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Supply Chain Management

The supply chain is the network of organizations linked through upstream and downstream processes and activities that produce value for the patient.  Through these linkages flow products, information, and financial transactions.

Supply chain management is a strategy that seeks to maximize the effectiveness and efficiency of these processes and linkages, and the flows between them.

The health care system relies on a complex network of processes and linkages between product manufacturers, distributors, MRO service providers, health service providers, regulatory agencies, laboratories, pharmacies, payers, and patients. When looking at the supply chain as a total system of interconnected processes and flows, it becomes clear why the supply chain has direct impact on operational performance and value delivered to the patient.  This impact can have a positive effective, or, a negative effect depending on how well the supply is designed and operated. 

The ultimate goal of the supply chain is to deliver materials and information to create value for the patient.  An effective supply chain delivers the right materials and information at the right time, in the right quantities, and in the right locations.  An efficient supply chain creates value at the lowest cost.  Supply chain management seeks to deliver the highest level of value at the lowest possible cost.

In many cases, the health care supply chain is highly inefficient.  Business processes are typically cumbersome.  Investments in technology have been minimal.  Access to accurate, up-to-date information is limited and disconnected. 

Consider this: supplies and equipment cost US health care providers $200+ Billion annually, with about 10-15% of that amount wasted due to inefficiencies and redundancies in the process.  Supply chain costs account for as much as 30% of a hospitals expenses, second only to personnel costs.  Up to 40% of buyer time and 68% of accounts payable staff time are spent on manual order processing.  As much as 85% of this activity could be automated.  Supplier’s sales teams spend up to 49% of their time on non-sales-related activities, and their collection of accounts receivables takes longer than it should due to the significant rework that pricing process complexity and manual ordering create.  

All participants in the health care supply chain, from hospitals and group purchasing organizations to manufacturers and distributors, are under pressure to cut costs and enhance efficiency. As we can see from the above data, the supply chain provides ample opportunity areas to reduce cost and improve performance, and to increase the level of value delivered to the patient.

Studies have shown that supply chains are a key enabler for delivery of quality patient care and that 15% of patient care time is spent on supply chain activities.  An efficient supply chain will eliminate the need for patient care staff to perform non-value added activities.

Healthcare organizations can leverage best practices from other industries such as retail, automotive, aerospace, medical device, electronics, and develop a strategy to improve supply chain performance.  Best practices should include vendor managed inventory, supplier consolidation, performance measures, continuous replenishment, target costing, logistics and information technology.

Supply chain management is an essential strategy for improving the operational performance of the health care system network.