Arnold Palmer Hospital Supply Chain Management Strategy

Introduction

Arnold Palmer Hospital is one of the country's leading hospitals for women and children. Located in Orlando, Florida, it is currently part of a national purchasing group through which it makes supply chain purchases. Although membership in the purchasing group offers some cost advantages stemming from collective bargaining power, there are also significant disadvantages that are not entirely consistent with the organization's priorities. These disadvantages can be mitigated by equipping the hospital with more modern supply chain technology.

An investigation was therefore conducted to identify the supply chain options available to Arnold Palmer Hospital that would better suit the organization's requirements. It is recommended that the hospital implement an automated point-of-use (APU) system to manage inventory. This system has been proven to be an effective tool for inventory and supply chain management in hospital environments.

Hospitals and Supply Chains: An Overview

In any organization it is critical that the supply chain is optimized with regard to the overall organizational goals so that it can properly support core business functions. One important aspect of supply chains in the health industry is that consistency is absolutely critical, since lives are often at stake and emergency deliveries can be quite costly (Alverson, 2003). A hospital's strategy is to maximize patient care, but it must achieve this by balancing cost and space limitations (Stark & Mangione, 2004). The hospital supply chain must therefore operate as efficiently as possible while simultaneously meeting several criteria. The following criteria were identified as necessary components of healthcare supply chains (Thomas Group, 2011):

• Ensuring product availability
• Minimizing storage space
• Maximizing patient care space
• Reducing material handling time and costs for all medical staff (nurses, pharmacists, doctors)
• Minimizing non-liquid assets (inventory)

Hospital supply chains are complex with respect to the variety of inventory items that must be procured. Hospital inventories consist of a range of items including high-cost and low-cost items, as well as perishable and durable goods consumed in large and small volumes. In addition, some items are highly critical and must be readily accessible, while non-critical items can be stored away. Hospital supply chains must be constructed to handle products with all combinations of these traits — for example, items that are simultaneously highly critical, low volume, high cost, and perishable.

A hospital's size, location, range of services, and various specializations all dictate the nature of its operations. Accordingly, supply chain requirements vary significantly from one institution to another. The number of products and their demand levels can also vary greatly between different units within the same facility. The optimal supply chain must therefore consider all requirements across different hospital functions and represent a holistic approach to meeting overall organizational needs. Ideally, the supply chain should rely on as few suppliers as possible; however, broad-ranging requirements with specialized needs often prohibit supplier consolidation. Thus, a hospital typically requires more than one supply chain policy in order to meet its strategy of maximizing patient care without incurring prohibitive costs.

Evolution of Hospital Supply Chain Models

In the 1980s, hospitals began employing innovative supply chain strategies with the goal of reducing costs and improving service levels (Felder et al., 2008). The standard supply chain was gradually replaced with new paradigms, including stockless inventory, vendor managed inventory, consignment, and automated point-of-use systems. This section reviews the standard supply chain model and four contemporary alternatives.

Standard Supply Chain

In the standard hospital supply chain model, all material operations are controlled in-house by the hospital. Inventory personnel are required as full-time employees and include purchasers, material handlers, and stockroom staff. Primary care personnel — mainly nurses, technicians, and pharmacists — may also spend a substantial amount of time on inventory management under this model. Purchasers and material handlers are typically assigned to one or more floors or divisions within the hospital.

Material from the hospital's various suppliers is delivered in bulk shipments to the loading dock and usually transported to a primary storage facility. Employees then transport material from the main storeroom to secondary storage areas in different sections throughout the hospital as inventory in those areas is depleted. Under this model, hospitals generally do not track perpetual inventory; instead, they rely on visual assessments or periodic counts to determine when a reorder point has been reached. In many cases, hospital employees can pull inventory as they see fit with no record or accountability. The standard hospital supply chain is characterized by inflated inventories and a high occurrence of stock-outs (Landry et al., 2002).

In most situations, medical staff have neither the incentive nor the time to be overly concerned with efficient inventory management. They are — and should be — primarily focused on caring for patients. Additionally, the absence of a well-defined inventory system makes it nearly impossible, or at least impractical, for personnel to effectively manage this organizational function. Knowing which inventory is in excess and which is short falls well beyond the primary job responsibilities of clinical staff, and as a result, medical inventories are often scattered across the health campus.

Stockless Inventory

To help hospitals reduce inventory and increase fill rates, healthcare distributors began offering stockless inventory programs to their customers (Kowalski, 1991). Under a stockless program, the distributor delivers products in smaller allotments rather than bulk shipments. Hospital purchasing staff remain generally responsible for organizing and placing orders; however, orders are transmitted from individual wards and material is delivered directly to the point of need, eliminating the requirement for a central storeroom. Some redundant functions are bypassed: under the old system each shipment was counted twice — upon receipt and again when it reached the needed hospital area — whereas under the stockless model it is counted only once by the receiving division.

In comparison with the standard supply chain, distributors assume the function of holding inventory and replenishing it at individual locations rather than the hospital performing this function itself. Implementing a stockless system requires a continuous flow of information between the point of use and the distributor (Danas et al., 2006). The benefit to distributors under this model is that they capture a larger share of the hospital's profit margin, typically charging a markup of roughly five percent on all products they stock for the hospital. Furthermore, since distributors gain greater visibility into actual hospital usage, they may be able to reduce inventory levels by leveling demand requirements — thereby reducing the bullwhip effect prevalent in many hospital supply chains that rely on untrained staff to manage inventory levels (Sethuraman & Tirupati, 2008).

The bullwhip effect describes the phenomenon whereby demand variations tend to increase as they move up the supply chain. For hospitals, the benefit of the stockless program is that it reduces inventories, labor costs, and stock-outs. Some studies have documented that hospitals can reduce inventories anywhere between forty and eighty percent (Sethuraman & Tirupati, 2008). Other studies reported that full-time equivalents were reduced by over forty percent. Transferring this business process to those who have both a greater stake and stronger incentives for efficient management can lower costs while simultaneously reducing the burden on an often already overwhelmed medical staff.

The removal of a main storage facility can also be financially beneficial. In some cases, hospitals have rented out their former stockroom space, with stockless programs allowing them to close those areas, eliminate maintenance expenses, and generate rental income. In other cases, hospitals converted storage facilities into patient care units, enabling higher revenues. The reduced expenditures in real estate opportunity cost have in some instances allowed hospitals to redirect funding to other critical needs. Additionally, as the number of suppliers is often reduced under this arrangement, administration expenses are also significantly reduced (Berling & Geppi, 1989).

Vendor Managed Inventory

Stockless inventory systems may offer many benefits for hospitals that currently have virtually no inventory control; however, the system still does little to reduce costs and optimize operations across the entire supply chain channel (Ozcan, 2009). This type of system removes most financial accounting responsibility from the hospital, placing the burden of reporting on distributors. Hospitals can, for example, order one unit of a particular item every day rather than consolidate to weekly shipments of five units, as would be the case under other models. In short, hospital ordering personnel have no incentive to be efficient.

It is not uncommon for vendors to gradually increase their charges for stockless accounts to offset the inefficiencies inherent in the system. Consequently, distributors developed a service known as vendor managed inventory (VMI). Under VMI, the distributor hires employees to work on-site at the hospital and assume all material operations reporting — including material handling, warehousing, and purchasing. Under this system, the distributor not only purchases materials from its own facilities, but also from manufacturers and competitors to meet the hospital's medical inventory needs.

Distributors operating under VMI have a much stronger incentive to focus on supply chain efficiencies, and as a result they generally implement formal inventory systems within hospital operations while optimizing order sizes and inventory levels (Saipe & Geiger, 1996). Additionally, VMI has a major impact on controlling "unofficial inventories" — those inventories unaccounted for in hospital accounting and inventory records (Global Health Solutions, 2011). For example, before implementing APU systems, hospitals typically recorded an inventory expense when inventory was issued to the ward, regardless of when it was actually consumed.

Consignment

Under the consignment model, the vendor owns the inventory until it is actually issued to the end user at the point of care. The vendor holds inventory at a hospital location and the hospital purchases items as needed. Consignment policies may also exist within each of the supply chain strategies described above. The primary benefit of a consignment arrangement is that the hospital's inventory assets decrease, freeing up capital that can be invested in medical equipment and other needed assets.

Conclusion

The alternative to the problems created by the purchasing group would be for Arnold Palmer Hospital to establish its own supply chain. This possibility is becoming increasingly feasible due to recent advancements in healthcare inventory management technology. By forming its own system, the hospital can set its own rules and standards, rather than conforming to another group's requirements. The most effective alternative available to the hospital is the development of an internal inventory system that utilizes the latest APU technology. This approach allows the hospital to do what is best for its patients and aligns most closely with its mission and vision, which are centered on delivering the highest quality of patient care.

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