The hospital supply chain - a healthy state of affairs

A new study reveals that responsive, flexible hospital supply chains are commonplace rather than exceptional. That’s good news – but what challenges still remain?

Vast, highly complex and in a state of perpetual change, the healthcare industry is both recipient and dispenser of significant financial sums. In Flanders, hospitals alone account for some 7bn euro of annual spend. And while clinical quality and patient safety have always been paramount, today, managers increasingly face challenges brought about by rising costs (such as staff and R&D) and falling public investment. A degree of consolidation may have helped, by way of pooled resources and systems – but for many hospitals, this barely scratches the surface.

Better supply chain management may hold the key; expenditure on supplies may represent as much as 20 per cent or more of a hospital’s operational costs. But while organisations in other sectors have long recognised the impact of the supply chain on their business costs and capacity for efficient service delivery, the healthcare industry has been slow to catch on.

Yet there is ample room for improvement, particularly with regard to inbound supply – simply getting products and services to hospitals in the first place. Focusing on producers, logistic service providers and other service providers, recent research carried out by Vlerick indicates a number of emerging trends and thinking around optimisation of the supply chain – one that has plenty of scope for shaping by key players in the chain as it matures, drawing on specialist knowledge and technology.

From Start to Finish

The classic supply chain encompasses suppliers, manufacturers, distributors, retailers and customers, with materials, information flowing in both directions. Effective management of the external supply chain typically covers every facet of procurement activity – such as supplier selection, contract negotiation, planning and implementation, distribution and delivery – while taking factors such as risk, reward into account. Outcomes (which might mean profitability and successful customer service to suppliers, or patient welfare, service delivery and affordability to hospitals) are other important factors.

Supply chains typically deal with the flow of products, information and finance. However, within healthcare, information and financial flows will often be greater drivers of supply chain design than might be the case in, say, manufacturing or other industry sectors. For instance, Belgium’s system of unique track-and-trace codes on drugs and implants is a critical part of a wider patient safety programme, while hospitals only qualify for government reimbursements once they have demonstrated high administrative standards, especially IT systems.

A typical healthcare supply chain structure might comprise:

  • Supplier – including manufacture
  • Intermediary – including storage and logistics
  • Hospital – purchasing functions, individual departments and, ultimately, patients
In most cases, we found that hospitals purchase directly from suppliers, turning to intermediaries for logistics reasons. Fewer links in the chain may mean less chance for error; however, each link might easily consist of smaller sub-links representing both risk and cost.

Who’s Who? A Network of Networks…

A number of key stakeholders and actions play significant roles in the overall healthcare value chain, with varying degrees of supply chain maturity.

Hospitals are characterised by low maturity levels, historically demanding short lead times (typically just one day) but high levels of service – and with individual physicians frequently making one-off purchases personally (and claiming back afterwards). There is no standardisation amongst IT systems, creating a mix of different electronic prescription, ordering and distribution systems. And because hospitals – unlike retail pharmacies – order direct from producers, they have far greater volumes of individual suppliers to contend with.

Product suppliers fall into three broad categories:

  • Pharmaceuticals suppliers, carrying high cost pressures and featuring massive product complexity (to put into perspective: the top 10 global pharmaceutical companies represent annual sales of 185bn euro, yet Flanders’ 10 largest hospitals generate only 2.6bn euro annually)
  • Medical items suppliers, dealing with a vast number of stock-keeping units (SKUs) and carrying the main costs (such as delivery and consignment)
  • Office and hotel product and service suppliers, representing a less critical link in the chain but nevertheless committed to high delivery speed and service standards

Hospitals and healthcare suppliers preoccupied with cutting costs are faced with a number of key concerns:

  • Centralisation of purchasing within hospitals – the holding of inventory by facility departments and pharmacies traditionally amounts to extra links in the supply chain; centralisation aims to reduce the link and allow greater collaboration and more efficient IT systems (although greater professionalisation and negotiation power are not always balanced out, as links may simply be moved, rather than cancelled out)
  • Outsourcing – supply chains may be more efficiently and inexpensively sub contracted out for certain non-clinical services (such as linen, food, or cleaning)
  • Safety stock – stakeholders acknowledge excessive stock levels (as much as 50 days in some cases) throughout the supply chain, especially considering the short lead times and order frequencies; greater efficiency could be achieved through, for instance, tactical strategies for low safety stock

Getting the Right Products in Place – and on Time

Hospitals have thousands of products to source. Therefore they need a classification system that supports the sourcing strategy. For hospitals, products in the supply chain might typically fall into a number of distinct categories:
  • Pharmaceuticals (drugs)
  • Medical items (sterile and non-sterile; disposable and re-usable)
  • Office supplies & hotel facilities (food, waste, linen, stationery, etc.)
  • Investment goods (non-operational/capital, such as machinery or heavy equipment)

These might be further defined in terms of cost, criticality and other criteria. For instance, bed linen may be less critical and represent a low cost to the hospital; painkillers may be urgently required but inexpensive; while specialist cancer drugs may be both urgent and costly.

This product classification will dictate supply chain design. For example, drugs and medical equipment might be ordered directly from the manufacturers’ own stock, often at short notice and in unpredictable quantities, requiring storage relatively nearby. Office equipment, on the other hand, will be subject to a more regular supply chain, providing greater flexibility in responding to emergencies.

What can go Wrong… will go Wrong? Not Necessarily…

Ultimately, even the most meticulously planned supply chains can be vulnerable to external factors beyond reasonable control. Product characteristics and consumption behaviour all play a role in determining the supply chain’s effectiveness and impact – for instance, cost and criticality are clearly contributing factors. Yet, so might be how swiftly a product becomes obsolete as a result of new, better products, or how available a certain drug might be.

Similarly, the quantity and regularity with which end users in hospitals prefer (or are forced) to order certain products or materials can also have an impact. Even legislation might play a part when dealing with pharmaceuticals and other controlled substances, especially in a market where mitigation of risk and the threat of litigation are never far from the minds of management. But the good news is that there hardly appears to be a sense of ‘waiting to pounce’ between links in the chain – it’s perhaps one of the more heartening aspects of our study that shows that people recognise the need to work together to optimise supply chain efficiency.

The hospital supply chain model has become more refined and sophisticated in recent years – and yes, there is more to do. Demanding customers in the business of healthcare have little room for manoeuvre and in many senses zero tolerance of errors. Considering the stakes, the balancing act between cost and service may seem precarious – yet demonstration of a sure-footed ability to strike that balance has become an accepted ‘given’ in today’s market – it’s no longer regarded as something that’s simply a ‘nice-to-have’.


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