January 1, 2012

The Transformative Hospital Supply Chain - Balancing Costs with Quality

Booz & Company details why hospital supply chain management is essential to curbing rising medical costs while maintaining—and possibly even improving—healthcare standards.

In light of the escalating costs of healthcare globally, experts from Booz & Company have identified ways in which to alleviate the rising costs through hospital supply chains, while helping to improve patient care.

“In the MENA region, healthcare accounted for 3-5 percent of GDP in 2008 and has been rising rapidly at an average annual rate of approximately 15 percent since 2005. The region’s healthcare systems, like many others around the world, has so far been unable to develop a successful formula for providing high-quality, universally accessible healthcare at a cost that is sustainable over the long-term,” said Jad Bitar, a Principal with Booz & Company.

Containing Costs and Improving Care

Successful hospital supply chain management (SCM) is the capability to execute broad functions—from planning to working capital management—that are involved in obtaining any product or service that hospital staff needs to care for a patient. Implementing SCM can help to contain costs while improving care; in hospitals, SCM covers medical and non-medical items as well as operational and capital expenditures.

Maturing Hospital SCM

“Hospital administrators strive to improve operations in their facilities because of the far-reaching, broadly positive impact it can have. Administrators should look first to streamline and optimize their hospital’s supply chain, which accounts for between 20 - 30 percent of a hospital’s budget,” said Gaby Chahine, Partner with Booz & Company. “Hospital SCM typically goes through three stages of maturity, and even in mature markets, few hospitals have made significant progress toward the most advanced level.”

These stages are:

Foundation Model: The first and most basic model aims simply to ensure supplies are in stock. This often is a minimalistic SCM with a focus on operations and materials management and limited strategic capabilities. At this level, hospitals usually adopt a segmented approach, fulfilling each department’s needs in a vacuum rather than taking a hospital-wide view, achieving few synergies or efficiencies across departments.

Optimization Model: This more advanced model uses a hospital-wide approach to reduce costs and improve efficiency. Hospitals take a more strategic approach to SCM, building capabilities that will allow them to improve supply predictability and control. This model mandates close collaboration among departments to reduce costs via hospital-wide synergies and economies of scale; it requires leaders in the supply chain function to analyze expenditures, outsource non-core SCM functions, and push for standardization to improve efficiency.

Transformation Model: The most mature SCM model is fundamentally different from the optimization model, aiming to balance cost control with patient outcomes. Organizations that operate under this model typically have engaged in cost optimization efforts and now realize the importance of focusing on increasing overall value for the hospital. This is a daunting prospect, given the inherent contradictions of reducing costs while improving outcomes and satisfaction. But SCM organizations can rise to this challenge by adopting a collaborative approach, especially with clinicians. The goal is to engage them in identifying items that offer the best outcomes for patients based on evidence compared to costs. This collaborative model hinges on strong governance structures, such as establishing product standardization committees.

In sum, hospital SCM models can evolve and shift focus from simply ensuring required items are in stock to developing integrated processes and systems that aim to reduce costs, improve efficiency, and enhance patient safety and clinical outcomes.

The Transformation Model in Practice

Three different enablers are crucial to facilitate the development of the transformation SCM model. These are:

  • Collaborative Governance: The right governance structure for SCM allows hospitals to maintain the balance between reducing costs and providing high-quality care. With increasing maturity, SCM governance evolves from focusing on the SCM team alone to a collaborative approach involving all stakeholders, without which all other efforts to move to the transformation model simply will fail.

    This collaboration requires the appropriate governance structure and processes to support clinicians in understanding the trade-offs involved in selecting products. A hospital SCM team needs to engage clinicians; they must establish themselves as partners who appreciate the importance of quality care, to win the trust of clinicians.

    According to Bitar: “To achieve such a mature governance model means moving away from merely executing clinician orders to engaging with them in an on-going, constructive dialogue and equipping them with the proper information to help them make the right decision for their patients and for the hospital. This is a complex process that includes data collection, comparative and cost/value analyses, and communication.”


  • Streamlined Processes: Streamlining processes within core supply chain functions will ensure efficiency of SCM execution, while supporting transparency and compliance with the collaborative governance structure that is so important to achieving the transformation model. Ensuring transparency of SCM processes allows supply chain stakeholders to be equipped with the right set of data to react positively to challenges, such as having too many items out of stock or too many suppliers providing similar products. At the same time, a transparent process would inform stakeholders and enable them to participate in making critical decisions based on a set of trade-offs regarding items or services required to provide patient care.

  • Integrated Systems: Automating and integrating IT systems will allow hospitals to seamlessly link their governance and SCM processes. An integrated system will establish approval flows electronically both for ordering and payment processes, ensuring that SCM applications comply with governance policies and processes by giving logged-in users the authority to make decisions only within the parameters ascribed to them.

    Hospitals will need to establish a common SCM data architecture as well as a detailed flow for the approval of expenditures, tied to the delegation of authority. The architecture works as the language of the integrated system, facilitating a collaborative environment in which buyers and suppliers establish a virtuous circle of SCM information flows and provide transparency throughout the entire supply chain to facilitate the procure-to-pay process.


Overcoming Challenges to Achieve the Transformation Model

Hospitals will face individual difficulties in building and maturing its SCM capabilities, however there are potential solutions to a number of common issues:

  • Defining an SCM strategy with a clear path forward. Without a documented strategy, hospital SCM organizations typically revert to a reactive mode in which they aim to fulfil requests from other departments. To move beyond this basic approach, those involved in SCM need to recognize that the function is not a service provider but a strategic partner in providing quality care, and then act from that perspective.

  • Building strategic SCM skill sets. This is a recurrent challenge worldwide, as expert hospital SCM talent is scarce. In particular, hospitals that are still at the foundation level will have a difficult time attracting and retaining top hospital SCM talent, because most leaders will feel that they can’t play a strategic role in such environments. Hospital boards will need to involve clinical leadership and recognize the importance of having SCM as a true partner with the administration and physicians to support the efforts to move toward a transformation model.


  • Creating a strong governance model. Without a robust governance model in place, the hospital SCM organization will lack the necessary mechanism to partner with all stakeholders and involve them in key decision making. Therefore, it is essential to establish such a model with senior leadership commitment from both a clinician and an administrative perspective. The governance structure becomes a forum for dialogue, and the SCM serves as a provider of key information that enables hospitals to make careful, balanced decisions.


  • Ensuring data is available and reliable. Foundation SCM organizations rarely collect comprehensive sets of data. Few hospitals have invested in designing the necessary data structures, such as taxonomy and item master. It is critical for hospital SCM organizations pursuing the transformation model to invest in comprehensive IT systems that can automate the procure-to-pay processes and enable comprehensive data sets.


  • Integrating SCM processes. When processes are fragmented or incomplete, SCM will resort to ad hoc activities, leading to divergence from existing policies and procedures. Such systems cause numerous errors, so it is critical for any hospital aiming to achieve the transformation model to reengineer its procure-to-pay processes comprehensively, complement them with the proper policies and procedures, and align those with capable IT systems.


In conclusion, Chahine believes that hospitals today have a substantial opportunity—and a significant challenge—in transforming their supply chains to meet ever-higher standards for patient outcomes and the need to deliver healthcare services in a more efficient manner.

“Most hospitals worldwide still operate under the foundation model, in which the function is essentially a service provider. As the costs of healthcare continue to increase, many hospitals can revamp their SCMs into a more strategic and dynamic collaborative endeavour—one that could help them control costs and enable them to serve their patients better. Learning that achieving efficient delivery of services and increasing the quality of care are not mutually exclusive can be a strong regional catalyst for supply chain transformation,” he said.

Hospitals eager to transform their SCM will have to embark on a capabilities-building mission, ensuring that workers have strategic SCM skill sets, clearly defining strategies, creating a strong governance model, integrating processes, and ensuring availability and robustness of data.

Transforming a hospital SCM mandates a change in thinking as well as practices as hospitals become lean and efficient, while improving their overall hospital operations, forging long-term partnerships with suppliers with whom they can collaborate closely to deliver value year in and year out, and ensuring better outcomes for patients.

Click here to download the pdf report by Booz & Company.