Redesigning the supply chain for the healthcare industry

The healthcare business is a mature industry providing a variety of products and services such as medical consumables, pharmaceuticals, catering, laundry, waste management, home-care products, information technology, vehicle fleet management and general supplies to their customers. Analysis of the healthcare industry indicates that the supply management system is one of the potential areas where cost reductions are highly possible since the healthcare industry has historically viewed itself as being operationally different from other businesses.

This is due to healthcare providers’ myth that, unlike managers in manufacturing industries, they cannot control or project their production schedules which is not true in today’s context. As a result, healthcare supply chains not only end up with poor inventory control arising from years of outdated supply chain strategies, but also from inefficient delivery of healthcare.

Traditionally, the suppliers meet the purchasing department in each hospital
individually to determine their replenishment needs or emergency needs. After confirming the purchase order, items and equipment are dispatched to nurse stations, operating rooms and wards by its staff. Meanwhile, the staff also takes back recycled items such as surgical instruments.

The role of hospital supply has been transformed in some countries due to a reduced need for storing goods between supplier delivery and internal delivery to departments. A more efficient hospital would receive items from its supplier and deliver them directly to the appropriate unit. A central distribution centre provided by a 3PL could be built to store materials from suppliers, and sterilise and pack soiled medical instruments for each of the hospitals.

The central distribution centre can be reorganised into a single contact point for suppliers and the number of suppliers will decrease eventually due to consolidation. This will result in the elimination of supplies delivery at a loading dock in each hospital. Instead, staff can deliver orders directly to the hospital corridors from the distribution centre, dropping them to the stock supply closets in the nursing stations, operating rooms and wards. This creates a “stockless inventory” effect or just-in-time delivery for the hospital’s warehouse and result in reduced storage space and personnel.

In the new system, labour utilisation increases while inventory levels and fill rates diminish. The linkage between hospitals is strengthened by a common network that allows for the sharing of expensive life-critical supplies and medical staff. Such partnerships will help healthcare facilities to manage limited resources, resulting in savings and the possibility of encouraging other hospitals to join the network. This can be considered a good move because with the bulk purchase of common and standardised items on a regular basis, economies of scale can be achieved. However, due to the specific nature of service provisions in hospitals, the purchasing of non-common items and small items are left to the individual hospitals so that quality control can be better assured by the respective hospitals.

Hospitals can also outsource some activities such as cleaning, security, cafeteria, food and laundry, in order to cut costs. A study conducted in Singapore recently showed that outsourcing logistics activities such as housekeeping and repair is pretty prevalent. Three hospitals reported outsourcing of information system services and two hospitals reported outsourcing of linen and warehousing services. Only one hospital outsourced food service, while other hospitals showed concern about food supply and quality when it is outsourced. Some managers believed that although outsourcing did not reduce the logistics costs significantly (there have been some reductions), the maximum benefits were obtained in terms of expertise held by the outsourced companies. In the long run, due to the need to focus on core competency and to reduce the costs, hospitals may outsource more logistics services to the service providers.