BEYOND TECHNOLOGY:
BETTER PROCESS FOR SUPPLY CHAIN MANAGEMENT

MODERN SUPPLY CHAIN PROBLEMS AT HOSPITALS
Emerging technology, shifting population demographics, governmental regulation and skyrocketing costs have elevated the business of healthcare to an unprecedented level of global scrutiny. One of the primary drivers of the escalating cost of healthcare is the cost of materials management. Hospitals and health systems may soon spend more on their supply chains than on labor. Historically, total supply expenses have consumed up to 45% of a typical hospital's operating budget and a recent analysis suggests that by 2011, it could exceed 50% [1]. While improvements to supply chain management have been widely noted in the shipping, textile, big-box retail and e-commerce industries, three factors have made it difficult to translate the advances achieved in other industries to healthcare: complexity, unpredictability, and risk.

In the US, the healthcare supply chain involves more than 650,000 different manufacturers, distributors, carriers, GPOs, hospitals, clinics, and providers. A single ailment can involve multiple interdependent yet disparate entities: primary care providers, specialists, pharmacies, diagnostic imaging and laboratories, outpatient surgical centers, hospital patient care units, anesthesiologists, surgeons, physical and occupational therapists and others. Within the hospital, each department, area, and role has unique needs and multiple ways of obtaining supplies. A single patient care unit may use point-of-use, par level, perpetual inventory, case carts, requisitioning, and consignment. And physicians' preference of multiple types of supplies that could be standardized requires not only more storage space, but also the additional management of codes and general ledger entries, making the system even more complex.

Linkages between clinical operations, materials management, and the supply chain are often fragmented. There is no integrated, seamless flow of information from the bedside, where demand occurs, to the disposition, where capacity is established. Information must be translated manually from one system’s format to another’s, compounding wasted time, cost, and the potential for errors at each exchange.

There is no way to estimate, with confidence, the number of patients and the vast variety of symptoms they present on any given day. This unpredictability has significant ramifications: the consequences of underestimating the appropriate inventory of a type of antivenom or artificial heart valve are far different than those associated with bicycle or computer parts. The potential consequences of stock out include litigation, disability and death. Nurses hoard supplies and patient care units maintain safety stock above par level because of the personal and professional risk involved. Until a system that can consistently stock what is needed to care for patients before it is necessary, providers will continue to resist efforts to cut supply costs. These competing goals result in the following conflict:

The conflict involves the increasing versus decreasing inventory. Both positions have the common goal to increase financial viability, however the rationale and conclusions are different. The first argument states that in order to increase financial viability we must protect supply availability and in order to do that we must increase inventory. The other side of the conflict argues that to increase financial viability we must control cost and the only way to control cost is to lower or limit the amount of inventory. The key to resolving the conflict is to focus on the impact of improved supply chain management on patient care, not solely on product acquisition costs. A more efficient supply chain will not only add to the bottom line, it will also reduce the time that healthcare workers spend on administrative tasks, allowing them to focus on delivering quality patient care. Linking patient outcomes to value in a holistic collaboration that answers the question ‘WIFMP?’(What’s in it for my patient?) removes barriers to change, facilitating implementation and ensuring sustainment.

THE CONVENTIONAL APPROACH
Conventional healthcare supply chain management balances on the accuracy of forecasting. Many problems arise when organizations execute to a forecast. The first problem is risk associated with missing the forecast, which is almost a 100% guaranteed result. If a forecast reads, "we will use 600 orthopedic joints for the month of June," this translates to an order for 600 orthopedic joints from Biomet. But the chances that the hospital will use exactly 600 joints in the month of June are extremely slim: at the end of the month, the hospital will either have excess orthopedic joints or they will have stocked out before the month's end. For this reason, the forecast is almost never correct. It’s much better to plan to a reasonable range.

The result of executing to forecast are:

1. Stocking the wrong medicines, which can result in too much of one type of medicine and not enough of another.
2. Limited responsiveness to true doctor / patient demand.
3. Pressure on cash flow.
4. Inventory erosion / spoilage / outdates.
5. Inventory is pushed into the system, which results in loss of control.

In the conventional approach to supply chain management, hospitals depend on forecasts of expected customer demand in what is called a ‘push system.’ In a push system, a management decision must be made far in advance, at each re-order, regarding the amount of supplies to be purchased and how often to re-order. Inventory is pushed downstream through the links of the supply chain to reduce the appearance of excessive over-inventory, clogging the supply chain with inefficiency.

THE SOLUTION: DYNAMIC REPLENISHMENT
The key difference between Dynamic Replenishment and conventional approaches is that it is fundamentally a 'pull system' rather than a push system. A pull system controls the flow of supplies by automatically adjusting inventory levels based on actual consumption, with strategic buffers of inventory for each item to act as shock absorbers, compressing when inventory is consumed until replenishment occurs. Each time an item is ordered, an equivalent order is placed. Replenishments occur in the smallest possible batches as frequently as possible. Thus, statistical variations are dampened rather than magnified, reducing fluctuation of stock levels across the chain.

As supplies flow downstream, a majority of the inventory remains further up the supply chain. This reduces the amount of safety stock across the supply chain. Yet shortages are also reduced because of constant flow and rapid response to consumption. Buffer management matches stock of each product at each location to changes in replenishment time and demand, adjusting buffer sizes continuously.

One-to-one ordering with frequent replenishment, combined with buffer management, liberates hospitals that adopt pull from reliance on inaccurate and unreliable forecasts. Implementing a pull system increases revenues without increasing operating expenses and typically reduces investment in inventory [3].