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