Supply Chains for Healthcare Products: Are They ‘Wacky’ or Not?
Leroy B. Schwarz
Krannert School of Management
Goals of Research• Understand how the supply chains for
healthcare products work– Medical/Surgical Supplies– Pharmaceuticals– Devices (e.g., stents, pacemakers)
• Understand why they work as they do
• Seek “leverage points” for improvement
Expected Impact• Improve Efficiency (i.e., lower $/unit in
delivered cost)
• Improve Quality and Safety of Healthcare Delivery
What is a Supply Chain?SUPPLIER
MANUFACTURER
DISTRIBUTOR
RETAILER
CUSTOMER
GOODS
GOODS
GOODS
GOODSORDERS
ORDERS
ORDERS
ORDERS
Historically (and typically), these chains have been managed independently
What is Supply-Chain Management SCM)?
CUSTOMER
RETAILER
DISTRIBUTOR
MANUFACTURER
SUPPLIERORDERSORDERS
Information
ORDERSORDERS
Information
ORDERSORDERS
Information
ORDERSORDERS
Information
GOODSGOODS
Information
GOODSGOODS
Information
GOODSGOODS
Information
GOODSGOODS
Information
Supply-Chain Management means managing the chain as a chain
Why Supply-Chain Management (SCM)?
• The benefits of Supply-Chain Management– Smaller Inventories – Less Capacity Required– Shorter Leadtimes– Typically: More influence
• Buyer Influence Over Supplier
• Supplier Influence Over Buyer
Why Supply-Chain Management (SCM)?
• The “Gold Standard” is:
But “Also-Ran” Supply Chains Involve:• “Customers” that decide what products to
buy and where to buy them
• “Retailers” that– Decide what products to “sell”– Negotiate with Manufacturers or Distributors
on Prices– Understand the “Payoffs” from Strategic
Sourcing and Procurement
But “Also-Ran” Supply Chains Involve:
• Moderate Levels of Information-Sharing
• Moderate Use of Information Technology in Procurement and Logistics
Economics of Healthcare Supply Chains• Total US Expenditure on Healthcare: $2.1 T
– 16% of Gross Domestic Product (growing at 6.8%)
• US Expenditures on Devices, and Medical/Surgical and Pharmaceutical Products: $275 Billion (13% of Healthcare Expenditure)
– 78% on Pharmaceuticals – 22% on Medical/Surgical Supplies & Devices
• For Hospitals, the 2nd-Largest Expense
Different “Players” in HC Healthcare Supply Chains
• Group Purchasing Organizations (GPOs)– Negotiate with Manufacturers on Behalf of
“Member” Hospitals– Do NOT take possession of products
More on GPOs– Account for 72% of Devices, Med/Surg and
Pharmaceutical Products Sold to GPO Members (or Hospitals)
– Major “Players”• Novation
• Premier
• Med Assets
More on GPOs
– Earn Revenue by:• Charging “Marketing Fees” to Manufacturers
• Charging Fees to Distributors for Products Sold “off contract
– Also offer Additional Services– Purchasing/Logistics Services
– “Networking” Services
– Learn About Member Purchases• From Distributors
Different “Players” in HC Healthcare Supply Chains
• Distributors– Purchase Products from Manufacturers, Warehouse,
and Distribute Them to Hospitals, Clinics, Pharmacies
• Earn Revenue by– Charging Manufacturers for Information about Sales of
Manufacturers’ Products
– Don’t Typically Earn a Margin on Sales
• “Charge-backs” to Manufacturers
More on Distributors– Account for the Majority of Devices, Med/Surg
and Pharmaceutical Products Sold to GPO Members (or Hospitals)
• Ex: 63% of Pharmaceuticals
– Major “Players”• Owens & Minor
• Cardinal
• Medline
Disciplines Involved/Help Wanted
• Supply-Chain Management Modeling Expertise
• Economics Expertise: Mechanism/Incentive Design
• Health Policy/Regulation Expertise