Seven r's of supply chain management

Chapter 1: The Healthcare Supply Chain

Learning Objectives:

Outline and explain the concept of a supply chain and supply chain management.

Discuss and give examples of categories involved in the healthcare supply chain.

Explain the concept of the Value Chain.

Distinguish the functional areas of the Value Chain in the healthcare supply chain.

‘Follow the Cotton Ball’ – Relate the processing of cotton into a medical/surgical supply item to the functional areas of the healthcare supply chain.

Consider the benefits of improved healthcare supply chain management.

Introduction

The healthcare supply chain plays a large role in the production of healthcare services.

Providing the right item, at the right time, at the right place and with quality into healthcare providers’ able hands are the focus of the supply chain.

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Supply Chain Management (SCM)

Supply chain management is the integration of the flows of products, information, services and finances from the point of origin to the final customer.

Supply chain management is an important area of growth for healthcare organizations for several reasons; the most obvious being the cost associated with mismanagement of the supply chain.

The Supply Chain

A supply chain is an interconnected network of people and organizations that are involved in the production of products and services.

Every organization is part of a supply chain, whether they produce a product or a service.

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Logistics

Logistics management “ is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements."

In the healthcare sector logistics is often referred to by an older name for logistics: materials management.

Materials Management

Material management in healthcare is the procurement , storage, inventory control, quality control and operational management of supplies, pharmaceuticals, equipment and other items used in the delivery of patient care or the management of the patient care system.

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Figure 1-1: Simplistic View of the Healthcare Supply Chain

Logistics Vs. Supply Chain Management

SCM includes all of the 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.“

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Common Terminology Associated With Inbound Logistics

Sourcing is a component of supply chain management that is concerned with improvement and continual evaluation of the purchasing process.

Acquiring is the actual day to day purchasing of goods.

Moving is the component of a supply chain that deals with the transportation of products from their point of origin to where they are needed.

Storing includes the storage of materials used in patient care.

Dispensing in a hospital can be as simple as restocking supply cabinets on each floor or as complicated as dosing out pharmaceuticals and insuring they are administered to the correct patient at the correct time.

The Importance of Supply Chain in Healthcare

The healthcare supply chain plays a large – and usually hidden – role in the production and delivery of healthcare services.

The supply chain integrates with the healthcare provider to diagnose, treat and care for a patient

Patient safety, cost of care, quality of care and access to care are intimately connected to the healthcare supply chain.

Competitive Advantage

A competitive advantage is an attribute or process that out preforms competitors in a specific area.

In all industries, not just healthcare, three out of four chief executive officers consider their supply chains to be essential to gaining competitive advantage within their markets.” Vance Moore, CEO of Roi

Wal-Mart, for example, has provided several sustainable competitive advantages in:

Lower product costs;

Reduced inventory / inventory carrying costs;

Improved in-store selection; and

Competitive pricing for consumers

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Lower Cost Structure

The industry needs a lower cost structure even as they improve the quality of patient outcomes.

Typically, if the network has more than four hospitals, savings in procurement become a major opportunity.

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Direct and Indirect Costs

The complete cost of an item or procedure includes direct and indirect costs during the life of the product or service.

An example of direct cost is the list price of the item.

An example of an indirect cost is additional training for physicians or specialized storage needs of new medical devices or supply items

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Differences in Healthcare SCM Compared to other Industries

The consequences of failure are very different.

The healthcare industry faces unprecedented regulation

The healthcare industry’s supply chains have greater levels of variation

Many of the assets being utilized in the delivery of a service by a hospital are not directly controlled by the hospital.

Providers control a very small portion of the cost of products used in their facilities and have very little control or impact on the quality of supply service.

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Group Purchasing Organizations (GPOs)

In healthcare, purchasing is typically dependent on group purchasing organizations or GPOs.

A GPO is an entity that is formed by its members to leverage their combined purchasing power to obtain discounts from its vendors.

Forming a partnership with a supplier instead of working with a GPO to purchase goods directly is not common in healthcare.

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What Makes up the Supply Chain in Healthcare

Healthcare supply chain is comprised of several elements:

1. medical and surgical supplies (sutures, gauze, cotton balls and syringes, sometimes called ‘Med/Surg’);

2. pharmaceuticals (medicinal and biological treatments such as tablets, pills, injections and the like, called ‘pharma’);

3. equipment used in healthcare services; linen services (scrubs, lab coats, bed items, towels, etc…);

4. contracts for services (such as housekeeping);

5. facilities (such as maintenance of buildings and areas and gas services such as liquid oxygen).

Healthcare

Healthcare is the diagnosing, treating, caring and supporting patients that need services for illness, injury, disability, and for services focused at prevention of illness, injury and disability.

Healthcare, as a continuum, starts with self-care and prevention to primary care, secondary care, tertiary care, rehabilitative care, long term care to hospice care; each component of the continuum of care has a supply chain aspect associated with that level of appropriate care.

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Healthcare Treatments Grow in Complexity

As healthcare treatments increase in complexity, the associated costs of these products tend to increase.

As the cost of medical supplies and devices continues to increase, the total expense associated with the supply chain increases as well.

Currently, supply chain management is second only to labor in terms of expense for the average health system.

Quality of Care

Stents used in percutaneous coronary intervention (PCI) improve quality of care, but increase the costs associated with the procedure. Stents help protect against infections.

PCI procedures done with DES (Drug-eluting Stents) cost about $2,500 more per procedure than they would have if basic, older version stents were used

The improvement in the quality of care, is now accepted as the standard of care.

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Disruptions in the Supply Chain

The consequences of supply chain disruptions in healthcare organizations, be they weather related, or errors in judgment, can prove deadly for patients.

Due to the consequences associated with running out of items necessary for patient care, all hospitals are attempt to maintain a reserve level of important items, called safety stock, in storage.

This can add additional administrative costs to the delivery of care, thus resulting in lower monies the company can spend elsewhere.

Healthcare Lagging Behind Industry

Healthcare organizations, individually and as an industry, are lagging behind other industries in the areas of supply chain structure, coordination, management, and value creation.

Industry leaders understand a simple reality: funds, information, services and products are closely linked together.

It is imperative for healthcare, using a team approach, to make improvements to the supply chain operations, management and information systems that drive their care delivery processes by providing the ‘technology of care’ to providers of care.

Healthcare Supply Chain Disparities

Multiple systems, multiple processes that lack cohesiveness and uniformity

High distributor fees

Service quality failures & service frequency did not match need

Wholesalers lead pharmacy processes

Inconsistent management processes

Limited usable data

Many intermediaries or middle-men

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Value Chain

Any discussion of logistics, transportation or supply chain management would be incomplete without discussing the importance of creating value for the ultimate customer.

Value is generated through a chain of actions or processes.

The central idea is that a chain of specific activities, when done correctly, can add more value to an organization than the cost of each activity individually.

The value added to the organization is in the form of competitive advantage. Due to the potential to generate a competitive advantage, the value chain can be used as a tool for strategic planning and process improvement.

Figure 1-3: Value Chain by Michael Porter

Reprinted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from COMPETITIVE ADVANTAGE OF CREATING AND SUSTAINING SUPERIOR PERFORMANCE by Michael E. Porter. Copyright © 1985 by Michael E. Porter. All rights reserved.

Primary and Support Activities in the Value Chain

The value chain categorizes activities as primary and support.

The primary activities include Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales, and Service.

The support activities include Infrastructure, Human Resource Management, Technology Development, and Procurement.

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Support Activities: Infrastructure Related and Not related to Infrastructure

Support activities are further classified into activities that are infrastructure related and those not related to infrastructure.

The infrastructure related activities are human resource management and infrastructure.

Procurement is the planning to purchase and purchasing of components required to perform a service or create a product; this is often referred to as ‘strategic sourcing’ in other industries.

Technology management is playing an ever increasing role in adding value to organizations. Value is added through technology primarily by supporting other business functions and making them more efficient.

Primary Activities: Market or Product

Primary activities can be related to either the market or product. Product related activities are what enable the organization to add value to products and services.

The product related activities are service, operations, and inbound logistics.

The remaining two primary activities: outbound logistics, marketing and sales, are considered to be market related.

Market related activities are what organizations do to transfer goods and services to customers.

Outbound logistics focuses on order fulfillment to the customer once a service has been ordered or a product purchased.

Value Chain Analysis

Value chain analysis can be used to describe the activities internal and external to an organization and relate them to the competitive strengths of the organization.

This is done through assessing the “value added” by a particular activity.

The Seven Rs

Instituting data standards for information systems will enable hospitals to actively implement and measure success of “the Seven R’s.”

Right product

Right quantity

Right condition

Right place

Right time

Right customer / patient

Right price

Four Types of Items Used in Healthcare

Commodities- items that are easily substituted with another brand or have different alternatives to acquire (E.g.- printer paper)

clinical commodities- commodities used for patient care (E.g.- cotton balls)

clinical staff preference items-include things such as gloves or scalpels

physician preference items (PPI)- usually high volume / high dollar items

Packaging String

A packaging string is a common and standard series of packaging of supply items.

The American National Standards Institute (ANSI) sets packaging and volumetric standards.

An example of a packaging string would be BOX/10 VIAL/10 ML. This string indicates that there are 10 milliliters (MLs) in a VIAL and 10 VIALS in a BOX.

http://webstore.ansi.org/?source=google&adgroup=ansi_standards&gclid=CLeojpDln8ECFRJp7Aod2CcAyw, Retrieved October 9, 2014.

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Volumetric Tables

Volumetric tables basically count the total volume of the item in its package. Such as 1 square foot, .25 square feet.

Knowing the size of the item or product is important for storage and space considerations.

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‘Follow the Cotton Ball’ Theme

For purposes of learning and illustration, the ‘Follow the Cotton Ball’ theme will be utilized in the first two parts of the textbook.

The cotton ball is commonly used in healthcare facilities and seems to be a simple product.

However, the transformation from raw cotton fibers on the plant to finished product is a multistep process that involves much different business

Can you describe the cotton ball as it moves through the value chain as part of the supply chain?

Supply Chain Cost in United States

It is estimated that in the United States supply chain costs in healthcare are typically around 40-45% of the operating cost of the organization and the associated costs are likely to continue to increase.

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Rapid Changes

From the Logistics Viewpoints, “the health care industry in the United States is undergoing transformation driven by the Affordable Care Act (Obamacare) and the increasing impact of consumerism.

Now reimbursements are not only going down, they are becoming incentive based.

If a hospital does a procedure and the patient is released but then has to be readmitted, the provider takes a major hit on what they are paid.

Integrated Delivery Systems (IDS)

Historically, many integrated delivery networks ordered from large medical supply distributors like Cardinal Health or Owens & Minor.

Now larger healthcare chains are building warehouses, automating them, ordering direct from the manufacturers, and eliminating the middle man markup.”

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Hospital Value Based Purchasing program (VBP)

The healthcare industry is highly regulated by federal, state and local governments because of the consequences of poor performance.

VBP is designed to incentivize hospitals based on the quality of care with increased reimbursements and penalizing those hospitals who under preform with lower payments and reimbursements.

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Summary

In this chapter the healthcare supply chain was introduced as a vital component of the healthcare value chain concept in providing the ‘technology of care’ in the delivery of healthcare services.

Providing the right item, at the right time, at the right place and with quality into healthcare providers’ able hands are the focus of the supply chain.

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Discussion Questions

Outline and explain the concept of a supply chain.

Discuss and give examples of categories of items involved and functions provided by the healthcare supply chain.

Relate, discuss and provide an example where the Value Chain integrates with healthcare supply chain operations and management.

Distinguish the functional areas of the Value Chain in the healthcare supply chain.

Relate the processing of cotton into a medical/surgical supply item with the functional areas of the healthcare supply chain.

Evaluate the benefits of improved healthcare supply chain operations and management in terms of a healthcare organization, a patient, a community and from the health industry standpoints.

Exercises

Outline the Healthcare Value Chain and identify important supply chain functions in the delivery of healthcare services.

Discuss healthcare supply chain item categories, provide examples and identify stakeholders who would have significant preferences for those categorical items.

Relate the sequence of the healthcare supply chain to sourcing, acquiring, moving, storing and dispensing cotton balls.

Distinguish the key concerns and incentives for manufacturers, distributors and providers of care in sourcing and acquiring healthcare supply chain items.

Relate costs of supply chain to potential improvements in efficiency, effectiveness and efficacy in the healthcare supply chain with examples of industry-wide change.

Evaluate the ‘value’ of the healthcare supply chain to the healthcare delivery process.

Journal Items

Define:

Supply Chain:

Item Master:

Vendor Master:

Transaction History File:

Packaging String:

Unit of Measure:

Volumetric Table:

Answer the following questions with one (1) to three (3) sentences:

Answer: What are the functions of the healthcare supply chain?

Answer: What is similar and what is different between the healthcare supply chain and other industry supply chains?

Search: Search items may give you great assistance in understanding the healthcare supply chain, provide the website/URL and provide a one paragraph summary of what you found.

Packaging String (hint: ANSI Standards):

Volumetric Tables (hint: ANSI Standards):