Hospital Supply Chain Essay

1287 words - 6 pages

Health Care Supply Chain The developments in health care encompassed vertical and horizontal integration, managed care pressures, and the rise of e-commerce. There have also been many other changes, few of them are:  Hospitals and hospital systems vertically integrated into the health insurance business, such as starting up their own Health Maintenance Organizations (HMOs) and ambulatory care practices, in the process of developing Integrated Delivery Networks (IDNs). Attempts to integrate downstream towards the patients to capture a greater portion of patient flows and insurance premiums lead to the development of HMOs. Initially such attempts were futile and providers had to integrate ...view middle of the document...

Within the health care value chain, the products (drugs, devices, supplies, etc.) are transported, stored, and eventually transformed into health care services for the patient. The health care value chain as described above has various inherent flaws. Third party GPO’s negotiate on behalf of providers but are funded by administration fees paid by the manufacturer, usually based on a percent of sales. This arrangement raises the question as to how aggressively a GPO will truly negotiate. Major full-service distributors tend to operate on a percent of sales distribution fee as well. Hence, the distribution fee for a small sized fast moving item could cost the hospital many times more than a bulky slow moving item. Another issue is that many distributors are also major manufacturers, allowing them to leverage the margin on self-manufactured products to discount the distribution fee. The distributors, in such situations, can also cut the inventory levels of competing product, with full knowledge that they can support stock-out substitutions with highly profitable selfmanufactured goods. If this happens very often, the hospital may be forced to switch to the readily available distributor of manufactured goods even if they are considered inferior. These issues should

not be blamed fully on the purchasers since the hospitals are willing to pay the extra amount for these services every day. The main issue is that most health care providers have been unwilling to challenge the traditional model for fear of the risk associated with throwing away a well-established model. In a traditional distribution model, suppliers ship their products to distributors. At the distributor’s warehouse, the products are packed into pallets and shipped to each hospital’s warehouse. The hospital warehouse then receives the pallets, breaks them down into smaller quantities, and stores the products until they are needed by the hospital. Sometimes items are also ordered directly from suppliers. Figure 2 shows this model.

In this traditional model, there is a large amount of inventory in the system. This keeps the number of deliveries relatively low, which keeps transportation and ordering costs low. However, there is a high cost in both holding inventory and the significant amount of material handling required. An initiative by HealthyLife1 Hospitals An example of a health care system that has benefited from streamlining their inventory and distribution process is the HealthyLife Hospitals. The HealthyLife Hospitals created a new supply chain division called Resource Optimization and Innovation (ROi) to establish the supply chain as an area of value for the business. ROi has simplified the health care supply chain by reducing its dependence on third party intermediaries, such as GPO’s and distributors. The ROi created its own GPO, which purchases products directly from suppliers for all products, eliminating the need for third-party GPO’s. The result is a new model that has...

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