Where to reduce healthcare operation costs

The business of healthcare industry comprises a wide variety of enterprises. Products and services comprise of medical consumables, pharmaceuticals, catering and food, laundry cleaning, waste management and disposal, home-care products, information technology, vehicle fleet management and general research supplies (Gattorna, 1998). The healthcare industry has historically viewed itself as being operationally different from other businesses (Jarrett, 1998). Primarily, this thought has developed because healthcare providers believe that, unlike managers in the manufacturing industry, they cannot control or project their production or operational schedules. However, the healthcare industry is facing an environment where there are pressures to reduce operating costs and increase margins, without threatening production or medical-care quality.

An analysis of the total healthcare system indicates that the supply-management system is one of the primary areas where cost reductions can be a predictable outcome (Butters and Eom, 1992). At the same time, as Jarrett points out, the one advantage of reengineering the supply chain is that the cost reductions would not affect all the components of the medical-care operation. The increase in healthcare costs and inefficiencies are partly due to inadequate and tedious purchasing procedures (Alt, 1997). With supplies and services representing the second largest expense category in a hospital’s operating budget, procurement professionals are under enormous pressure to reduce cost in these areas.

To do so, there are two pathways available. One is to lower the unit price paid for those goods and services, and the other is to lower the transaction costs. The theory of information systems (ISs) concentrates on getting the right information at the right time in the right format to the right user. This requires focus on organisational objectives as well as design and dynamics as much as it requires focus on the procurement of the most appropriate hardware and software (Leonard et al., 2000). It is to be recognised that healthcare supply chains have evolved from mass to focused marketing and that while flexibility is essential, facilities need to be concentrating on integrated supply chains.

Healthcare costs are under attack by the public because healthcare information management systems are merging and consolidating (Adams, 1995). That means current healthcare logistical research needs to focus on specific supply chain processes, especially on the information flow. Indeed, supply chain automation in a modern healthcare organisation (HCO) represents a huge target for cost savings.