1. Supply Chains for Healthcare Products: Are They ‘Wacky’ or Not? Leroy B. Schwarz Krannert School of Management

2. Goals of Research Understand how the supply chains for healthcare products work –Medical/Surgical Supplies –Pharmaceuticals –Devices (e.g., stents, pacemakers) Understand why they work as they do Seek “leverage points” for improvement

3. Expected Impact Improve Efficiency (i.e., lower $/unit in delivered cost) Improve Quality and Safety of Healthcare Delivery

4. What is a Supply Chain? SUPPLIER MANUFACTURER DISTRIBUTOR RETAILER CUSTOMER GOODS ORDERS Historically (and typically), these chains have been managed independently

5. What is Supply-Chain Management SCM)? CUSTOMER RETAILER DISTRIBUTOR MANUFACTURER SUPPLIER Information Supply-Chain Management means managing the chain as a chain

6. Why Supply-Chain Management (SCM)? The benefits of Supply-Chain Management –Smaller Inventories –Less Capacity Required –Shorter Leadtimes –Typically: More influence Buyer Influence Over Supplier Supplier Influence Over Buyer

7. Why Supply-Chain Management (SCM)? The “Gold Standard” is:

8. But “ Also-Ran ” Supply Chains Involve: “Customers” that decide what products to buy and where to buy them “Retailers” that –Decide what products to “sell” –Negotiate with Manufacturers or Distributors on Prices –Understand the “Payoffs” from Strategic Sourcing and Procurement

9. But “Also-Ran” Supply Chains Involve: Moderate Levels of Information-Sharing Moderate Use of Information Technology in Procurement and Logistics

10. Economics of Healthcare Supply Chains Total US Expenditure on Healthcare: $2.1 T –16% of Gross Domestic Product (growing at 6.8%) US Expenditures on Devices, and Medical/Surgical and Pharmaceutical Products: $275 Billion (13% of Healthcare Expenditure) –78% on Pharmaceuticals –22% on Medical/Surgical Supplies & Devices For Hospitals, the 2nd-Largest Expense

11. Different “Players” in HC Healthcare Supply Chains Group Purchasing Organizations (GPOs) –Negotiate with Manufacturers on Behalf of “Member” Hospitals –Do NOT take possession of products

12. More on GPOs –Account for 72% of Devices, Med/Surg and Pharmaceutical Products Sold to GPO Members (or Hospitals) –Major “Players” Novation Premier Med Assets

13. More on GPOs –Earn Revenue by: Charging “Marketing Fees” to Manufacturers Charging Fees to Distributors for Products Sold “off contract –Also offer Additional Services –Purchasing/Logistics Services –“Networking” Services –Learn About Member Purchases From Distributors

14. Different “Players” in HC Healthcare Supply Chains Distributors –Purchase Products from Manufacturers, Warehouse, and Distribute Them to Hospitals, Clinics, Pharmacies Earn Revenue by –Charging Manufacturers for Information about Sales of Manufacturers’ Products –Don’t Typically Earn a Margin on Sales “Charge-backs” to Manufacturers

15. More on Distributors –Account for the Majority of Devices, Med/Surg and Pharmaceutical Products Sold to GPO Members (or Hospitals) Ex: 63% of Pharmaceuticals –Major “Players” Owens & Minor Cardinal Medline

16. Disciplines Involved/Help Wanted Supply-Chain Management Modeling Expertise Economics Expertise: Mechanism/Incentive Design Health Policy/Regulation Expertise