Supply Chain Management in Hospitals:

A hospital, or any business for that matter, cannot operate in isolation. Right from
the procurement of raw material to providing the service and finally to the
concluding transaction where service/ goods delivery is completed and exchange of
money takes place, it is a chain of interconnected businesses and business
processes. Every time a requirement is communicated, order is placed and
inventory is stocked, there is a potential opportunity of value addition, waste
reduction and process standardization.

Supply Chain Management (SCM) is the process of planning, implementing and

controlling the operations of the supply chain with the purpose of satisfying the
customer requirements as efficiently as possible with a continuous eye on operating
cost reduction. SCM encompasses the planning and management of all activities
involved in sourcing and procurement, conversion and all logistics management
activities.1

(Refer: http://www.supplychainmanagement.in/scm/ )

The “keeper” of the supply chain has two main objectives. The first is making sure
the product is always available when it is needed. The second is to ensure the first
objective is fulfilled in the most cost effective way.

According to the 2008 Health Care Executive Survey on Supply Chain Management,
Clinical Performance and Patient Safety is the No. 1 challenge faced by the hospitals
and all the executives agrees that the challenge No.2 was the overall operating
costs possible. To achieve this twin objective, a balance should be hit with At-par
levels, inventory turns ratio, re-order point and restocking playing the decisive role.

Hospitals provide a unique problem in establishing and maintaining a supply chain

process. Not only, in most cases, individual departments in a hospital act as
individual buying centers but also there exist a mind boggling number of
intermediaries.

The challenge lies in efficiently integrating suppliers, logistics, different hospital

departments (outpatient, emergency ward, radiology, pathology, supplies, stores
and purchase) to ensure optimum utilization of resources. The ultimate aim is to
transform a sick patient to a healthy person at a reasonable cost, in the shortest
possible time and with superior patient satisfaction.

Consolidation of demands from all the departments and proper flow of information
between the departments and suppliers can remove a lot of bottlenecks and result
in reduced cost of all the parties involved.

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Most of the times, orders are placed to the suppliers on an “As and When required
basis”. The problem of this approach is twofold:

I. There is a higher chance of stock-outs from the supplier’s end.

II. The transport and ordering cost incurred is also more, considering the
fragmented nature of the orders placed.

This approach also prevents the hospitals from entering into any long term
contracts with drug distributors. Hence, they are denied of optimal bulk order
discounts from the drug distributor/ manufacturers. From a criticality point of view,
this has an even larger dimension attached: the hospitals lose out the preferential/
priority supplies commitments in case there is a shortage of some life saving drugs.
So in all, there is incurring of greater cost and still running a chance of lower
customer service being offered.

From materials management point of view, having a centralized database and

standardized inventory control systems in place is of immense importance. As
observed in the financial reports of one of the India’s greatest hospital chains, the
expense towards materials and supplies amount to more than 45% of the total
revenue generated 2. (Reference:
http://www.apollohospitals.com/images/pdf/jun09.pdf)

According to a research published in a leading medicine journal, high volume drugs

like antibiotics and anti-ulcer drugs constitute more than 70% of the total drug
consumption in a typical hospital. Expensive, restricted drugs account for a mere
5% of general usage. This suggests that a proper inventory control mechanism and
order placing procedure can be brought in place for these high volume drugs.
Systematic measurement of drug utilization patterns is the key element of drug cost
control strategies.

Continuing the above point further, research also proves that majority of the cost is
borne by specialized departments like Oncology, Cardiology etc. It is unlikely that
these specialized departments will have a high degree of variation in their
prescribing practice. In contrast, routine drugs like Claforan/ Cefotaxime are used
by a large number of hospital’s internal departments and practitioners including
specialists, surgeons, gynecologists and surgeons for different clinical conditions. In
such a case where the use spans different departments and wards, subject to
individual practice and policy, the usage experiences greater variation of demand.
The volume of usage and variability in demand are mutually exclusive. Some
medicines like ampicillin, tetracycline etc, are not only prescribed by many
departments but also their volume of usage is much higher. This presents a good
case where ABC method of inventory classification can be done and suitable re-
order point policies can be brought in. The article later deliberates on a probable
inventory control system and application of some contemporary supply chain
management technique for the improvement of the overall operations in hospitals.

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At present, sourcing mostly is done locally on an ad-hoc basis. So a large number of
small distributors/ retailers vie for the orders and having numerous players involves
a great deal of paper work. Having an established supply chain mechanism helps in
systematic ordering and consolidation of the order quantities. Forward contracts
can be entered into which would result in lowering of medicine and supply cost. The
risk of stock-out also reduces since, inventory records and lead time for individual
data can be accommodated in the central SCM database. Having lesser number of
suppliers also translates into lesser lead time variability of the ordered materials.

One of the biggest problems with medicines and supplies faced by hospitals is the
risk of expiration. Centralized procurement also yields significant power on the
hands of the hospitals and they can enter into contracts with manufacturers/
distributors whereby they can return the unused medicines when they near their
usable life. This translates into direct waste reduction and reflects hugely in the
profit margin.

Application of SCM in Hospitals:

Operational efficiency and even patient safety can be positively affected by
automating activities such as medical-surgical and pharmaceutical supplies. These
can be achieved by in-time inventory replenishment and lesser stock-out chance of
important drugs. Having a centralized database provides a means to keep a tab on

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the inventory status on a real time basis. As was discussed earlier in the article also,
proper inventory classification can be done depending on the criticality as well as
usage of the respective drugs.

A simple ABC mechanism of inventory classification can help in devising

replenishment policy for the pharmaceuticals and medical supplies. A seminal
approach that can be followed is:

The costly life saving/ critical drugs are one of the most prized items of the hospitals
and should be stock all the time. But the high cost as well as the short expiry date
of the medicines prohibits stocking them up in large quantities. ABC classification of
inventory, based on Pareto’s 80-20 rule, lays down simple ways to monitor
inventories according to their relative importance to a company.

Carrying the discussion about the volume and cost of medicines used in a typical
hospital scenario, we can safely recommend:

 “Class – A” status to the critical/life saving drugs.

 “Class – B” status to the important drugs that are used by different
departments.
 “Class – C” status to the routine drugs and medical supplies.

A perpetual inventory management system can be adopted for the “Class – A”

items while a simple reorder point and Economic Order Quantity/Period Order
Quantity can be used to determine the replenishment policy for “Class – C” items.
This way the hospitals can not only ensure they carry optimum stock but can also
bargain for quantity discounts, especially for Class – C items. The hospital, with the
database about the usage volume and demand pattern of medical supplies, is also
in a position to enter into forward contracts with drug manufacturers and can look
forward to vendor consolidation as the next step.

In the United States of America, an entity called “Group Purchasing

Organisation” has already come up to leverage the collective purchasing power of
some group of buyers companies to obtain discounts from the vendors and
manufacturers. Members participate based on their purchasing needs and their
level of confidence in what should be competitive pricing negotiated by their GPOs.
Group Purchasing is used in many industries for purchasing raw materials and
supplies and should be more intensely applied in the heavily fragmented health
care sector.

Use of barcodes can make record keeping a lot easier. Not only does it ensures
removal of data entry errors but also ensures exact knowledge of the stock at any
time. Barcodes also facilitates in exact maintenance of place holders for individual
drugs and quick reference in cases of need. Customers can be accurately billed for
the medicines administered to them. Last but not the least, barcodes can also play
an important role in prevention of pilferage of drugs.

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 RFID technology is being used increasingly for Asset and package tracking both
inside and outside the hospitals. The precision medical instruments are of high cost
and hence justify investing in RFID to know their exact position while in transit from
manufacturers to the hospitals. Inside the hospital, this is used as a tool to restrict
the movement of specific medical instruments to individual departments. This
brings in ownership and accountability in the individual departments to which a
particular asset is tagged. Though there has not been much use of this technology
till recent past, but surveys have come out showing the increasing inclination of
hospitals to adopt this in near future.

Electronic medication administering and recording is one of the emerging

technologies in the healthcare segment. To attain full benefit realization of
improved patient safety at a reduced operating cost, automated clinical functions
requires broader integration uniting people, process, applications and technology. A
fully automated medication administering process provides tools and guidance that
assist in ensuring the “Five Rights” of prescribing and administering a medicine:

✔ Right Drug
✔ Right Dose
✔ Right Patient
✔ Right Route
✔ Right Time

Injection syringe involving manual fluid intake is being increasingly replaced by

Smart Pumps that not only takes in prescribed fluid accurately, but also prevents
injection of wrong medicine by continuously checking the to-be administered
medicine with the prescribed medicine using the patient barcode information
database. This is facilitated by tagging each patient with a specific identity barcode
(mostly in the form of wrist bands) and maintaining a clinical history log file for
individual patients. The hospitals are rounding it up with an ERP system that
encompasses all these with the inventory management system and external
departments. This also allows for automatic orders being placed to the suppliers
whenever the inventory level for a particular stock falls below a specified limit. Web
based catalogs are also making their way in, saving the hospital officials countless
hours of searching through the paper catalogs and making telephone calls to
enquire the availability of the desired item.

The daily drug usage data captured by these automated systems and stored in
the central database presents an excellent case of developing accurate forecasting
model which could incorporate the number of patients and ailments to come out
with the expected drug usage rate. In this way, a policy can be framed in line with
Just-In-Time principles to bring down the inventory stock to days. This not only cuts
down the warehouse cost but also reduces obsolescence risks.

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 Logistics Management in Hospital Supply Chain: Logistics is flow of goods/
resources, information and people between the point of origin and the point of
consumption. Medicinal supplies have a limited shelf life and many drugs are
expensive. This call for a specific method of provisioning, storing and administering
such medicines which starts with storing them in a temperature/ humidity controlled
atmosphere and issued on a First Come First Served (FIFO) order.

Conclusion:
After being successfully implemented in most of the major sectors, Supply Chain
Management has finally started getting acceptance in Healthcare sector also. SCM
is much more than a fancy buzzword; it’s a powerful concept, strategy and
approach that encompass most of the operations functionalities of an organization.
Worldwide surveys proves that hospitals that have implemented SCM successfully
have recorded a 50% inventory reduction, 40% increase in on-time delivery,
doubling of inventory returns coupled with nine-fold reduction in out of stock rates3.(
http://www.expresshealthcaremgmt.com/200905/scmspecial03.shtml )

As put forward in this article, every touch point with the patients has to be closely
monitored to improve the service delivery and reduce cases of mistreatment. The
updated database can be utilized to come up with near perfect forecasts and
demand variability patterns. Vendor Managed Inventory and Group Purchasing
Organisation take away the burden of frequent ordering and bargaining off the
hospitals. Vendor rationalization helps in building trust between the buyer and the
supplier, which paves the way for collaborative resource planning approach.

With the advancement of technology, radio frequency based tracking of

consignments and assets would enable complete visibility and proper book keeping
of resources even without manual supervision. The computerized inventory control
system enables automatic order placing, thus removing chance of a stockout due to
human error or a possible delay by the overseer. The “Glass Pipe Concept” in
Supply Chain Management is the order of the days to come, where there will be
complete visibility of information from supplier to manufacturer to distribution
centre to transporter to customer.

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