Specific Benefits of Total Supply Chain Cost Model Compared to the Cost Track Method
The working of total supply chain has benefited the partners by hastening processes like item acquisition, managing inventories and also in controlling their technological expenses. Assessing the total cost of ownership gives a clear view of a product by evaluating individual expenses such as acquisition, purchase, maintenance, fuel, operation labor, disposal, delivery, installation, and other associated costs. Taking this analysis of the total cost of ownership into account, TSCC is the cost incurred throughout the supply chain from the initial step of placing the order for a particular item to the execution. The five essential elements considered in the computation of the TSCC are the processing of the order, item acquisition, inventory management, financing, and related technological expenses.
The addition of all the costs incurred in each of these elements to get the TSCC is a more accurate and efficient approach than the cost track method. By dividing it by the total revenue generated from the product, the firm can assess its performance alongside the allocated budget and gauge the efficiency of supply chain management strategies. While the cost track method does not account for price elasticity of demand, the total supply chain cost method considers the actual product prices; hence there are minimal deviations from the current market price. The TSCC also considers all demand levels on the supply chain and the “supplier factor,” which incentivizes the firm to choose the most efficient suppliers. The cost track model only focuses on the costs and does not consider demand dynamics in the supply chain.
Challenges Faced in the Healthcare Supply Chain Based on Medical Supply Distribution
The nature of procedures and preferences of physicians are notable challenges in the medical supply chain. Different surgeons, physicians, and other healthcare personnel may have varying practice principles, such as how they conduct medical evaluations and surgical procedures on their patients. As a result, each practitioner may have preferences on tools, equipment, and products such as the medicine they prescribe to their patients. Most healthcare institutions base their inventory on the physicians’ preference cards, posing a challenge in the procurement of hospital supplies and inventory management in a case where multiple physicians have varying preference cards. This lack of uniformity can lead to hefty costs associated with wastage and procurement of unnecessary, expensive, or excess items.
Loopholes in the policies that govern the procurement process allow for mistakes and chances of shady business taking place within the supply chain. Many healthcare institutions have dealt with unscrupulous distributors or have themselves engaged in unlawful bidding and ordering transactions. Failure to establish specific rules and regulations on the procurement process allows for issues such as undercover bidding, interceptions of orders, and theft. This challenge can also be avoided by investing in systems and technology that tracks the whole procurement process from end to end, ensuring transparency and accountability from every party involved.
Many countries, especially in the developing world, rely heavily on other countries for their medical supplies. They outsource most of their needs, including medicine, machinery, equipment, and even in some cases, the workforce from technologically advanced nations. While this is beneficial for global trade, it negatively impacts innovation. During crises such as the COVID-19 pandemic, the country is unprepared and faces challenges procuring these commodities and cannot rely on its production due to failure to invest in ramping up its industries and healthcare sector.
Flowchart
Inventory Management System
Virginia Mason is a middle-sized healthcare institution with over 400 physicians. The inventory management system facilitates effective and prompt communication between the physicians and the administration in charge of inventory management. The organization employs a comprehensive management system for its inventory, enabling it to streamline its operations by improving the efficiency of healthcare personnel. The list is analyzed and managed virtually, eliminating the need for paperwork and reducing costs for materials. All crucial data is stored in a cloud-based platform, ensuring the visibility and accessibility of inventory information. Despite easily accessing medication records, tools, equipment, and other supplies, virtual systems might be imperfect. Although the management system enables personnel to avoid excessive paperwork, there is a chance of hacking the electronic system or other technical malfunctions. Therefore, it might be a worthy idea to keep essential records in writing, protecting the institution from technical mistakes, which can happen at any time. Paperwork does not require huge costs, and efficient management can save time on writing crucial information.
The purchase of medical supplies is a recurrent expenditure that takes up an enormous fraction of the hospital’s annual budget. It is, therefore, strategic for Virginia Mason to contract supplier services from companies that offer bulk purchasing contracts. This agreement will help VM cut down on expenses incurred purchasing essential items such as medication and medical tools. Buying stock in bulk can help the hospital save money, help patients increase their savings, and also prevent the risk of medications selling out. Additionally, bulk purchasing leads to economies of scale, allowing the hospital to cut down on their purchases, making slightly more profits. Generally, the hospital should contact more suppliers for bulk purchases as this result in economies of scale that allows both the healthcare facility and the patients to save.
Supporting Virginia Mason’s Decision to Keep the Suture Contract with O&M
The total supply chain cost model helped Virginia Mason identify stock-keeping unit (SKU) as the most crucial factor contributing to the transaction cost between the healthcare institution and the distributor. Under each SKU, VM and O&M analyzed the inventory cost, the interest on the list, warehouse costs, and occupancy and overhead costs. The TCSS model proved that O&M is a low-cost provider, and Virginia Mason was able to create better space designs and optimize the usage of space.
Moreover, the institution saved an estimated capital investment of 11 million dollars had planned on spending. The lab results turn-around time was reduced by 85 percent, thereby giving clients their lab test reports faster. Inventory costs, which directly affect the stock-keeping unit, were lowered through efforts to standardize and reduce expenses in the supply chain. Labor costs incurred from procuring temporary labor and paying staff for overtime services were also reduced by $500,000 within the first year of applying the TSCC model. The productivity in some of the key targeted areas within the healthcare institution increased by 93 percent within one year. Therefore, keeping the suture contract with O&M was a beneficial decision, as O&M is a substantial national distributor; the TSCC model evidenced its efficiency. As a result of the partnership, Virginia Mason cut down inventory expenses, saved profits, and expanded its space.
Logistical Challenges in the Virginia Mason and O&M Partnership
The partnership needs to evaluate its current systems and identify loopholes before developing new techniques. One of the key logistical challenges is the hidden costs of products. While fees like item price and its shipping cost are always accounted for, the institution always runs the risk of overlooking certain expenses, such as the cost of inventory holding. The risk of some supplies reaching their expiry date before use is unavoidable, especially in cases where there is the procurement of excess reserves. The partnership can curb this by budgeting based on the total landed cost of supply and evaluating product standards and variance of purchase prices.
Drug shortages sometimes occur due to the unpredictable nature of the healthcare industry, which can disrupt the supply chain. The firms are forced to source for other drug alternatives that may be more expensive, leading to an increase in both inventory and inventory management costs.
Data shortages negatively impact the decision-making process since the executives do not have access to sufficient real-time information and modeling systems to inform their decisions and strategies on business operations. Failure to integrate supply chains and centralize purchase and distribution channels with other facilities locks out the partnership from the opportunity to gain access to better pricing tiers. VM and O&M also need to work on workflow design. Tasks should be automated and processes integrated, allowing all personnel in the partnership to share information, thereby eliminating unnecessary duplication of functions and promoting the smooth flow of operations and efficiency of systems.