In healthcare, the supply chain stretches from the components and materials used by device manufacturers and the basic chemicals bought by pharmaceutical manufacturers to the patient. Depending on where you stand on that continuum, the healthcare supply chain has different functions. Generally, healthcare supply chain management refers to the procurement and distribution of services and products as they move from a healthcare organization’s receiving dock right up to the patient.
Healthcare supply chain management is very complicated due to a lack of automation, increasing regulatory requirements, inaccurate data reporting, poor product standardization, etc. In this comprehensive guide, we discuss the complexities of healthcare supply chain management, including its current state, health system challenges, healthcare supply chain trends, the importance of value-based procurement, and changes organizations need to implement to make their supply chains more resilient.
Current State of Healthcare Supply Chain Management
According to recent global healthcare supply chain market analysis, the global healthcare supply chain management market is projected to grow at a CAGR of 7.8% from 2020 to 2025, growing from 2.2 billion to 3.3 billion during the global forecast period. The main drivers of the market’s growth include:
- Increased adoption of supply chain management software
- Emergence of cloud-based solutions
- Reduction in operational costs
- Adoption of GS1 standards
In 2018, Gartner named Cleveland Clinic as the leading healthcare supply chain. Gartner’s rankings recognize organizations across the healthcare value chain and showcase only the supply chain leaders that demonstrate outstanding results in improving life through innovation and sustainable costs.
The healthcare supply chain is associated with pharmaceutical products and is essential in providing adequate supplies of medical products for pharmacies and ensuring the highest possible standards of care for patients. Compared to other healthcare expenditures, the supply accounts for approximately 25-30% of operational costs in the healthcare system. That’s why the supply chain must be managed effectively to ensure that cost and service objectives are met. At the distribution element, hospitals are facing various issues (especially from the wholesaler to the hospital):
- Profit margins. Pharmaceutical products have a high value per unit, but despite that, operating margins are small (particularly in the wholesaler sector). The controlled over-pricing held by manufacturers, retailers, and hospitals is one cause of this.
- Product life cycle. When the active ingredient is patented, it may take years to develop the product into something that can hit the market. When the patent expires, companies may reduce the product price, or alternative products may enter the market. Tech advancements are shortening product life cycles, which creates more pressures on today’s distribution channels.
- Lack of supply chain education. Market research shows that healthcare employees lack awareness of the concept of SCM. That means that managers aren’t properly educated and equipped to control the supply of medical products and devices.
- Forecasting. Predicting the exact demand for medical products is difficult, and the availability of accurate data on consumption is one of the issues that healthcare SCM faces. What creates further uncertainties are the preference of clinicians and the lack of standard nomenclature for healthcare products.
One of the potential solutions for addressing these healthcare supply chain management issues is supply chain integration. The supply chain strategy of healthcare organizations should be to maximize patient care. Their supply chain can enable this strategy by:
- Maximizing patient care space
- Minimizing storage space
- Minimizing inventory (non-liquid assets)
- Ensuring product availability
- Reducing costs for all medical staff and material handling time
Challenges and Changes in the Healthcare Supply Chain
Healthcare cannot be stocked like it is a traditional product, meaning that it’s not based on supply and demand. That makes a hospital’s supply chain very unique and different from a business supply chain. The highly-regulated nature of healthcare and the changing expectations of consumers (patients) are driving change and creating unique challenges. The supply chain management (with its strategic role within the quality and affordability of patient care and the cost structure of healthcare institutions) is at the heart of those changes. The challenges and changes that the healthcare supply chain faces include:
- Data collection and value analysis
Understanding exactly how much it costs to deliver health care has become more critical in a payment environment that reimburses for value. Costing based on inaccurate and uncoordinated data will become perilous. According to this 2016 survey, almost 70% of healthcare leaders said that their supply chain is the most valuable source of actionable data – even more than population health information and electronic health records.
Accurately capturing and analyzing data along the supply chain can help provide better information on product needs, stabilize inventory, improve risk management strategies, reduce waste, and bring costs down. But since many steps within the supply chain are still manual, there is a lack of data gathering, modeling, and reporting. A surprisingly high number of hospitals are still manually counting inventory and have never implemented an automated system to track inventory in real time. Those without automated resource tracking and planning systems were also less likely to implement other available supply chain technologies, such as CPOE (Computerized Provider Order Entry) and RFID (Radio Frequency Identification) systems, which can bring up the efficiency of SCM and help reduce costs even further.
Besides providing greater efficiency and invaluable data (which help reduce costs), a technology-based supply chain can also help improve patient outcomes because it supports a higher level of patient care.
- Reimbursement and costs
After staff expenses, SCM costs comes as the second-largest expense for hospitals and healthcare systems. Healthcare supply chain cost reductions and productivity improvements are among the top priorities of healthcare administrators and executives. The Affordable Care Act implemented the value-based reimbursement model to incentivize healthcare providers to coordinate patient care with a pay-for-value model. This model is based on results and performance rather than the traditional pay-for-service model (where patients need to pay upfront). Supply chain plays a significant role in the delivery of value-based care, especially in the area of cost control.
Due to the value-based model, more leaders in healthcare are looking for ways to provide a better patient experience while reigning in cost – and they’re looking at the healthcare supply chain since it’s the biggest area for savings opportunities. They can start by planning their budgets around total supply costs, which include the total cost of getting medical products from manufacturers or distributors to the hospital/office. These costs include insurance, logistics costs, taxes, and other fees. For some healthcare organizations, this assessment has led to cutting costs by bypassing vendors (e.g., becoming their own warehousers) or working with a third-party logistics provider.
- Procedure processes and physician preferences
Healthcare providers themselves can often be one of the biggest factors in supply chain costs. Different healthcare professionals, surgeons, and physicians have their own preferences for the tools and products they use (as well as how they use them during a procedure). Many organizations allow this to be the decisive factor in many purchase decisions, even though it’s not the most cost-efficient method. Failure to update practitioners’ preferences (once vendors, inventory, or those preferences change) and lack of uniformity can lead to excess products wasted, inefficient use of supplies, and a black hole of costs.
Many healthcare clinicians and staff may resist changing their preferred supplies and products, demonstrating how their preferences can be tied to both cost and patient outcomes. Certain estimates indicate that preference medical items may account for over 60% of supply chain spending. Therefore, moving inventory management away from clinician preferences and integrating those steps into the supply chain will allow the supply chain team to detect process repetitions and inventory gaps and come up with a more efficient solution.
Ways of Reducing Cost in the Healthcare SCM
Healthcare organizations that find themselves going over their budget limitations should closely examine their supply chain for efficiency and make appropriate changes to reduce spending. When analyzing supply chain processes, you should look at several key things:
- Reducing waste
Wasted supplies drive up spending, and they can result from poor supply management. The best SCM process allows for supply levels and products used to be tracked in real time. Being able to order supplies when they are needed will reduce the probability of expired supplies showing up due to lack of inventory visibility. Just by analyzing, strategically planning, and controlling the use and purchase of supplies, hospitals can significantly reduce supply chain expenses by up to 15%.
- Standardizing inventory
The most cost-effective and efficient processes are usually the simplest ones. In a healthcare supply chain, that is particularly true for standardizing inventory.
For example, you can save thousands of dollars by deciding to buy a certain type of gauze across the board because you are buying more from a single supplier (which usually qualifies for a discount). On the other hand, ordering several types of gauze from different suppliers results in fewer cost savings and smaller orders. That same principle can be applied to hospitals and medical products.
- Automating manual processes
A rise in costs can result from human error, such as an error in data collection, ordering, and other supply chain processes. By automating manual processes, hospitals will reduce the potential for human error and supply chain expenses. There are many software supply chain management solutions that can help capture data accurately and manage it throughout the supply process easily. If you decide to team up with a third-party logistics partner, they can provide valuable software to automate your manual processes.
- Accurate data capture
Accurate data capture is an integral part of healthcare supply chain management. Hospitals and healthcare organizations should be aware of all medical devices and products used (both on the facility level and during each patient procedure). Then, they can use this data to anticipate supply costs and needs using monthly averages. They can also enable the use of that same data in other locations, including EHRs (electronic health records). Thanks to accurate data capture, hospitals will have a foundation for determining where and how costs can be lowered. For example, they can identify items bought off-contract and integrate them into orders from current contracted suppliers.
- Joining GPOs (Group Purchasing Organizations)
Another great way to save on supply costs and improve your supply chain management process is by joining a group purchasing organization. These organizations can help you generate up to 18% in cost savings for healthcare supply chains. What a GPO does is it gives more buying power to a healthcare organization because they can negotiate lower costs in the same way that discounts are applied to bulk orders. GPOs can also create healthy competition in the healthcare supply marketplace and provide more options for purchasing supplies, which also helps with keeping costs low. Vendor management and category management are both ways to initiate collaboration in sourcing and purchasing medical products.
The Chief Financial Officer (CFO) is one of the most important executives in a healthcare organization because they are responsible for its financial health and sustainability. As part of the CFOs role to achieve financial solvency, they must work with other types of leadership from facilities and supply chain (such as the Chief Supply Chain Officer) to compliance to help them achieve their objectives while keeping the budget in check. To be able to achieve that, CFOs must use analysis and modeling to come up with actionable solutions that are measurable and driven by data.
Important SCM Changes to Make Post-COVID-19
The global outbreak of the COVID-19 virus has stressed global healthcare supply chains. It changed everyone’s perspective, regardless of the industry, but the effect was particularly strong in healthcare because it has exposed many vulnerabilities in the already-complex supply chain. For example, medical device and pharmaceutical buyers’ heavy reliance on global sourcing lowers costs, but it has created major supply chain disruptions during the pandemic. As hospitals and healthcare organizations have struggled to maintain the right levels of medications, COVID-19 testing kits, ventilators, and PPE, hospital and medical center executives have shifted their priorities towards optimizing and benchmarking supply chain operations. An important global impact of the coronavirus pandemic is a renewed focus on supply chain visibility from all levels of governments and healthcare providers.
Hospitals cannot control all the external factors that impact the healthcare supply chain. For example, the COVID-19 pandemic was a severe supply chain disruption-inducing occurrence that nobody had expected to happen. And what if the Strategic National Stockpile doesn’t have enough supplies on hand? Hospitals and other healthcare providers can make changes to their supply change management to make sure they’re better prepared for the next big disruption.
They can get started by:
- Using demand forecasting technology. Again, with the right incident and peak demand forecasting tools, they will be able to plan for supply chain disruptions, as well as manage them better and recover more quickly from them. The supply chain operations have to be adjusted to align with increased patient needs (such as those in critical care).
- Automate and update current systems. Making a transition from manual to automated processes is imperative for tracking and analyzing data more accurately and efficiently. In case of any disruptions, hospitals will be able to respond faster to shortages and make better-informed uses of limited resources.
- Develop contingency plans with increased duration and scope. The coronavirus was novel in many ways, including that hospitals need to have stronger contingency plans. What should be included in these plans are sourcing plans for secondary and tertiary resources. Hospitals should also begin to form coalitions with other healthcare organizations to enhance resource-sharing when possible and necessary.
The healthcare industry is interdependent, meaning that only one part cannot attain efficiency while leaving others behind. That is why these strategies for SCM improvement are proving to be successful. There is little doubt that increasing the effectiveness and efficiency of healthcare supply chain management can drastically reduce costs. Supply chain leaders have to find ways to adapt to the changing healthcare environment in order to lead their organizations forwards. They should continuously look ahead at what providers and patients need to ensure the best possible quality of care.
In case you need assistance with logistics planning and optimizing your healthcare supply chain management, Redbird Logistics Services is a third-party supply chain and logistics solutions partner that can help you maximize your productivity and efficiency. As an expert in the field, we continue to identify emerging trends, technologies, and apply best practices, cutting-edge solutions, and forward-thinking ideas to optimize our clients’ supply chains. For more information, reach out to us today!