Hospital SCM Arnold Palmer Hospital

Managing Service, Processes and Supply Chains

Hospitals and Supply Chains - Overview

Hospital Supply Chains - Advancements

Standard Supply Chain

Stockless Inventory

Vendor Managed Inventory

Consignment

Automated Point of Use Systems

The Next Step in Supply Chain Evolution

Arnold Palmer Hospital Supply Chain

The Arnold Palmer Hospital is one of the country's leading hospitals for women and children. It is located in Orlando, Florida and is currently a part of a national purchasing group in which it utilizes to provide supply chain purchases. Even though being a part of the purchasing group has some cost advantages stemming from the collective bargaining power, there are also many disadvantages that are not entirely consistent with the organizations priorities. These disadvantages can be mitigated by equipping the hospital with more modern supply chain technology. Therefore, an investigation was conducted that identified the supply chain options available for the Arnold Palmer Hospital that would better suit the organizations requirements. Furthermore, it is recommended that the hospital implement an automated point of use system (APU) in order to manage inventory. This system has been proven to be an effective tool for inventory and supply chain management in hospital environments.

Hospitals and Supply Chains - Overview

In any organization it is critical that the supply chain is optimized by designed in regards to the overall organizational goals so that it can properly support the business functions. One aspect to supply chains in the health industry is that consistency is absolutely critical since lives are often at stake and emergency deliveries can be quite costly (Alverson, 2003). To put it simply, a hospital's strategy is to maximize patient care but it must also do achieve this by balancing cost and space limitations (Stark & Mangione, 2004). Therefore the hospital supply chain must operate as efficiently as possible while simultaneously meeting several criteria. The following criteria were identified as necessary components to health care supply chains (Thomas Group, 2011):

Ensuring product availability

Minimizing storage space

Maximizing patient care space

Reduce material handling time and costs for all medical staff (nurses, pharmacists, doctors)

Minimizing non-liquid assets (inventory)

Hospital supply chains are complex in regards to the amount of various inventory items that they must procure. Hospital inventories consists of a range of items including high cost and low cost items as well as perishable and durable goods that can be consumed in large and small volumes. In addition, there are also highly critical items that must be readily accessible while non-critical items can be stored away. Hospital supply chains have to be constructed such that they can handle products with all combinations of these various traits (i.e. highly critical, low volume, high cost, perishable goods).

A hospital's size, location, range of services, and various specializations all dictate the nature of its operation. Hence, the requirements of its supply chain vary significantly with each situation. The number of products and demand of those products can also vary greatly from different units within the same facility. Therefore, the optimal supply chain must consider all the requirements from all the different hospital functions and represent a holistic approach to meeting the overall requirements. Ideally the supply chain should have as few suppliers as possible yet broad ranging requirements with specialized needs often prohibit supplier consolidation. Thus, a hospital requires more than one supply chain policy in order to meet its strategy of maximizing patient care without incurring prohibitive costs.

Hospital Supply Chains - Advancements

In the 1980s hospitals began employing innovative supply chain strategies with the hopes of reduced costs and improved service levels (Felder, et al., 2008). The standard supply chain was replaced with new paradigms, such as stockless inventory, vendor managed inventory, consignment, and automated point of use systems. For review and exploration, this section will review the standard supply chain concepts and four contemporary paradigms.

Standard Supply Chain

In the standard hospital supply chain model, all material operations are controlled by the hospital in-house. Inventory personnel are required as full time employees and include purchasers, material handlers, and other stockroom personnel. Primary care personnel, mainly nurses, technicians, and pharmacists also may spend a substantial amount of time with inventory management under this model. Purchasers and material handlers are typically assigned to one or more floors or divisions within a hospital.

Material from the hospital's various suppliers is delivered in bulk shipments to the hospital's loading dock and usually transported to some primary...

Employees then transport material from the main store room to various secondary storage areas in different sections throughout the hospital as the inventory in those areas gets used up. Under this model hospitals generally do not track perpetual inventory, but rather rely on visual assessments or periodic counts to decide when to a reorder point has been reached. In many cases, hospital employees can pull inventory as they see fit with no record or accountability. The standard hospital supply chain is characterized as having inflated inventories and a high occurrence of stock outs (Landry, et al., 2002).
In most situations, medical staffs have no incentive or the time to be overly concerned with efficient inventory management. Hopefully they are preoccupied on their primary position which is, and should be, caring for patients. Additionally, the lack of any well-defined inventory system makes it nearly impossible, or at least impractical, for the personnel to effectively manage this organizational job function. For employees to know which inventory is in excess and which is short lies well beyond their primary job responsibilities and as a result of this fact, it is common for medical inventories are scattered all over the health campus.

Stockless Inventory

In order to help hospitals reduce inventory and increase fill rates, healthcare distributors began to offer stockless inventory programs to their various customers (Kowalski, 1991). Under a stockless program, the distributor delivers product in smaller allotments rather than in bulk shipments. The hospital purchasing staff is generally still responsible for organizing and placing the orders. However, the orders are transmitted from individual wards, and the material is delivered directly to the needed, eliminating the need for a store room. There are some redundant functions that are bypassed, from the perspective of the hospital, from the supply chain as shipments are counted only by the receiving division when compared to the old system where each shipment was counted twice; upon receipt and then again when it received by the needed hospital area.

Basically, when compared with the standard supply chain, distributors have assumed the function of holding inventory and replenishing it at the individual locations instead of the hospital performing this function itself. The implementation of a stockless system requires a continuous flow of information between the point of use and the distributor (Danas, et al., 2006). The benefit to the distributors under the model of stockless inventory program is that they capture a larger share of the hospital's profit margin and generally charge a markup in the range of roughly five percent give or take a couple percentage points on all the products they stock for the hospital. In addition, since the distributors gain more visibility into the actual usage of the hospital they may be able to reduce the inventory levels by leveling demand requirements; thereby reducing the bull whip effect that is prevalent in many hospital supply chains that rely on untrained staff to manage inventory levels (Sethuraman & Tirupati, 2008).

The bull whip effect explains that demand variations tend to increase it moves up the supply chain. The benefit to the hospitals under the stockless program is that it reduces inventories, labor costs, and stock outs. Some studies have documented that hospitals can reduced inventories anywhere between forty and eighty percent (Sethuraman & Tirupati, 2008). Other studies reported that hospitals reduced full time equivalents reduced by over forty percent. It is reasonable to speculate that transferring this business process to those who have both a greater stake as well as more incentives for efficient management could lower the costs while simultaneously reducing the burden on an often already overwhelmed medical staff.

The removal of a main storage facility in a hospital can also be financially beneficial. In some cases hospitals have rented their stockroom space, and stockless programs allowed them to close those areas and remove those expenses associated with maintaining them as well as gain extra revenue from the income that these spaces generated for the hospital. In other cases hospitals were able to convert their storage facilities into patient care units also enabling higher revenues for the hospital. The reduced expenditures in real estate opportunity cost in some cases allow the hospital to provide funding to other critical needs. In addition, as the number of suppliers is often reduced under this arrangement, the hospital's administration expenses are also significantly reduced (Berling & Geppi, 1989).

Vendor Managed Inventory

Stockless inventory systems may have many benefits for hospitals with virtually no inventory control under their current systems; however the system still does little to reduce costs and optimize operations within the entire supply chain channel (Ozcan, 2009). This type of system removes most of the financial accounting responsibility from hospital placing the burden of reporting on the distributors. Hospitals can, for…