supply chain need to
be tailored to the healthcare sector. Health Supply Chain Managers need to be given the necessary
tools in order for them to be able to manage the risks associated with SCM. Especially since
disruptions in the health supply chain don’t only reflect in higher healthcare costs, but can have
serious impacts on people’s lives. Adequate research needs to address risks to patient safety that
can be impacted by SCM systems and policies in place, such as risks of medication errors and
counterfeit drugs (McKinsey & Company, 2012). Furthermore it needs to categorize and prioritize
those risks and examine the most effective prevention and response strategies.
4) Identification of roles most appropriate for the public and private sectors as part of the SCM in
healthcare
Health care supply chains, especially in developed countries, rely heavily on the private sector for
functions such as supply, distribution and provision of key auxiliary services even if the healthcare
system itself is largely controlled by the public sector. There are various roles to play related to
SCM in healthcare, such as product registration and quality oversight, market regulation,
procurement, health services networks, financing, physical distribution and others (MIT-Zaragoza
International Logistics Program, 2008). Research effort is needed in order to investigate which of
those areas are most appropriate for the public or for the private sector to play a role.

4 CONCLUSIONS

The healthcare industry is one of the most important industries in modern societies. In recent years we
have seen challenges arising from legislative and regulatory obstacles as well as spread of
globalization, cuts in state funding, severe competitive pressures and increasing operating costs. These
factors are forcing healthcare organizations worldwide to streamline their processes and lower their
costs without compromising the level of quality demanded by the users of the healthcare services. The
key for their success seems largely to lie in the optimal management of their supply chains.
Implementing SCM systems in order to assist in the realization of these tasks is not always easy, as
there are many barriers, especially organizational and people-related. The existence of limited
academic research related to these significant areas of healthcare SCM supports the necessity of future
research, especially regarding CSFs, performance metrics and standards, risk factors and response
strategies as well as private vs. public sector involvement.

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