The Increasing Strategic Importance of Supply Chain

Dec. 27, 2023

The start of a new year always brings a flurry of predictions about what lies ahead for the healthcare supply chain.  In contrast, this edition of Value.Delivered. takes a look at how far supply chain has come in the past 15 years.  The opportunity for such reflection comes as a result of a new edition of a textbook entitled Strategic Management of the Healthcare Supply Chain.  The first edition, published in 2007, was written by Arizona State University professors Gene Schneller and Larry Smeltzer.  As we began to emerge from the pandemic, Dr. Schneller asked a few of us to help him update the book to consider, among other things, the innovations developed in response to Covid-19 and the continued pursuit of a value-based system.  The book considers the supply chain as an important system within the larger healthcare system.  I have highlighted a few of the major changes since that first edition, which in aggregate have elevated the consideration of the supply chain as a strategic asset, although not yet to the level that my co-authors and I believe it should be. 

Preparedness and Response

The challenges faced in procuring supplies needed during the pandemic, especially personal protective equipment (PPE) and ventilators, raised awareness of the frailties of a supply chain dependent upon just in time deliveries and products made and shipped from far away locations in Asia.  There have been notable efforts to onshore more PPE production, with some health systems and group purchasing organizations investing in domestic manufacturing.  Unfortunately, Dr. Schneller notes that the priorities of many health system executives have since shifted away from supply chain resiliency to other priorities, such as strengthening their bargaining position with payors.  He further bemoans the fact that few if any have added emergency preparedness and response to their strategic objectives.

Value-based healthcare

The implementation of key aspects of the Affordable Care Act prompted creation of the Cost, Quality, Outcomes Movement by the Association for Health Care Resource & Materials Management (AHRMM), the professional supply chain association of the American Hospital Association.  The CQO Movement seeks to expand the perspectives of supply chain professionals to think beyond the pursuit of the lowest unit acquisition price and consider the role of products and process in improving the total cost and quality of healthcare.  Both are becoming more important factors in determining reimbursement for healthcare organizations and physicians.  The pursuit of a more value, vs. volume, based healthcare system continues, although sometimes at glacial pace.  As a result, with many health systems facing record deficits in the wake of pandemic, the demands for supply chain cost reductions remain high. 

Clinical-Supply Chain Integration

During the pandemic, as health systems scrambled to address product shortages, clinicians began working much more closely with supply chain professionals to source what they considered suitable alternatives.  This accelerated a movement that had begun before the pandemic toward what has been referred to the clinically integrated supply chain, while the number of health systems with formal supply chain medical directors has grown.  Physicians have also become more focused on the cost of the care they prescribe as they, too, have seen their compensation tied to cost and quality.    

Non-acute care

Physician specialists, especially in orthopedics, have also driven growth in ambulatory surgery centers (ASCs).  Many physicians also have ownership stakes in such facilities, as they seek to offset reductions in traditional reimbursement.  Both government and commercial payors have also enacted reimbursement policies designed to drive more care to these locations, given data that shows surgical procedures can often be performed at lower costs and with equal or even better quality.   Both technology companies and supply chain professionals are actively working to support these expanding care delivery locations. 

Social Imperatives

The move to value has also expanded supply chain’s purview to support the social determinants of health, such as employment and access to nutritious food, safe housing and transportation that play more of a role in someone’s health and longevity than the clinical care received.  For years, this work has been primarily focused on increasing spend with diverse suppliers, but more recently health systems have sought to support economic development in the local communities where their most at risk patients live.  Some health systems have even opened grocery stores in disadvantaged neighborhoods to address food insecurity, with supply chain managing the sourcing, purchasing, contracting and inventory management for such offerings. 

Supply chain professionals also have an important role in reducing the impact of healthcare operations on climate change given that a majority of greenhouse gasses associated with healthcare are tied to the supply chain.   Work is underway by many to source more sustainable products and collaborate with suppliers to reduce the greenhouse gas emissions in the procure to pay cycle.  Most recently, supply chains are also being asked to be more vigilant about the potential for purchasing products made with forced labor. 

Fully Integrated Supply Chain Organization (FISCO)

The book also introduces readers to the concept of a fully integrated supply chain organization or FISCO, which was developed at Arizona State University.   A FISCO recognizes that the supply chain is a system of systems, operating in support of the larger health system.  As such, rather than focusing on any one aspect, it takes a more holistic approach to optimize how the various supply chain functions and stakeholders operate in concert to support clinical, financial, and operational performance and ultimately the best use of resources to generate health. 

For more information on the book, visit Wiley.com and search on Strategic Management of the Healthcare Supply Chain, 2nd edition. 

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