Exploring the Role of Supply Chain Management in Healthcare

What is healthcare supply chain management?

Take a moment to think about what providers use every day to treat patients. Providers use a myriad of items, such as syringes, prescription drugs, gloves, pens, papers, and computers. Employees involved in healthcare supply chain management are responsible for stocking organizations with the products providers need and managing inventory.

However, managing the supply chain is not as simple as making sure providers have enough gloves.

“Simply stated, supply chain is the management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole,” James Spann, Practice Leader of Supply Chain & Logistics at Simpler Healthcare, said in a 2015 interview.

“The challenge for hospitals is to align the supply chain to the care delivery model.”

The healthcare supply chain starts at the medical product manufacturer where items are produced and sent to a distribution center. Depending on the type of product, hospitals can either purchase inventory directly through the manufacturer or distributor, or the transaction can be conducted through a group purchasing organization, which establishes a purchasing contract with the manufacturer on behalf of the hospital.

Medical products are then sent to the healthcare organization, where the goods are stocked into inventory for providers and patients. The organization ensures that providers are not left without essential medical products and patients have access to potentially life-saving tools.

Another aspect of healthcare supply chain management involves the participation of regulatory agencies, such as the Federal Drug Administration, and healthcare payers, including Medicare and private health insurance companies. Regulatory agencies and payers determine if a medical resource is fit for consumer use and whether providers will be reimbursed for using it on specific patients.

Why is healthcare supply chain management so complex?

Healthcare supply chain management is unique because each stakeholder has their own interests to protect. Different stages in the supply chain flow may be focused on their own goal. Providers may want to use a specific product because they were trained with it, whereas hospital executives aim to purchase the most affordable, quality items. Meanwhile, medical device companies may want to profit from their products.

Since supply chain goals are not always aligned within an organization, the healthcare supply chain management process can be inefficient and fragmented. Healthcare organizations must take into account numerous requests and viewpoints to settle on specific product budgets.

For example, providers may prioritize their own preferences for certain products, while financial managers attempt to cut healthcare costs and reduce out-of-date products. Oftentimes, hospitals face hoarding or squirreling away of certain products by providers.

“In most cases, clinicians just want the products when they need them,” Spann explained. “But to ensure that happens, they oftentimes hoard or opt to manage their own supplies. This can contribute to cost variance and off-contract spending, which are hard to uncover. One more invisible cost that is often overlooked is the time spent looking for supplies or waiting for someone to deliver what they need.”

While this is generally true in healthcare supply chain management, the COVID-19 pandemic has also had a lasting effect on the supply chain. A 2021 analysis of one of the leading GPOs in the country found that healthcare organizations were still struggling to meet increased demand for personal protective equipment (PPE) and other supplies nearly a year after the start of the pandemic.

More recent surges of COVID-19, as well as RSV and the flu, have continued to put a strain on the healthcare supply chain. Healthcare organizations are not only facing active supply shortages, but higher costs for everyday items and constrained levels of equipment.

Ensuring an efficient supply chain is paramount for organizations looking to streamline costs and care. Medical supplies now account for about a fifth of hospital expenses, on average. Supply chain costs are likely to increase in response to widespread inflation and the higher costs of medical devices and items.

How can providers be more efficient and resilient?

Fragmentation, complexity, and disruption are three of the most common healthcare supply chain management challenges. As healthcare organizations continue to face unprecedented price and certain volume growth, implementing strategies to make supply chain management more efficient is key to success.

A 2020 survey of healthcare providers and suppliers found that organizations are overcoming healthcare supply chain obstacles created by COVID-19 by prioritizing US-made goods, gathering more inventory and demand planning data, and relying less on IT.

Over half of survey respondents said more prioritization of products produced in the US would help to alleviate PPE shortages, bidding wars, and other healthcare supply chain challenges in the future. About 57 percent also said more inventory and demand planning data sharing among providers and suppliers would preserve the healthcare supply chain in the future. Another 52 percent reported less reliance on IT and more safety stock.

Other areas of focus for a resilient healthcare supply chain in the future included more investment in inventory visibility across individual health systems (49 percent), closer coordination between clinical and supply chain teams (41 percent), and more investment in demand planning and sensing (31 percent).

“Accurate forecasting is critical if we are to run responsive supply chains, better adapt to supply shifts, and secure what we need to manage a potential second wave and to ramp up elective procedures while also supporting the needs of patients receiving care at home,” said Bruce Johnson, CEO of Global Healthcare Exchange (GHX), a supply chain management solutions provider.

Some providers have already started improving demand forecasting by building in-house solutions or partnering with other healthcare stakeholders, Johnson stated. However, this area still needs more attention for the healthcare supply chain to overcome other public health threats.

Additionally, interoperable enterprise resource planning (ERP) systems that enable providers and suppliers to connect to a national database and communicate with standardized data elements can help the healthcare supply chain become more responsive, which is key during a public health crisis, Johnson concluded.

An ERP implementation at Bayhealth in Delaware led to supply chain management efficiencies.

“An ERP system is so important because it helps drive our personnel management, talent management, payroll, finances, and supply chain management,” Brian Dolan, vice president of resource management at Bayhealth, said in a recent interview with RevCycleIntelligence. “The systems aren’t native to healthcare, but they are a critical investment for healthcare institutions. They ensure the business is running smoothly and efficiently.”

On the supply chain side, the technology helped everyone from executives to clinicians see the bigger picture. So when there was a sudden spike in manufacturer backorders, for example, Dolan was able to show his colleagues that it wasn’t an organization issue, rather an industry-wide problem from a global supply chain disruption.

Greater visibility into the supply chain is key to resiliency and efficiency. Tools like the ERP enable supply chain leaders to pinpoint where items are within an organization and even beyond, such as if there is a backorder at a vendor organization. Modern technology is also bridging the gap between supply chain and the clinical side of healthcare by enabling greater data sharing.

Getting all hospital departments on the same page is also a key strategy for optimizing healthcare supply chain management. In the era of value-based care, healthcare organizations are focused on reducing redundancies and eliminating waste, but providers also need to work together to effectively reduce costs and boost performance.

Value analysis at Bon Secours Mercy Health helped to get everyone on the same page and optimize supply chain management, Amy Whitaker, vice president of supply chain clinical integration, said in a 2019 interview.

Value analysis in healthcare is the process by which organizations purchase supplies and services after considering the product’s impact on care delivery and health outcomes, as well as total cost. The process emphasizes appropriate utilization and pricing, in addition to cost-savings and improved outcomes.

“We take that total picture and we talk through the impact the products will have on patients and our clinicians. That is the leading portion of the analysis,” Whitaker explains. “We always talk to the key stakeholders first to show them the information and see if they are willing to try another product that has very similar quality outcomes and/or better quality outcomes.”

Different automated tools can also help organizations increase price transparency, such as computerized provider order entry systems, which can standardize and streamline physician orders, or Radio Frequency Identification (RFI) technology that can capture volumes of data from a product’s barcode.