The Vital Role of Supply Chain Management in Modern Healthcare

• Kara L. Nadeau, Healthcare Industry Contributor

The answer to the question - is supply chain management important in healthcare? - has become a resounding yes among all stakeholders, as they recognize its importance in patient care optimization and cost-saving in healthcare delivery.

Today's supply chain management strategy goes beyond meeting clinical customer demand and customer satisfaction to positioning healthcare logistics as a competitive advantage.

In this article, I explore the significance of supply chain management in healthcare from ensuring patient care to optimizing costs, how technology is helping overcome supply chain challenges, and where the we are headed with implementation of advanced digital technologies, including AI and blockchain.

Table of contents

1. The many roles of supply chain in healthcare
2. New technologies elevating supply chain operations
3. The benefits of efficient management
4. Potential pitfalls and areas of concern
5. Future trends and supply chain innovation

What is the role of supply chain?

"Without proper visibility into current inventory and supply chain gaps, procurement leaders in the healthcare industry lack the information they need to plan strategically for the future. They also run the risk of falling short on their savings goals."

How 4 Healthcare Leaders Built Resilient Supply Chains, Workday (July 2022)

The importance of supply chain planning in healthcare has never been as valued as it is today. As much as we all want to put the pandemic behind us, there is no doubt that it spurred supply chain management recognition - with many supply chain professionals saving the day with their work to secure desperately needed medical supplies for clinicians and their patients in the face of shortages of raw materials and finished products.

And this work continues as supply chain managers in hospitals tackle the challenges of continued disruptions and shortages to meet clinical customer demand. Collaboration and information sharing on supply chain activities with manufacturers and distributors has become more widespread.

Supply chain leaders in healthcare want to know the source of raw materials and details of the manufacturing process, including where production takes place, to mitigate risks and monitor for factors that could signal a disruption (e.g., natural disasters, political unrest, infectious disease outbreaks).

But it doesn't stop at supply chain sourcing. Supply chain today is recognized for its strategic value at the health system level, with chief supply chain officers (CSCO) side by side with other C-suite executives developing strategies to optimize clinical, operational and financial performance for their organizations.

There are countless ways that supply chain optimization can address modern healthcare challenges, most notably in reducing costs, managing inventory for less waste, and maximizing customer value through clinical integration.

What supply chain needs is a supporting structure of digital technologies and advanced analytics to make impactful decisions in these areas.

How technology enhances supply chains

"As organizations place greater emphasis on supply chain management, Chief Supply Chain Officers (CSCOs) intend to grasp their collective opportunity to invest in growth through new technology investments."

Top Supply Chain Technology Trends for 2023, Gartner

Supply chain management in healthcare has been steadily evolving over the decades, from manual, paper-based processes and disjointed legacy IT systems, to a digitized, automated, cloud-based continuum where the entire process - from product procurement through usage - is readily visibility to an organization's supply chain leaders and team in real-time.

Not only can they see what is happening in the supply chain management process, they can control variables for clinical, operational and financial impacts. Here are some key areas where technology is enhancing the supply chain management process.

Cloud solutions

When designing a digital backbone for supply chain management, experts call out the importance of scalability and interoperability, specifically the "the ability of different information systems or equipment to exchange and make use of data."

Cloud enterprise resource planning (ERP) and supply chain management (SCM) systems have been key to supply chain optimization in healthcare, enabling seamless integration of clinical, financial and supply chain systems and data.

Whereas before, processes began and ended within a single system and data resided in silos, now cloud solutions break down barriers, making it far easier for stakeholders to share information and for business intelligence (BI) teams to generate actionable analytics.

Automatic identification and data collection (AIDC)

A key priority among supply chain teams has been automating the capture of supply chain data for medical supplies management - from the time an item arrives at a healthcare facility from a manufacturer or distribution center to when it is used in patient care - because it improves efficiency, minimizes non-value-added labor, reduces errors, waste and costs, and enables the capture of accurate and complete real-time data in supply chain management SCM systems.

Use of AIDC technology, including barcode and RFID scanning, in place of supply chain staff manually recording the receipt and movement of items for inventory management, is now widespread throughout health system and hospital supply chains.

The use of AIDC has extended to clinical areas at the point of use (POU) where clinicians can scan items as they are used on the patient. With system integration (ERP, SCM, EHR) enabled by the cloud, supply chain can seamlessly establish a source of clinical, financial and supply chain data for cost, quality and outcomes analytics.

AIDC can also facilitate reverse logistics, such as healthcare organizations identifying recalled items in the supply chain and sending these products back upstream to the manufacturers.

Data standards

Another key component of electronic data capture at the unit level is data standardization. While I was at AHRMM23, I attended a breakout session on unique device identification (UDI) adoption presented by Nancy LeMaster, CEO of Nancy J. LeMaster Consulting, and Terrie Reed, Chief Strategy Officer for Symmetric Health Solutions - two healthcare supply chain leaders who have played an instrumental role in data standards development and implementation.

They pointed out that while it has been a decade since the U.S. Food and Drug Administration (FDA) issued its final UDI Rule to establish a system to adequately identify devices through distribution and use, little progress has been made in leveraging UDIs in the health care supply chain.

The main message to supply chain leaders in healthcare - manufacturers have populated the Global Unique Device Identification Database (GUDID) with UDIs, and placed the corresponding barcodes on their product packaging - so what not use them?

Perhaps with the growing use of AIDC in supply chain, including supply chain management SCM systems that can capture UDIs, healthcare stakeholders will finally push forward with using UDIs as the FDA intended.

AI-enabled analytics

"By 2026, more than 75% of commercial supply chain management application vendors will deliver embedded advanced analytics (AA), artificial intelligence (AI) and data science."

Gartner Predicts the Future of Supply Chain Technology, Gartner (April 2022)

A key benefit of artificial intelligence (AI) is in the lightning fast processing of vast quantities of data to surface trends, risks, predictions and other insights to inform decisions. In healthcare, use of AI-driven analytics can help supply chain management uncover opportunities to:

1. reduce costs

2. improve inventory planning

3. meet demand for supplies to improve clinician customer service

4. prioritize supply chain activities, such as identifying and targeting supply categories at the greatest risk for shortages (e.g., limited raw materials, localized manufacturing process disruptions, increased market demand for items, etc.).

The ability to leverage AI-driven analytics in supply chain starts with bringing "together information systems to build the big data that AI and machine learning depend on," explained Eugene Schneller, PhD, Professor of Supply Chain Management at the Arizona State University in a recent Becker's Hospital Review article.

Blockchain

Blockchain is defined as "a collection of records linked with each other, strongly resistant to alteration and protected by cryptography. It is a technology that allows users to store data in a decentralized manner." It "is a transparent, traceable, and distributed ledger technology that has the potential to solve many of the challenges of traditional supply chains," according to A Review Study of the Blockchain-Based Healthcare Supply Chain (2022).

The authors note how "major troublesome activities of traditional healthcare supply chains, such as tracking objects, monitoring orders, receipts, invoicing, payments, and so on, can be performed fairly fast in a Blockchain-based supply chain." They believe emerging blockchain technology has the potential to overcome the following obstacles in supply chain management:

• Traceability

• Counterfeit drugs

• Imprecise stock data

• Quality focus

• Regulatory restrictions

• Reverse logistics

• Product perishability

The benefits of efficient management

From supply continuity to patient outcomes via ESG goals, leveraging new technologies has the potential to yield valuable benefits for health systems.

Supply continuity

Technology in healthcare supply chain that improves the accuracy and efficiency of supply chain sourcing, all the way up through understanding the availability of raw materials used in the production of medical supplies, will help facilitate informed decisions for successful supply chain management and help better meet clinical customer expectations.

Medical suppliers and logistics providers (e.g., distributors) that are open to sharing upstream information (e.g., raw materials and finished product manufacturing processes) in exchange for demand signals from health system and hospital supply chain professionals will be better positioned to meet market demand, better manage customer expectations, maximize customer loyalty and improve customer service.

Lower costs and waste through automation

More efficient and effective supply chain management can reduce costs on many levels. Automating the procure-to-pay process eliminates costs related to manual tasks and intervention. Consider the savings that comes from transitioning from manual purchase order (PO), invoice processing and payment generation and delivery (e.g, fax, email, postal mail) to automating this entire process via EDI.

Achieving the 'perfect order', in which purchase orders are processed electronically from order to payment without human intervention, has long been recognize as a key to cost savings in the supply chain management process.

With transparency into purchasing decisions, leaders can standardize on suppliers/products, optimize contract savings opportunities, and ensure they are paying the right price for items. With greater visibility to inventory and product usage, they can better manage supply levels, avoiding unnecessary purchases and maximizing the use of existing supply assets.

Then there is the cost savings that comes from less waste. The ability to track product expiry dates in real time through a supply chain management SCM system enables an organization to identify products nearing expiration and collaborate with clinical teams to use them before they expire and must be thrown away.

💡 Watch: Controlling Costs Through Payment Automation

Better patient outcomes

Having the right products, available in the right quantities, at the right times for patient care is the cornerstone of the supply chain management process. An end-to-end, digital supply chain with complete visibility and control helps supply chain teams achieve this goal.

Then there is the work of the clinically integrated supply chain, where supply chain provides to clinicians data on product costs and quality to inform value analysis efforts. Let's say for example, supply chain determines that a higher priced item could deliver lower long term costs because there are fewer patient complications or readmissions - that is a way for the healthcare organization to address two key issues - costs and outcomes - at the same time.

Supply chain visibility and control also enables supply chain teams to better manage product expiry, as mentioned above, with the ability to remove expired items from inventory, minimizing the risk they will be used on patients. Optimized inventory management also improves supply chain's ability to find recalled items in facilities' inventories and remove them.

Environmental, Social and Governance (ESG) goals

Most healthcare organizations today have specific goals aimed at managing their environmental and social effects. Supply chain can help with initiatives such as contracting with diverse suppliers (e.g., minority, women or veteran owned) and sourcing products closer to home to support local communities and reduce carbon footprint (e.g., emissions from transportation of goods across long distances).

A panel discussion at AHRMM23 presented the issue of forced labor in the healthcare supply chain. It is prevalent but invisible to most U.S. healthcare organizations, and even suppliers. But upstream in the supply network, in other areas of the world, forced labor is used to produce raw materials and components of medical supplies, along with finished products.

The panelists stressed the need for informed supply chain planning related to the practice of forced labor. The AHRMM website offers resources health care supply chain leaders can use to establish anti-forced labor policies, map high-risk supply chains, and craft supplier contracts.

Addressing potential pitfalls and areas of concern

Advanced technologies and the digitization of the healthcare supply chain presents opportunities, risks and challenges. Here are a few to consider:

Data privacy/cybersecurity

"Data in the health system and hospital supply chain is more sensitive...As a result, developers and operators of healthcare blockchain should place a greater emphasis on data privacy."

A Review Study of the Blockchain-Based Healthcare Supply Chain (2022)

A new report, The State of Healthcare IoT Device Security, finds 89% of hospitals experience one or more cyberattacks annually. When implementing new technologies that facilitate data sharing, supply chain leaders must evaluate the risks.

Cost and return on investment

"Across many industries, digitally transforming the supply chain has been shown to reduce process costs by 50% and increase revenue by 20%; hospitals are no exception."

How Digital Transformation Can Improve Hospitals’ Operational Decisions,

Harvard Business Review (January 2022)

At a time when healthcare organizations are reducing costs in their supply chains, it could be a challenge to convince leaders to invest in supply chain management (SCM) solutions and related technologies. But widespread proof exists that digital supply chains drive significant savings.

To help healthcare supply chain leaders build their case for optimization, technology providers should provide proof of return on investment (ROI) along with their solutions.

Talent and training

"Health systems may be hesitant to use AI for the supply chain due to a lack of training—and the intense need to focus on more pressing tasks."

Could AI Fix Medical Supply Chain Woes? Becker's Hospital Review (September 2022)

As supply chain shifts from manual and tactical to automated and strategic, healthcare organizations need supply chain talent that has the skills to support this transition. Training on the use of digital technologies, specifically AI, is another hurdle healthcare supply chain teams have to overcome.

💡Watch: The Next Generation of Healthcare Supply Chain Professionals

Future trends and innovation in supply chain

Efforts to reduce costs will likely remain a priority in the coming year. There is no doubt that supply chain management will play a key role in cost reduction, and those that are successful will provide their organizations with a competitive advantage. Here are some predictions about how supply chain management might evolve in healthcare in 2024 and beyond.

Reducing administrative burden on clinical staff

"Hospitals and physicians are expected to seek higher rate increases (potentially also at a higher frequency) in contract negotiations. Workforce shortages and physician consolidation can further amplify the effect."

Medical Cost Trend: Behind the Numbers 2024, PWC (2023)

Supply chain management has been steadily evolving to alleviate clinicians from performing time-consuming and labor-intensive tasks, most notably by automating product data capture in clinical storage areas and at the point of care.

With clinical workforce shortages continuing and the cost of labor rising, supply chain managers can be a part of the solution by expanding technology to drive efficient supply chain processes in clinical departments. Increased customer satisfaction, with clinicians able to devote more time to care, could also help with retention.

Tighter supply chain/finance collaboration

Technology that can unite supply chain and finance leaders in sharing information and collaborating on common goals to strengthen their healthcare organizations' financial standing will likely grow in value in the near future.

During the AHRMM23, Andrew Donahue, Director Healthcare Finance Policy at Healthcare Financial Management Association (HFMA) described the pending financial landscape 2-5 years down the road and the urgent need for supply chain executives to align with their finance counterparts.

A stronger focus on pharma

"The first week of July 2023, 59 manufacturers raised prices on 105 brands with a price increase averaging 3.80%. There are 9 brands that all raised their prices by 10%"

Price Increases by Drug Manufacturers to Start July 2023, AnalySource (August 2023)

Then there is the November 27, 2023, Drug Supply Chain Security Act (DSCSA) deadline. While medical/surgical supply chain management has historically been the prime focus of optimization and cost savings, perhaps increasing drug cost pressures, supply disruptions, and regulations will prompt health system and hospital leaders to turn a critical eye on the pharmaceutical supply chain management process.

Dive deeper into supply chain innovation

• GHX Summit On Demand 2023: Get insights from healthcare supply chain leaders that are changing the industry through digital transformation, cloud ERP optimization, implant order automation and more.
• AHRMM23 Virtual Conference: Catch up on proven strategies to remain adaptable and resourceful in times of continued crisis from health care supply chain leaders, suppliers, clinicians, and administrators.

Common FAQs about supply chain management in healthcare

Q. Why is supply chain management crucial in healthcare?

A. Supplies are critical to patient care delivery and outcomes, and the supply chain is the second largest area of expense for healthcare organizations (behind only labor). Supply chain optimization has been proven to reduce costs, enhance patient care quality, and improve financial outcomes in healthcare.

Q. How can healthcare institutions optimize their supply chain?

A. The transition from transactional to strategic and reactive to predictive supply chain management, supported by digital technologies, will position healthcare supply chain for successful optimization.

Q. How does technology play a role in improving the healthcare supply chains?

A. Without advanced technologies, supply chain management will remain stagnant, operating with disjointed systems and data silos that cannot support today's need for forward-looking strategies and approaches. What supply chain in healthcare needs today is process automation, complete visibility, real-tine data capture and assimilation, and advanced analytics that only digital technologies can enable.

Q. How does an efficient supply chain affect patient care and costs?

A. Supply chain efficiency paves the way for faster decisions around procurement, inventory management and demand planning. When supply chain leaders have the data they need - at their fingertips - they can perform analytics to drive better choices to improve outcomes and reduce costs for their organizations.

Kara L. Nadeau

Healthcare Industry Contributor

Kara L. Nadeau has more than 20 years of experience as a writer for the healthcare industry, working for clients in fields including medical device/supply manufacturers and distributors; software, solution and service providers; hospitals and health systems; and industry associations.