The 4 Weakest Links in Almost Every Hospital Supply Chain

― Adam Polka

April 3, 2014. We all know the adage ‘the supply chain is about having the right supplies in the right place at the right time’, but in order to achieve this, there are certain common assumptions that we must all be sure to avoid.

When a hospital is performing well, it requires a healthy supply chain to support its performance; when policy changes or a slow economy temper growth, hospitals rely on efficient supply chains to survive on thin margins. In all cases, the supply chain needs to be acutely responsive and exceedingly dynamic.

Achieving demand accuracy is singlehandedly the most effective way to make or break your supply chain. Set quotas too high, and the point-of-use is overloaded, messy, products expire, and capital is locked up through too-slow turns. Too low, and time is wasted restocking too frequently, responding to stat orders, and waiting for supplies. An inaccurate demand chain leaves the front line continuously feeling like they have too much of something and not enough of something else.

As a result, we all work to come up with the best proactive method to assess demand accurately; real-time reporting, frequent assessment rounds, automation, kaizen, and a slew of other methods. But in this search of the demand accuracy holy grail, be sure to avoid these pitfalls that will keep you in a state of reactivity:

Weak Link 1:

Contract negotiation is the key to cost control

It’s true, better contracts on medical supplies directly impact the operating margin. However, negotiating prices can only carry you so far; significant opportunities for continuous improvement are being neglected because so much focus is spent on transactions rather than strategies.

Leaders in healthcare supply chain management have moved away from a transactional perspective of the supply chain to a strategic point of view. Instead of focusing on pricing, receipt, delivery and reordering, the strategic supply chain manager focuses on information flows, standardization, performance measurements and cost-to-quality ratios.

These less tangible elements of the supply chain are being leveraged for better resource allocation, improved financial performance and less waste (a better price on Product A is squandered if you need to dispose of 10 Product A’s because they expired!)

Compound that with a common byproduct of standardization; with concurrent favorable pricing contracts, comparable products end up sitting on shelves, which ultimately leads to obsolescence.
Ultimately, contract negotiation will always be important, but you can no longer ignore making sure those negotiated contracts are worth their while through effective strategy and inventory control within the hospital.

Weak Link 2:

Better to increase stock levels to avoid stock outs.

The tendency to raise safety stock levels to account for periods of greater consumption is the natural – and logical – reaction. Although this serves as an effective temporary fix, it ties up working capital, thus hampering cash flow.

Many facilities are indeed stocking too much ‘just-in-case’ inventory, and continue to do so because it effectively results in fewer urgent orders. Instead, the goal should be to ensure availability without increasing ‘just-in-case’ inventory levels to account for high volume periods, and in the best of scenarios, are able to decrease these levels in order to tie up less capital in supply.

Failure to control stock levels in this manner is likely to result in a classic example of the bullwhip effect, where erratic ordering causes excess supply and unreliable supply availability.

Weak Link 3:

Past is prologue

Using historical data to inform future supply chain needs is a necessary evil; we must rely on the data that exists to make intelligent decisions about how our demand will change over time. Unfortunately, forecasting tools are notoriously inaccurate.

Obamacare, ACOs, and the general economic volatility stemming from the Financial Crisis have further eroded already poor predictors of demand forecasting. Using data from what happened last year, last season, last quarter, last week – these are all techniques from last decade!

Big data is shedding some light on demand forecasting effectiveness, suggesting forecasting errors are consistently hovering around 50%, indicating a huge discrepancy between what we ‘think’ we need, and what we ‘actually’ need.

This is perhaps because we have focused more on results then on how to achieve those results. As H. James Harrington said,

“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.”

The shift in demand forecasting for healthcare has been towards measuring thrice: measuring historical cyclic trends, measuring linear trends, and measuring real-time point-of-use trends. By considering the past as only one ingredient rather than the whole recipe, these latest analytics tools are challenging the notion that a 50% error rate is acceptable.

A best practice is to collaborate with the greater healthcare community in order to develop a composite infrastructure that leads to greater visibility into our aggregated data. This ‘big data’ approach would strengthen our capacity to forecast demand and engage in data-driven demand planning.

Weak Link 4:

All I need to do is fix the problem!

Perhaps the greatest offense in healthcare supply chain management is to try and quick-fix the problem rather than address the source of that problem. These band-aids will not have long-term sustainability, and ultimately cause more logistical or financial issues in the future.

The most effective way to improve your supply chain is to look at it holistically; to consider the moving parts on both sides of the equation. How will the back office function? How will the front lines of service be impacted? What will inject sustainability and confidence? Addressing the supply chain in this manner can have a transformative effect, but likewise requires time and energy to undertake a transformation rather than a quick-fix.