A way for reducing drug supply chain cost for a hospital district: A case study

Journal of Industrial Engineering and Management JIEM, 2016 – 9(1): 207-230 – Online ISSN: 2013-0953 – Print ISSN: 2013-8423 http://dx.doi.org/10.3926/jiem.1262 A Way for Reducing Drug Supply Chain Cost for a Hospital District: A Case Study Leonardo Postacchini1 , Filippo Emanuele Ciarapica2 , Maurizio Bevilacqua2 , Giovanni Mazzuto2 , Claudia Paciarotti2 1 Libera Università di Bolzano, Faculty of Science and Technology (Italy) Department of Industrial Engineering, Università Politecnica delle Marche (Italy) 2 , , , , Received: September 2014 Accepted: February 2016 Abstract: Purpose: This work aims at providing insights to optimise healthcare logistic of the drug management, in order to deal with the healthcare expenditure cut. In this paper the effects of different drug supply chain configurations, on the resulting average stock, service level and Bullwhip effect, of the studied supply chain, is quantitatively assessed. Design/methodology/approach: A case study of an Italian district has been studied, taking into account three echelons: suppliers, central stock, and hospitals. A model of the various supply chain configurations has been created with the use of the simulation. Specifically, 24 supply chain configurations have been examined, stemming from the combination of several supply chain design parameters, namely: transshipment policies (Emergency Lateral Transshipment or Total Inventory Equalization); re-order and inventory management policies (Economic Order Quantity or Economic Order Interval); required service levels (90% or 95%); the number of available vans (one or two). For each configuration, hospital average stock, service level and a “Bullwhip effect” analysis are computed. To know which input variables are statistically significant, a DoE (Design of Experiments) analysis has been executed. -207- Journal of Industrial Engineering and Management – http://dx.doi.org/10.3926/jiem.1262 Findings: The output of this paper provides useful insights and suggestions to optimize the healthcare logistic and drug supply chain. According to the developed DoE analysis, it can be stated that the introduction of transshipment policies provides important improvement in terms of service and stock levels. To reduce the Bullwhip effect, which results in a service level decreasing, and in a managing stock costs increasing, it is worth to adopt an EOQ re-order policy. Practical implications: This research gives practical recommendations to the studied system, in order to reduce costs and maintain a very satisfactory service level. Originality/value: This paper fulfils an identified need to study which combination of transshipment policies, re-order/inventory management policies and required service levels, can be the best one to reduce costs and maintain a very satisfactory service level, in the specific logistic system. Keywords: healthcare logistic, drug management, supply chain design, discrete-events simulation model, design of experiments 1. Introduction Drug management represents a large portion of the costs in the healthcare system, due to the significant costs of these products and their storage and control requirements. Reducing waste / increase the efficiency in healthcare system is therefore a global challenge, highlighting the need to identify any source of potential improvement and leverage on any tool, technique, methods and technologies to improve health care delivery and services (Bertolini, Bevilacqua, Ciarapica & Giacchetta, 2011). Despite well-documented evidence of significant competitive advantage and cost reduction resulting from supply chain management (SCM) practices, the healthcare industry has been extremely slow to embrace these practices (Balaji, Lewis & Rai, 2010; Lee, Lee & Schniederjans, 2011); the challenges are many: i. products and medical devices used procedures can be extremely expensive ii. demand in terms of types and amount of product required for procedures can be highly unpredictable due to the diversity in patient characteristics iii. inventory tracking can be difficult due to the urgency of medical procedures -208- Journal of Industrial Engineering and Management – http://dx.doi.org/10.3926/jiem.1262 iv. product expiration and tracking issues caused by a lack of accountability for products managed under a consignment process (Balaji et al., 2010). Chow and Heaver (1994) analysing the logistics activities stress that around 46% of an average hospital’s operational budget is related to this type of activities; more precisely logistics costs may be split as follows: 27% for the cost of supplies, 4% for time spent by clinical staff on logistics tasks, and 15% for employees assigned to logistics duties, including material management, nutrition and laundry staff. More recent studies, analysis and report confirm that (i) the costs level of logistics activities remain very high (Ontario Buys & Health Care Supply Network, 2007) but slightly lower than what is analysed by Chow and Heaver (1994) and (ii) the adoption of traditional supply chain methodologies / strategies is still in its earliest levels, despite can bring significant performance improvements (Gjerdrum, Jalisi, Papageorgiou & Shah, 2000). This paper examines the effects of different logistic solutions, on the performance of a specific healthcare supply chain. In particular, the case of an Italian district has been studied. Due to the cut in health expenditure, which has been implemented in the recent years by the central government, to all the hospitals present in each Italian district, it has been asked to reduce costs and inefficiencies in the logistic system. Many hospitals merged together in order to reduce inventories to manage, and also to achieve scale economies in the supply and transport stage of the drugs (Ciarapica, Giacchetta & Paciarotti, 2008). According to Sinha and Kohnke (2009) there is a gap between the growing demand and available supply of high-quality, cost-effective, and timely health care, not only in developing and underdeveloped countries but also in developed countries. The significance of this problem is heightened when the economy is in recession. Recently, most healthcare organizations focus their attention on reducing the cost of their supply chain management (SCM) by improving the decision making pertaining processes’ efficiencies (AbuKhousa, Al-Jaroodi, Lazarova-Molnar & Mohamed, 2014). The availability of products through healthcare SCM is often a matter of life or death to the patient; therefore, trial and error approaches are not an option in this environment. Simulation and modeling (SM) has been presented as an alternative approach for supply chain managers in healthcare organizations to test solutions and to support decision making processes associated with various SCM problems. In this context this work aims at providing insights to optimise healthcare logistic of the studied system, in order to deal with the Italian (...truncated)