Chapter 4: supply

chain management at
valley memorial
hospital

Medicine, Hospital
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Chapter 4: Supply Chain Management at Valley Memorial Hospital

Details of Your Next Assignment

Bob Reilly, head of Kaizen, just called you to say that he was impressed with

your progress thus far in familiarizing yourself with operations at VMH-both

the strategic details pertaining to its mission, competitive priorities, etc. and

the specific details concerning its products and processes. He tells you that,

with all the buzz about supply chain management (SCM) that you hear these

days, VMH is actively interested in exploring how different SCM concepts and

techniques could be used in their operations. Maintaining an adequate,

assured supply of a variety of laboratory equipment, surgical instruments,

and supplies, is critical to VMH. Meg Willoughby, head of Materials

Management at VMH has a couple of specific assignments that you will work

on later. But for now, Meg would like a concise research report for the top

management team addressing SCM issues relevant to VMH.

Details of the Assignment: Conversation with Bob Reilly

“"Lee Jordan liked your write-up on the VMH service package and delivery

system. Meg Willoughby wants you to prepare a similar report addressing

SCM issues relevant to VMH. Senior Administrators at VMH are actively

interested in exploring how SCM concepts and techniques could be adopted

in their operations. Prepare a concise report addressing the specific

questions that Meg has put together for you to address. I look forward to

receiving your report, which I am sure will provide insight for SCM

applications at VMH."

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Assignment Questions for Chapter 4

1. Describe the essential concepts of SCM and explain to what extent SCM is

applicable to a service operation such as VMH.

2. Describe internet-based electronic data interchange (EDI) and explain how

VMH could benefit using EDI.

3. Describe how partnering with some of its suppliers could benefit VMH.

What issues should VMH consider when developing partnerships?

4. Consider the different activities or services in VMH's supply chain.

Describe which activities might be better outsourced than done internally by

VMH. Describe the key issues to consider before outsourcing a service or

activity.

5. Purchasing, a major function in SCM, is especially critical in ahealthcare

industry service. Given your fresh-from-school perspective, describe the

potential conflicts of interest or ethical issues facing the purchasing function.

1. Supply chain management (SCM) involves all the operations necessary to

ensure that the flow of goods and services through a company are as

efficient as possible . This involves all the production stages  - raw materials,

inventory of work-in-progress and finished products, and therefore it involves

good management practices relating to  sourcing, procurement, conversion 

and  logistics.  SCM involves good co-ordination and collaboration between a

firm and its 'channel partners' to be efficient; channel partners include a

firm's primary and intermediary suppliers, third party service providers and

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even customers. In terms of microeconomics, SCM involves matching the

supply and demand within companies and across the range of its

stakeholders  in  a planned, optimized fashion. Although initially SCM applied

mainly to the manufacturing industry, its current usage can be well extended

to service operations, similar to that  carried out by VMH. With the

unprecedented numbers of baby boomers , the healthcare industry in

particular has experienced a rapid expansion, forcing it  to rethink its

operational strategy to maintain competitiveness. SCM is a key area for a

healthcare supplier like the Valley Memorial Hospital (VMH) to address in

order to practice good cost management as well as achieve operational

smoothness and efficiency. Building good supply chain networks for VMH

involves not only building relationships with its suppliers and outsourced

service producers, but also maintaining a good relationship with its

consumers around  Albuquerque to ensure continuing, ongoing business.

Moreover, VMH provides for a wide range of medical services in  the area,

both acute and non-acute, which makes its operations quite complex. Unless

there is an integrated organization wide SCM policy in place, cost efficiency

for VMH as a whole is difficult to implement. The nurses, doctors, paramedics

and supporting staff  are all part of this supply chain, and their  handling of

all the resources of VMH in a co-coordinated, cost-effective fashion is critical

to a  successful SCM implementation.

2.  Electronic data exchange (EDI) is a standard protocol for carrying out

business transactions throughout different  companies and organizations

through an application-to-application datacommunicationsystem.  This

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means an electronic network of computers between businesses, voluntary

organizations, government entities and other groups. For example, EDI can

be used to produce and emulate documents to automate purchasing, and

EDI systems can make it possible for various departments, suppliers and

agencies to create, transmit and receive EDI documents whenever any

purchase occurs.  Despite the rapid growth of the internet, XML services and

webtechnology, EDI remains the commonest method of e-commerce through

out the world. Credit card payments, for instance, processed manually at

shops and outlets involve the use of EDI which involve typically huge

networks.

In the case of a complex organization like VMH, EDI could be put to good use

in the supply chain management system in several ways. Firstly, EDI could

save VMH a great deal ofmoneyin all its operations by replacing information

flows that typically require manpower (scanning, archiving, typing) ,

materials  (e.g. paper, fax)  and  resources (meetings, seminars, phone

calls). In healthcare systems, such savings could be enormous, as the work is

typically both time and labor intensive.  Secondly, it would give a

tremendous boost to VMH's logistics efficiency. Information flow will be

quick, data easily accessible, less paperwork will free up its professionals for

more productive work, while inventory management capacity could receive a

huge boost as the inventory and stock tally could be instantaneously and

continuously  updated  (e.g. bed occupancy, stock of hospital supplies). 

Thirdly, a huge reduction in  manual errors can result throughout the

organization, which could lead to potentially huge cost-savings, as cost-

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effective healthcare systems can ill-afford 'expensive' errors. EDI is an

essential part of SCM in modern healthcare organisations.

3. Strategic partnerships are an important part of modern SCM, whereby

short-term contracts based on tenders attracting lowest bids are replaced by

on-going informal relationships with suppliers. VMH could benefit in the

following ways by partnering with its suppliers :

(1) It could benefit from higher levels of productivity as its suppliers become

experienced and responsive to its own needs. This is because with

partnerships, mutual understanding of business needs grow with  time.

(2) Such arrangements could be cost-effective, as they minimize the

necessity to look for and contract fresh suppliers at intervals; savings also

result from being able to implement newer styles of inventory management

like just-in-time (JIT) which minimizes the need for large stocks, as it

becomes the  supplier'sresponsibilityto maintain adequate stock levels.

(3) There are likely to be much less disputes and dissatisfied stakeholders,

as long term strategic alliance ensures that everyone is more likely to  work

in the best of  their 'mutual' (rather than own) interests, and can even

generate a high degree of  'loyalty'.

For partnerships, VMH should however remember that :

(a)          Shorter supply chains make SCM easier, and hence, suppliers who

can provide a large number of products and suppliers are likely to effective

both in terms of efficiency and costs. The larger the business account it gives

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out to a supplier, the more VMH can demand volume discounts across a

wider range of items.

(b)          Partnerships with local suppliers would enhance VMH's image of

corporate responsibility in the eyes of the local communities by

strengthening the local economy. This has to be balanced with outsourcing

some activities like medical transcription, which cost  significantly less

overseas.

4. The activities within VMH's supply chain that can be best outsourced

include :

(i)  Setting up an EDI and other IT infrastructure essential to a new SCM

system, and providing training for its staff,  because VMH currently does not

have the capability or expertise to develop such systems internally. In

addition, ongoing maintenance of the systems could also be outsourced as

they would prove more cost-effective in the long run than setting up its own

I.T. department. Medical transcription and data archival is another key

related area that is best outsourced on cost grounds.

(ii) Publicity, medical communications and external website maintenance :

This is also another rapidly evolving specialized area, and to maintain

competitiveness at par with  the rest of the industry,  outsourcing is a good

idea.

(iii) Several key logistical areas like security, transport and handling of

patients, materials and waste disposal  are also suitable for outsourcing.

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They do not relate to VMH's core competencies in healthcare, but need

professional handling.

(iv)   Housekeeping and catering are also commonly outsourced by

healthcare organisations, and should be considered by VMH too.

The issues  to remember before outsourcing are :

(a) The move to outsource might be deeply unpopular with existing

employees and suppliers, unless there are  significant strategic and cost

benefits in doing so.

(b) Good contractual agreements  must be in place to protect VMH in the

case of unsatisfactory performance and sudden change of circumstances,

with a robust escape clause. The legal expenses can be significant if

outsourcing runs into difficulties.

( c)  Outsourcing must not affect the organisation's key competencies-

otherwise it will lead to reduced organizational learning and affect its future

competitiveness. The areas indicated above as suitable for outsourcing are

not 'key' healthcare areas.

5.            For a managed healthcare organization like VMH, purchasing

presents several areas of conflicts of interest and ethical dilemmas –

(1)   Cost-effectiveness decisions affecting individuals versus the population

– The most cost-effective solution for many healthcare situations might not

be the best, and  managers are often compelled to consider cases on an

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individualized  basis when it comes to 'expensive' purchases. For the same

infection, the available  antibiotics might differ widely in cost and efficacy. In

addition cost considerations may lead to managers ignoring some of the

potential drawbacks of preferred supplies and services.

(2)  Purchasing experimental treatment options  is a leading area of ethical

dilemmas as well as conflicts of interests, often between the medical

professionals and managers.  Similarly selective investment in technology to

develop future capabilities for the organization may lead to conflicts between

groups, as some may feel unappreciated and neglected due to an

'underinvestment' in their specialty.

(3) Suppliers often give corporate gifts or sponsor events to promote their

products, and in return, endorsing their product, particularly  for

organisation-wide use, may in itself present ethical dilemmas.

(4) The 'medical necessity' debate may also present problems for

purchasers, as some stakeholders will argue about the ethical validity of

purchases that would not directly benefit consumers (patients).  Such

advocates may be highly critical of expenses on décor, recreational facilities,

managerial and publicity expenses, 'unproven' but popular medical items

and devices.

(5)  In cases of competitive bids, important ethical issues regarding

breaching secrecy to secure competitive prices from preferred suppliers may

arise.

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Managed healthcare purchasing, as we can see, is fraught with ethical

dilemmas and conflicts of interest.

***

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