Imagine: You are in the operating room on the table having surgery. The surgeon just opened you up and as she turns to the instrument table to reach for the pacemaker required for your procedure, she realizes there is no pacemaker to be found. It turns out the hospital employee in charge of managing inventory did not order a sufficient number of pacemakers because he eyeballed the required inventory, and there are no pacemakers left in stock.
Of course this is an extreme example, and the consequences in this scenario are drastic. However, it reinforces the point that inventory management in hospitals is incredibly important. As such, the bias is to over purchase inventory to avoid the aforementioned situation, which leads to increased inventory holding costs. Hospitals currently spend approximately 45% of their operating budgets on supplies and materials, and industry experts expect that hospitals will spend more on supply chain management than labor costs in the near future1.
The impact of supply chain digitalization in any industry is hard to ignore, but the stakes in healthcare are higher. With increasing pressures from insurers and looming uncertainty on healthcare policy, cost containment has never been more important.
Investment in electronic inventory tracking that transfers data on medical supplies allows hospitals to automate the inventory replenishment process when items are used or expire. This differs greatly from current practices where inventory supplies are counted or eyeballed, frequently resulting in either a surplus or deficiency of inventory.
Recognizing the opportunity for increased operational efficiency, BJC Healthcare, one of the nation’s largest nonprofit healthcare organizations located in the Midwest, recently made an investment in technology that attaches radio frequency identification (“RFID”) tags to medical devices. This investment enabled the automation of inventory replenishment and allowed for in-network hospitals to lend supplies to one another, which drove BJC to realize a 23% reduction in required inventory on hand. In addition to cost savings related to inventory holding costs, BJC also realized cost savings from expired product avoidance and decreased labor costs of nurses and clinicians spending time on inventory management. BJC estimates that it will recover the cost of its initial investment, through cost savings resulting from the new procurement program, within a period of 18 months2. BJC was named the ‘Supply Chainnovator’ national healthcare provider of the year award in 2015 by Gartner, a global research and advisory company, for the company’s efforts in supply chain digitalization3.
A major benefit of digitalizing the supply chain is that it makes patient cost-to-serve easier to calculate. This cost-to-serve knowledge is critical to managing healthcare costs, especially in an environment with shrinking reimbursements from insurers3. Also, the potential of the industry moving away from a fee for each service reimbursement system to being paid based on the quality of overall care received will only increase the focus on costs.
The simplicity of this concept, which is common practice in other industries such as retail, could revolutionize the healthcare industry and provide substantial cost reductions. Industry experts estimate that supply chain management practices in healthcare lag other industries such as retail and manufacturing by approximately 10 years1. One of the major hurdles to adopt supply chain digitalization is the decentralized decision-making capacity in hospitals with multiple parties involved in current inventory management practices. This issue is perpetuated by a disconnect between the individuals making the purchasing decisions (doctors, clinicians, etc.) and those actually doing the buying (staff, administrators). Purchasing inventory is only further complicated by the current business environment in which larger healthcare networks are acquiring smaller providers, and a single network is operating on multiple inventory management and enterprise resource planning systems.2
While consolidation in the industry can complicate acquirers’ inventory systems, it will also provide more opportunity to centralize inventory management practices and achieve operational efficiencies across provider and supplier networks. Furthermore, those providers who are earlier to adopt will see a longer period of competitive advantage before digitalization becomes the industry standard. For example, medical professionals’ time spent manually monitoring inventory levels can be refocused to providing patients with a higher quality of care and researching cures for diseases.
In an industry where technological advancements have been made at a glacial pace, how long will it take for providers and suppliers to adopt this model? If supply chain digitalization becomes the norm, will lower supply chain costs drive lower reimbursement levels?
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1 Daniel Chen, David Preston, Weidong Xia, (2013) “Enhancing hospital supply chain performance: A relational view and empirical test,” Journal of Operations Management, Vol. 31, Issue: 6, pages 391-408, http://www.sciencedirect.com/science/article/pii/S0272696313000624, accessed November 2017.
2 Loretto Chao, “Hospitals Take High-Tech Approach to Supply Chain”, Wall Street Journal, October 21, 2015. https://www.wsj.com/articles/hospitals-take-high-tech-approach-to-supply-chain-1445353371.
3 BJC Healthcare, “BJC HealthCare Recognized for Innovation in Supply Chain Management”, May 2015, https://www.bjc.org/About-Us/Newsroom/BJC-News/ArtMID/897/ArticleID/144/BJC-HealthCare-Recognized-for-Innovation-in-Supply-Chain-Management.
4 Bruce Johnson, “Future of the healthcare supply chain”, January 18, 2015. http://www.supplychaindigital.com/procurement/future-healthcare-supply-chain.