Supply chains critical to well-being of healthcare systems

May 10, 2006

Spend just a few hours at your local hospital and you'll see why business researcher Vicki Smith-Daniels is convinced that analyzing and overhauling the health-care supply chain all the way back to the manufacturers can save millions upon millions of dollars while making patients safer.


Examples: operating rooms that run further behind as the day goes by, slowed because O.R. equipment trays are incomplete or the wrong pacemaker got delivered by the supplier; medication errors resulting from sloppy med cabinet stocking; backed-up emergency rooms crowded with sick people waiting while housekeeping and nursing staffers go floor to floor searching for supplies required to turn a patient room.


In a field where precision is literally a matter of life and death, it may seem strange, even a little frightening, that a crucial supportive function like inventory and purchasing often is a hit-or-miss process. But unlike other industries, where supply chains receive detailed attention, in the hospital/nursing home/clinic realm, no one's yet figured out how to cross the t's and dot the i's. There are, of course, very high performing health-care systems, while others are seeking lessons that have bolstered supply chains in other industries.


"Health care is different, as there are so many types of supply chains or models. And current methods for benchmarking assume that all supply chains are the same, and they are not," explains Smith-Daniels, a professor of supply chain management at the W. P. Carey School of Business. "Yet in health care, we are not using state-of-the-art research methods, best-of-breed, scientific approaches to study health-care supply chains in their entirety."


By "entirety," she means not just a hospital's internal ordering, stocking, inventory and distribution process, but also its external business partnering with the popular group-purchasing organizations (GPOs), distributors, exchanges, third party logistics providers, and manufacturers.



Regarding the big picture


Surprisingly, supply chain dollars gobble up an average 30 percent of all hospital spending, says Eugene Schneller, a professor in the School of Health Management and Policy and director of the Health Sector Supply Chain Research Consortium. Smith-Daniels is principal investigator on a groundbreaking health-care supply chain initiative. Accountancy Professor Stacey Whitecotton and Information Systems Professor Julie Smith David also play pivotal roles in the metrics benchmarking project, which is one of two major studies currently funded by the consortium.


To fix the problem, Smith-Daniels said, it's necessary to see the big picture in all its messy glory. Last year her team began meeting with members of the consortium's advisory board, comprising executives from GPOs and other health-care supply-chain players.


A directive emerged from the advisory board: find a way to benchmark (measure or judge based on a particular standard) how hospital supply chains work. Then catalog and compare the steps used by various hospitals and trading partners, with the end goal of describing what works best throughout the entire supply-chain system, recognizing that best practices will be influenced by what is being purchased and what capabilities firms in the supply chain can use. Ideally, hospitals and their trading partners across the country would then begin measuring and adopting these standardized supply-chain processes, comparing their supply-chain operations using the W. P. Carey benchmarking methodology. If it works, the new benchmarking approach could punch up health-care reform significantly.


The team's timing was right, in that few other university-based programs focus on health-care supply chains existed nationwide. Academic interest in this fertile research area is growing, though, as the W. P. Carey program generates increasing buzz. And barely a year after researchers began analyzing the extended hospital supply-chain process, other schools -- Ohio State University and the University of Minnesota among them -- are jumping on the bandwagon, Smith-Daniels noted.


Through consortium surveys and other data collection, Smith-Daniels' team quickly confirmed their suspicion that the overwhelming majority of hospital supply chain leaders focus on getting the best price -- period.


Another early confirmation was that hospitals use basically one research method, "gap analysis," (defined as assessing and documenting a company's actual performance with the best industry performance) to find out if they are getting the best price. And that, Smith-Daniels said, is just not getting the job done.


"The industry has been benchmarking whether or not they're getting the best price. But the current method used is gap analysis, and gap analysis does not tell the whole story. For health care to improve, benchmarking must move beyond price to measuring process improvement," she noted.



A survey of best practices


Currently, Smith-Daniels' team is getting ready to launch a large-scale survey of hospitals, GPOs, exchanges, and distributors to "measure and evaluate various practices and capabilities."


They expect to encounter a supply-chain spectrum that includes a range of approaches, including the partnership-run model (the distributor tracks the hospital's inventory and re-orders supplies, delivers them and physically stocks the shelves and cupboards), and the GPO model (the GPO manages most sourcing and order fulfillment functions, reviews new and existing products and technology, and advises the hospital which are best for its purposes).


At the other end of the spectrum are large, integrated hospital systems that self-contract with suppliers directly, do all their own inventory tracking, re-ordering, stocking and new-product/technology evaluation and selection, even sometimes running their own warehouses, Smith-Daniels said. Most common, though, are hybrid supply chains that incorporate lots of GPO partnering with some self-contracting -- relying on distributors for commodity type supplies, and third-party logistics providers for direct shipments from the manufacturer to the hospital.


Health care supply chains are complex, mostly due to the fact that many, many doctors are not on hospital staffs; instead, they contract their services to hospitals, sometimes through physician groups, or simply secure admitting privileges at one or more local facilities and remain self-employed. As independent contractors, these doctors are have frequently been free to choose their own equipment and vendors. So Doctor Jones may insist on using Company B's pacemaker, while Dr. Williams only uses Company C's pacemaker -- and on, and on, and on. Managing in this professionally dominated environment has been a real challenge of hospital supply-chain managers.



Supply-chain nightmares


Called "physician preference" ordering, it's a thorn in the side of supply-chain execs struggling to standardize operations. At a single hospital, doctors may order 15 different brands/types of sutures -- with the hundreds of combinations, sometimes only differentiated by thread length present. Multiply this scenario by the thousands of items a typical hospital stocks, and it's easy to see why physician preference presents a challenge to standardization.


Her biggest surprise so far has been that "very few" hospitals measure their supplier performance. Most hospitals lack even a procedure to monitor or measure how well their GPOs and distributors meet their contracted expectations. The team suspects that the lack of performance measurement being performed is due to the information technology available to the hospital team. Relying on various kinds of legacy systems that were developed to support either billing or inventory management, many hospitals face challenges with incompatible inventory master files, which make performance measurement difficult. As a result, GPOs and distributors may actually have better inventory data available about the hospital usage making them better prepared to provide measurement services to their clients. In effect, the suppliers are providing their own supplier performance statistics.


At the same time, GPOs and distributors who service the health-care industry rarely bother measuring customer satisfaction on a formal or systematic basis, Smith-Daniels added. The only area under scrutiny by either side of the fence is contract compliance, she said. "There also is a tremendous amount of measurement around price discrepancies on invoices. That's the thing they do measure -- contract compliance and price discrepancies."


Once the W. P. Carey team has recorded how hospitals and their trading partners measure their supply chain operations, "we will go back to the advisory board to present the foundation phase of building industry-wide benchmarking capability," she continued. "We'll say, 'here is what we think you should do.' The question becomes, does the industry want to use this methodology?"



Bottom line:


  • In the health care field, where precision is literally a matter of life and death, a crucial supportive function like inventory and purchasing often is a hit-or-miss process.
  • Supply-chain dollars consume 30 percent of all hospital spending.
  • Ideally, hospitals and their trading partners across the country would  begin measuring and adopting these standardized supply-chain processes, comparing their supply-chain operations using the benchmarking methodology.