Chapter 4: Supply Chain Management at Valley Memorial Hospital
Details of Your Next Assignment
Bob Reilly, head of Kaizen, just called you to say that he was impressed with your progress thus far in familiarizing yourself with operations at VMH-both the strategic details pertaining to its mission, competitive priorities, etc. and the specific details concerning its products and processes. He tells you that, with all the buzz about supply chain management (SCM) that you hear these days, VMH is actively interested in exploring how different SCM concepts and techniques could be used in their operations. Maintaining an adequate, assured supply of a variety of laboratory equipment, surgical instruments, and supplies, is critical to VMH. Meg Willoughby, head of Materials Management at VMH has a couple of specific assignments that you will work on later. But for now, Meg would like a concise research report for the top management team addressing SCM issues relevant to VMH.
Details of the Assignment: Conversation with Bob Reilly
“”Lee Jordan liked your write-up on the VMH service package and delivery system. Meg Willoughby wants you to prepare a similar report addressing SCM issues relevant to VMH. Senior Administrators at VMH are actively interested in exploring how SCM concepts and techniques could be adopted in their operations. Prepare a concise report addressing the specific questions that Meg has put together for you to address. I look forward to receiving your report, which I am sure will provide insight for SCM applications at VMH.”
Assignment Questions for Chapter 4
1. Describe the essential concepts of SCM and explain to what extent SCM is applicable to a service operation such as VMH.
2. Describe internet-based electronic data interchange (EDI) and explain how VMH could benefit using EDI.
3. Describe how partnering with some of its suppliers could benefit VMH. What issues should VMH consider when developing partnerships?
4. Consider the different activities or services in VMH’s supply chain. Describe which activities might be better outsourced than done internally by VMH. Describe the key issues to consider before outsourcing a service or activity.
5. Purchasing, a major function in SCM, is especially critical in a health care industry service. Given your fresh-from-school perspective, describe the potential conflicts of interest or ethical issues facing the purchasing function.
1. Supply chain management (SCM) involves all the operations necessary to ensure that the flow of goods and services through a company are as efficient as possible . This involves all the production stages – raw materials, inventory of work-in-progress and finished products, and therefore it involves good management practices relating to sourcing, procurement, conversion and logistics. SCM involves good co-ordination and collaboration between a firm and its ‘channel partners’ to be efficient; channel partners include a firm’s primary and intermediary suppliers, third party service providers and even customers. In terms of microeconomics, SCM involves matching the supply and demand within companies and across the range of its stakeholders in a planned, optimized fashion. Although initially SCM applied mainly to the manufacturing industry, its current usage can be well extended to service operations, similar to that carried out by VMH. With the unprecedented numbers of baby boomers , the healthcare industry in particular has experienced a rapid expansion, forcing it to rethink its operational strategy to maintain competitiveness. SCM is a key area for a healthcare supplier like the Valley Memorial Hospital (VMH) to address in order to practice good cost management as well as achieve operational smoothness and efficiency. Building good supply chain networks for VMH involves not only building relationships with its suppliers and outsourced service producers, but also maintaining a good relationship with its consumers around Albuquerque to ensure continuing, ongoing business. Moreover, VMH provides for a wide range of medical services in the area, both acute and non-acute, which makes its operations quite complex. Unless there is an integrated organization wide SCM policy in place, cost efficiency for VMH as a whole is difficult to implement. The nurses, doctors, paramedics and supporting staff are all part of this supply chain, and their handling of all the resources of VMH in a co-coordinated, cost-effective fashion is critical to a successful SCM implementation.
2. Electronic data exchange (EDI) is a standard protocol for carrying out business transactions throughout different companies and organizations through an application-to-application data communication system. This means an electronic network of computers between businesses, voluntary organizations, government entities and other groups. For example, EDI can be used to produce and emulate documents to automate purchasing, and EDI systems can make it possible for various departments, suppliers and agencies to create, transmit and receive EDI documents whenever any purchase occurs. Despite the rapid growth of the internet, XML services and web technology, EDI remains the commonest method of e-commerce through out the world. Credit card payments, for instance, processed manually at shops and outlets involve the use of EDI which involve typically huge networks.
In the case of a complex organization like VMH, EDI could be put to good use in the supply chain management system in several ways. Firstly, EDI could save VMH a great deal of money in all its operations by replacing information flows that typically require manpower (scanning, archiving, typing) , materials (e.g. paper, fax) and resources (meetings, seminars, phone calls). In healthcare systems, such savings could be enormous, as the work is typically both time and labor intensive. Secondly, it would give a tremendous boost to VMH’s logistics efficiency. Information flow will be quick, data easily accessible, less paperwork will free up its professionals for more productive work, while inventory management capacity could receive a huge boost as the inventory and stock tally could be instantaneously and continuously updated (e.g. bed occupancy, stock of hospital supplies). Thirdly, a huge reduction in manual errors can result throughout the organization, which could lead to potentially huge cost-savings, as cost-effective healthcare systems can ill-afford ‘expensive’ errors. EDI is an essential part of SCM in modern healthcare organisations.
3. Strategic partnerships are an important part of modern SCM, whereby short-term contracts based on tenders attracting lowest bids are replaced by on-going informal relationships with suppliers. VMH could benefit in the following ways by partnering with its suppliers :
(1) It could benefit from higher levels of productivity as its suppliers become experienced and responsive to its own needs. This is because with partnerships, mutual understanding of business needs grow with time.
(2) Such arrangements could be cost-effective, as they minimize the necessity to look for and contract fresh suppliers at intervals; savings also result from being able to implement newer styles of inventory management like just-in-time (JIT) which minimizes the need for large stocks, as it becomes the supplier’s responsibility to maintain adequate stock levels.
(3) There are likely to be much less disputes and dissatisfied stakeholders, as long term strategic alliance ensures that everyone is more likely to work in the best of their ‘mutual’ (rather than own) interests, and can even generate a high degree of ‘loyalty’.
For partnerships, VMH should however remember that :
(a) Shorter supply chains make SCM easier, and hence, suppliers who can provide a large number of products and suppliers are likely to effective both in terms of efficiency and costs. The larger the business account it gives out to a supplier, the more VMH can demand volume discounts across a wider range of items.
(b) Partnerships with local suppliers would enhance VMH’s image of corporate responsibility in the eyes of the local communities by strengthening the local economy. This has to be balanced with outsourcing some activities like medical transcription, which cost significantly less overseas.
4. The activities within VMH’s supply chain that can be best outsourced include :
(i) Setting up an EDI and other IT infrastructure essential to a new SCM system, and providing training for its staff, because VMH currently does not have the capability or expertise to develop such systems internally. In addition, ongoing maintenance of the systems could also be outsourced as they would prove more cost-effective in the long run than setting up its own I.T. department. Medical transcription and data archival is another key related area that is best outsourced on cost grounds.
(ii) Publicity, medical communications and external website maintenance : This is also another rapidly evolving specialized area, and to maintain competitiveness at par with the rest of the industry, outsourcing is a good idea.
(iii) Several key logistical areas like security, transport and handling of patients, materials and waste disposal are also suitable for outsourcing. They do not relate to VMH’s core competencies in healthcare, but need professional handling.
(iv) Housekeeping and catering are also commonly outsourced by healthcare organisations, and should be considered by VMH too.
The issues to remember before outsourcing are :
(a) The move to outsource might be deeply unpopular with existing employees and suppliers, unless there are significant strategic and cost benefits in doing so.
(b) Good contractual agreements must be in place to protect VMH in the case of unsatisfactory performance and sudden change of circumstances, with a robust escape clause. The legal expenses can be significant if outsourcing runs into difficulties.
( c) Outsourcing must not affect the organisation’s key competencies- otherwise it will lead to reduced organizational learning and affect its future competitiveness. The areas indicated above as suitable for outsourcing are not ‘key’ healthcare areas.
5. For a managed healthcare organization like VMH, purchasing presents several areas of conflicts of interest and ethical dilemmas –
(1) Cost-effectiveness decisions affecting individuals versus the population – The most cost-effective solution for many healthcare situations might not be the best, and managers are often compelled to consider cases on an individualized basis when it comes to ‘expensive’ purchases. For the same infection, the available antibiotics might differ widely in cost and efficacy. In addition cost considerations may lead to managers ignoring some of the potential drawbacks of preferred supplies and services.
(2) Purchasing experimental treatment options is a leading area of ethical dilemmas as well as conflicts of interests, often between the medical professionals and managers. Similarly selective investment in technology to develop future capabilities for the organization may lead to conflicts between groups, as some may feel unappreciated and neglected due to an ‘underinvestment’ in their specialty.
(3) Suppliers often give corporate gifts or sponsor events to promote their products, and in return, endorsing their product, particularly for organisation-wide use, may in itself present ethical dilemmas.
(4) The ‘medical necessity’ debate may also present problems for purchasers, as some stakeholders will argue about the ethical validity of purchases that would not directly benefit consumers (patients). Such advocates may be highly critical of expenses on décor, recreational facilities, managerial and publicity expenses, ‘unproven’ but popular medical items and devices.
(5) In cases of competitive bids, important ethical issues regarding breaching secrecy to secure competitive prices from preferred suppliers may arise.
Managed healthcare purchasing, as we can see, is fraught with ethical dilemmas and conflicts of interest.
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