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Hospital Healthcare Europe

Hospital inventory systems: powerplay or rational decision-making?

Jan de Vries
16 June, 2011  

Jan de Vries

Professor of Operations Management

University of Groningen

The Netherlands

Without doubt, the healthcare sector is confronted with many changes nowadays. In order to meet increased competition and deliver healthcare services in an efficient and effective way, many health care organisations have started projects in the area of patient logistics, care pathways, information systems and quality management. Moreover, several governmental initiatives in western countries are aimed at stimulating healthcare organisations to reduce costs and improve the delivery of health services.  

One of the areas within hospitals which is generally considered to be responsible for an increase in operating costs is the management of inventories. Studies performed suggest that inventory costs in the healthcare sector are estimated to be between 10% and 18% of net revenues. It will be of no surprise, therefore, that many hospitals have taken the initiative to reassess their inventory system in order to reduce costs and improve service levels.

It is interesting to note, though, that only few studies have addressed the question how the design and implementation of inventory systems in a health service setting takes place.1 Clearly, many different stakeholders are involved in the shaping of inventory systems, so projects in the area of inventory management are far from a simple, straightforward design process in hospitals. Undoubtedly, having a clear understanding of how inventory systems are influenced by the specific characteristics of hospitals can be helpful to strategic and tactical decision-making processes on inventory systems.

A number of differences can be addressed when comparing inventory systems in hospitals to practices used in industrial companies. In a hospital setting, patient care-givers must be sure that products such as drugs are always available. Additionally, pharmacists, doctors, financial managers and care managers often have diverse perceptions of the inventory system. Consequently, the process of shaping inventory management systems in a healthcare setting probably is more affected by political and organisational processes than in industrial companies.2

The influence of different stakeholders
In general, it is well known that various groups of stakeholders in organisations may have different perceptions of management systems, and studies performed in the field of information systems indicate that the design of these systems can often be explained by the actions and attitudes of the stakeholders involved.3-4

A stakeholder can either have the power, legitimacy and/or the urgency to affect the outcome of inventory projects.5 Power relates to the capacity to exert the will over others in order to realise certain intended benefits when involved in inventory projects. Legitimacy, on the other hand, relates to whether actions of an individual or a group are validated by another individual or group of individuals.

A third important attribute stakeholders can have, relates to the urgency (or necessity) of a claim. The urgency of logistical managers being responsible for inventory costs clearly will differ from the urgency doctors have to change certain aspects of a hospital inventory system.

Inventory systems in hospitals
Inventory systems in hospitals normally are built around four main areas:6

  • A physical system
  • A planning and control system
  • An information system
  • An organisational system.

The physical system relates to the way the hospital distributes and stores products and goods like supplies, clothing and hotel supplies (uniforms, towels etc.), medical-surgical supplies, medical devices, health aids (e.g. bandage) and pharmaceuticals. Hospital supply chains are quite complex7 and products can be distributed and stored in many different ways.

Therefore, the shaping of inventory systems in hospitals includes, among other issues, decisions on whether or not ‘stockless schemes’ ought to be applied and the way the organisation deals with planned versus emergency sourcing of goods. Additionally, numerous decisions on a strategic, tactical and operational level have to be made to coordinate the demand and supply of deliveries. It is for this reason that the planning and control system – as well as the related information system – dominate the performance of hospital inventory systems.

Although some argue that a general transposition of planning and control methods from the industrial area into healthcare is possible, others feel that this is difficult to achieve due to the high stakes if goods are ‘out of stock’ and to the combination of planned versus emergency care.

The organisational embedding of the inventory system is a fourth main area that highly influences the performance of inventory systems.6 Due to less distinguishable parties and multiple stakeholders, organisational arrangements regarding stock levels, as well as the allocation of responsibilities and authority, is often quite dispersed within hospitals.

Case studies in the Netherlands
Obviously, outcomes of inventory projects can have far-reaching consequences for the stakeholders involved and there are some strong indications that, in hospitals, inventory systems are shaped by rational decision-making as well as by social mechanisms and political processes. It is for this reason that several studies have been performed in the Netherlands aimed at revealing how outcomes of inventory projects within hospitals are shaped by the stakeholders involved.

One of these case studies concentrated on following an inventory project in a medium-sized hospital. The findings of this case study are illustrative for many other projects and will be used here to summarise the main conclusions of our study. The hospital in this case study employs 1,500 employees and has 400 beds. During the early process of shaping the inventory system, different events took place, which ultimately lead to only partly adopting a new hospital inventory system.

Five conclusions
After an in-depth study of the project – and 
supported by several mini-cases performed in 
other hospitals – five main conclusions can be drawn.

Firstly, perhaps quite obviously, the case study clearly supports the idea that within hospitals, many different stakeholders may affect the shaping of inventory systems in a complex and dynamic way. Parties and stakeholders apparently are more diverse and, in some cases, more indirectly related to the inventory system than in an industrial setting. Medical staff employees and unit managers, for instance, only have an indirect link with the inventory system.

During the course of the project, however, many of these indirect stakeholders showed to have an important impact on the decision-making processes regarding the (re)shaping of the inventory system. Interestingly, both the legitimacy as well as the power of these stakeholders is often based on their medical profession. Working with opiates, for instance, is regulated by legislation and, in some cases, medical-oriented stakeholders blocked decision-making processes because they felt the proposal didn’t comply with their medical responsibilities.

Secondly, starting from the goals and interests of the stakeholders involved, almost all stakeholders in the projects studied emphasised the necessity to increase the speed and flexibility of delivering medicines and to improve the quality of prescribing medicines by means of a more advanced inventory system. In other words, medical-oriented objectives seemed to prevail above logistical and materials management goals.

Because of the different scopes and backgrounds of the stakeholders, often a substantial amount of negotiation takes place during the course of the project. Different stakeholders have different perceptions of the outcomes of the inventory project and each proposal for reshaping the inventory system of medicines easily results in different coalitions opposing the proposal. However, in many cases, the medical specialists succeeded in convincing the other members of the project group by using their power and their legitimacy.

Thirdly, the dynamics of the relationships and interactions between the stakeholders seems to be strongly reinforced by the organisational structure of the hospital. In our case study, for instance, the logistical manager was considered to be formal accountable for inventory costs. Medical staff 
employees, on the other hand, are accountable by law for patient care, which is formalised by means of structural arrangements within the hospital. 
In many cases, medical specialists are represented by an independent board which has the authority to overrule the board of directors of the hospital in case they feel patient care is in severe danger.

Additionally, performance indicators linked to financial criteria do not belong to the mindset of medically qualified employees like surgeons and physicians. Clearly, this impedes the optimisation of the inventory system and results in different realities regarding the inventory system.

Fourthly, our analysis of the decision-making processes regarding the reshaping of the inventory system reveals that the strong interrelationship between cure and care processes on the one hand and the process of storing and distributing medicines on the other hand influences the outcomes of inventory projects significantly.

When assessing the proposals for adjusting the inventory system, medical-oriented stakeholders reviewed the pros and contras of the proposal by discussing the potential consequences of the proposal for the healthcare process. In doing so, these stakeholders applied a patient-oriented perspective, taking his or her role and responsibility regarding the usage of medicines as a starting point for the review. However, this severely hampered logistical discussions about replenishment levels, the amount of safety stock and the procedures to be applied in case of rush orders.

Finally, it can be concluded that at least three contingency factors strongly contributed to the results of the inventory projects in hospitals:

  • Top management support and policy
  • Project management
  • Health delivery setting.

Although having a clear policy to reduce costs and to operate in a more efficient and effective way, the board of directors in the hospital studied did not have a clear long-term inventory policy regarding medicines and pharmaceuticals. In this context, it is interesting to notice that, within hospitals, major investment decisions made by the board of directors are frequently based on the advice of an internal investment committee. In our case study, this process was shown to have its own dynamic character resulting in a somewhat fuzzy and less transparent decision-making process regarding the reshaping of the inventory system.

Additionally, in general, project members do not have an in-depth knowledge of inventory systems and issues related to the planning and control of inventories. On an overall level, the project members demonstrated a strong focus on the medical implications of the project and only employees working in the area of procurement, logistics and distribution applied a more logistical focus. Additionally, no clear methodology was applied regarding the way inventory problems can be solved and it is probably also for this reason why many of the projects only have been partly successful.

Lack of teamwork
Hospitals are often characterised as a professional bureaucracy being not as much an integrated 
organisation as well as a collection of experts hired by the organisation where they can practice their professions as individuals.8 Noticeably, our findings should be put in this context. 
Without doubt, the outcomes of the projects 
that were studied have been affected by the federated-type meritocracy which characterises the hospitals that were studied. For instance, it is interesting to notice that, during the course of the projects, none of the medical professionals in a project team was really worried about the disappointing outcomes of the project in terms of costs and efficiency.

A strong focus of the stakeholders on patient-oriented care and cure processes, the federated-type meritocracy character of hospitals and the multidimensional character of inventory systems easily lead to a fragmented process of reshaping the inventory system. Often, this process is more based on negotiation than on an operations and logistical-oriented design rationale. For project managers, it seems important to be aware of the influence this can have on the shaping of inventory systems.

Our study indicates that, besides the technical aspects of inventory management, good project management needs to include a thorough understanding of the dynamics of the relationships and interactions between stakeholders as well. In doing so, one of the main challenges of top management is to balance the different interests of the stakeholders involved in inventory projects. Hopefully, this will lead towards more successful inventory projects that are based on an integrated view rather than on powerplay.


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