Supply Chain Management in Hospital: a Case

Topics: Health care, Supply chain management, Kaiser Permanente Pages: 12 (3663 words) Published: October 15, 2012
Supply Chain Management in Hospital: A Case Study
Samuel Toba • Mary Tomasini • Y. Helio Yang
San Diego State University, San Diego, CA
It is a common misunderstanding that hospital purchasing is just a functional part of operations rather than a strategic means to achieve financial cost savings. The supply chain process is the essential link for all programs and services offered by a hospital, and hence any improvement in managing the supply chain can positively impact bottom line profitability of any hospital’s operations. This paper provides an overview of the current issues in supply chain management that today’s hospitals face as well as a look at the measures that a case health organization has taken in managing this aspect of their supply chains.


The growth of health care costs in United States has far outpaced the rate of inflation. Total health care spending in 2004 was $6280 per person, representing 16% of the US gross domestic product (NCHC, 2007). There is an ongoing debate between experts and policy makers that the health care system is burdened with inefficiencies, excessive administrative expenses, inflated prices, poor management, inappropriate care, waste, and fraud. In this paper, we will examine how efficiencies in supply chain management and effective use of sourcing and technology has reduced hospital costs. We will provide an inside look into Kaiser Permanente of Southern California in our analysis. II. HEALTHCARE INDUSTRY AND SUPPLY CHAIN

The healthcare supply chain is composed of three major players at various stages: producers, purchasers, and healthcare providers. Producers include pharmaceutical companies, medicalsurgical products companies, device manufacturers, and manufacturers of capital

equipment and information systems. Purchasers include grouped purchasing organizations (GPOs), pharmaceutical wholesalers, medicalsurgical distributors, independent contracted distributors, and product representatives from manufacturers. Providers include hospitals, systems of hospitals, integrated delivery networks (IDNs), and alternate site facilities (Burns, et al., 2002, pp. 11-12). At a broader level, healthcare supply chains are very fragmented. The three players are largely operating independently from one another and coordinated supply chain management hardly exists. The Journal of the American Medical Association found that 85 – 90% of hospital cost structure is comprised of fixed costs (Roberts, 1999). This finding puts hospitals more in a league with transportation or heavy manufacturing than with most other service industries (Ward, 2006). Neumann indicates (2003) that supplies constitute 25% to 30% of a hospital’s total operating expense. In addition, 25% of those expenses are tied to administration, overhead, and logistics. The healthcare industry is slow to adopt the supply chain management techniques that have had proven success in other industries.

Volume 6, Number 1, pp 49-55 California Journal of Operations Management © 2008 CSU-POM

Toba, Tomasini and Yang Supply Chain Management in Hospital: A Case Study

Several factors have been identified as contributing to the problems faced by hospitals in managing their supply chains. These factors include outdated IT systems and infrastructure, poor inventory and distribution management, adhoc procurement systems, lack of executive involvement, and no process improvement culture (Moon, 2004; Burns, et al., 2002). We use a case organization-Kaiser Permanente of Southern California to discuss improvement opportunities in hospital supply chain in four areas: product management, sourcing and services, purchasing systems and technology, and inventory and distribution management. III. BACKGROUND OF KAISER PERMANENTE

Founded in 1945 by Henry J. Kaiser and Sidney R. Garfield, Kaiser Permanente (KP) is a notfor-profit integrated medical care organization headquartered in Oakland, CA. There are three different...

References: With the supply chain costing as much as 40 percent of the typical hospital’s budget, the strategic importance of hospital supply chain is evident (McKone-Sweet, et al., 2005). Healthcare organizations must overcome years
Broadlane, “Savings for Kaiser Permanente,” retrieved from:, 2007. Burns, L., R. DeGraaf, P. Danzon, J. Kimberly, W. Kissick, and M.Pauly, The Health Care Value Chain: Producers, Purchasers, and Providers, John Wiley, NY, 2002. Department of Defense (DoD), “Reduced Costs and Streamlined Healthcare Supply Chain Pilot Expands Existing Data Synchronization Program to Create Industry-Wide Resource of Healthcare Product Information,” U.S. Newswire, March 15, 2007. Haugh, R., “Warehouses Return,” Hospital and Health Networks,” June 2004, Vol. 78 (6), 2004, 8. Kaiser Webpage, dex.html, 2007. Lave, J. R. and L. B. Lave, “Hospital Cost Functions,” Annual Review Public Health, Vol. 5, 1984, 193-213. McKone-Sweet, K., P. Hamilton, and S. Willis, “The Ailing Healthcare Supply Chain: S Prescription for Change,” The Journal of Supply Chain Management, Winter, 2005, 417. Mitchell, M., “Top 10 Myths that Hinder Supply Chain Success,” Supply Chain Solutions, January 2007, 1-5. Moon, S., “Taking Cost Off Supply Shelf,” Modern Healthcare, Vol. 34(47), 2004. NCHC, Health Insurance Cost, [online]., 2007.
California Journal of Operations Management, Volume 6, Number 1, February 2008
Toba, Tomasini and Yang Supply Chain Management in Hospital: A Case Study
Neumann, L., “Streamlining the Supply Chain,” Healthcare Financial Management, Vol. 57(7), 2003, 56-62. Polte, S., “Out with the Old, In with the New,” Health Management Technology, Vol. 28(3), 2007, 14. Roberts, R., “Distribution of Variable versus Fixed Costs of Hospital Care,” JAMA: Journal of the American Medical Association, Vol. 281(7), 1999, 644.
Scalise, D., “Building an Efficient Supply Chain,” Hospital and Health Networks, 2005. Volpe, J., “We Have a Preference Too,” Modern Healthcare, Vol. 37(8), 2007, 23. Ward, W., “Building the Business Case for Clinical Quality,” Healthcare Financial Management, Dec. 2006.
California Journal of Operations Management, Volume 6, Number 1, February 2008
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