Supply Chain Management Practice in Clinical Pharmacy: A Case Study

Rizki Siti Nurfitria School of Business and Management (SBM), Institut Teknologi Bandung (ITB), Indonesia

Abstract
The purpose of the paper is to discuss supply chain management (SCM) practice in clinical pharmacy where supply chain decision involves several participants such as pharmaceutical wholesaler and health care practitioners, to look specifically the wholesaler-pharmacy-practitioner relationship and to develop an understanding of the nature of collaborative arrangements to manage inventories. Major challenges for applying SCM in patient-oriented care provision will be presented. The paper adopts a literature review and case study in a health care organization in Bandung. Process mapping was conducted to model the supply chain flow to visualize the actual process and look for improvement to make it more effective. Other information related to current inventory and delivery process from the wholesalers to the pharmacy and how they decide product to order are gained from interview with the pharmacist and the pharmacy staff. The supply chain management process was analyzed to identify the main problems and factors that influence the inventory. Suggestions for improvements are proposed for development of collaborative supply chain management in a complex situation. This paper contributes to the emerging literature on SCM process in clinical community pharmacy that involves several supply chain participants such as patients, health care practitioners and provider, wholesaler, and manufacturer. A collaborative supply chain arrangement to control the inventory more efficiently and improve the service level is showed to be promising. Keywords: supply chain management, health care, pharmaceutical supply chain, clinical pharmacy, collaborative arrangement

1. Introduction Many countries around the world must struggle with the high costs their healthcare system among other costs due to the aging society. Suppliers of goods involved in health care provision are increasingly challenged to perform operational efficiency based on demand in a responsive manner and reduce costs while continuing to improve quality of care. They applied concepts and tools of supply chain management (SCM) are to hospitals and pharmacies (McKone-Sweet et al., 2005). Supply chain management in health care industry is more complex than other industry because dealing with peoples health and well being requires adequate and accurate medical supply. In this paper, we will present a case study on supply chain practice in a health

care organization in Bandung, identify issues on its supply chain process and discuss problems that occur in complex situations resulted from the situation in which the treatment of patients requires input and good supply from multiple health care providers. The research focuses on the inventory management and supply chain process that involve pharmacy, health care provider, and wholesaler. We will first discuss SCM in general starting with the notion of supply chain. In section two, we introduce our SCM perspective on health care provision. Potential improvements are then suggested to clinical pharmacy supply chain management practice. 2. Research Objective The purpose of the present paper is discuss SCM practice in clinical pharmacy where

supply chain decision involves several participants such as pharmaceutical wholesaler and health care practitioners, to look specifically the wholesaler-pharmacypractitioner relationship and to develop an understanding of the nature of collaborative arrangements to manage inventories. The paper will answer the questions of what major issues and factors that influence the inventory and purchasing decision in clinical pharmacy inventory management and how different echelons and health care practitioners in the supply chain collaboratively manage inventory in the future as perceived by supply chain participants. 3. Literature Review 3.1 Supply Chain Management Supply chain is defined as a way to envision all steps needed from beginning to end in order to deliver products or services to the customer. For the notion of supply chain several definitions have been proposed and include the following points: 1) The supply chain covers all activities from beginning to end; often presented as from raw materials to distributed products or services in the manufacturing industry; 2) An organization can be part of more than one supply chain; 3) Every activity of supply chain should add value to the product for the end customer as emphasis and 4) Information flow in supply chain between organizations should be addressed. Supply chain management (SCM) is a technique that is linked to the adoption of the lean production system. For many organizations, developing the lean production system is a key element is their SCM practice. This involves seeking to improve value delivery to customers, rely on just-intime system, eliminate waste, get the involvement of all stakeholders in the value, creation process, develop close collaboration, work closely with suppliers, reduce the

number of suppliers, and develop efficient suppliers (Otman and Gani, 2008). Many definitions of managing supply chain refer to the need for interaction and integration between enterprises in an interorganizational context. Christopher (1992) emphasized the goal is to do business as a supply chain at a lower cost than when doing business as separate firms. It is the customer who decides which supply chain has delivered most value for the lowest cost and will therefore be chosen to conduct business with. Stadtler (2005) had included all the components of different types of flows, customer demand, and supply chain competitiveness and mentioned the integration of organizational units. The principles of a supply chain and SCM practices in the manufacturing sector can be transformed to health care, although adaptations have to be made (Meijboom et al., 2011). 3.2 Supply Chain Management in Health Care Industry The supply chain is an integral part of providing quality care to the patient in the healthcare system. In recent years, SCM has drawn significant attention in the healthcare industry since SCM shows a significant impact on hospital performance. SCM in hospitals include the internal chain (e.g. patient care unit, hospital storage, patient, etc.) and the external chain (e.g. vendors, manufacturers, distributors, etc.) (RivardRoyer et al., 2002; Schneller and Smeltzer, 2006). A hospital receives products and services from suppliers, and then stores and distributes to each care unit based on the hospitals operation processes. Therefore, SCM includes business activities (e.g. purchasing, distribution, management of suppliers) and operations that integrate a continuous, seamless flow of materials and services for healthcare delivery (RivardRoyer et al., 2002; Shih et al., 2009).

According to Singh et al. (2006), healthcare SCM processes have three types of flows: physical product flow, information flow, and financial flow. T he physical product flow manages customized products and services for the treatment of patients and their needs. Information and financial flows are related to SC design decisions for effective product flow and improved organizational performance (Singh et al., 2006; Kowalski, 2009). The implementation of SCM system in the health care system is elaborate because it

involves many different stakeholders such as pharmaceutical manufacturers, distributors, wholesaler, regulatory agencies, and IT providers (Bakhoo and Chan, 2011). A study by Flynn et al. (1990) in wholesaler identified and categorized major changes in supply chain such as compensation forces; related inventory management agreement, pricing regulation by government and third agency, channel forces; related to evidence of increased direct selling and third party logistic, and product and regulatory forces; product diversity need more concerns regarding to handling and delivery.

Government Regulatory Agency

Technology Providers

Retail Pharmacy

Manufacturer

Wholesaler/ Distributors

Hospital Pharmacy

Patient

Drugstore

Inventory Push Production Pull Production

Figure 1. Pharmaceutical supply chain in Indonesia, adapted from Peraturan Pemerintah No. 51 (2009) and Shah (2004) The typical structure for these supply chain can be found in Figure 1. The manufacture involves the mass production of the active ingredients for medication and the convert of active ingredient into usable product. These activities are usually taken in separate industry or same manufacturer if the active ingredient is already the usable product itself. In the distribution process of the finished products, there are a number of different channel to the market. The dominant channel is the wholesaler. It is a legal channel pointed by government regulatory agency to distribute pharmaceutical products to health care providers. Manufacturer may have

its official wholesaler or distribute their products by cooperating with other legal wholesaler. Hospitals and retailers receive special kinds of product such as narcotic and psychotropic directly from these official wholesalers. Shah (2004) identified characteristic of these supply chain, such as long lead times, high inventory levels, and demand amplification. 3.3 Pharmaceutical Supply Chain (PSC) The Pharmaceutical SC (PSC) is a special SC in which medications are produced, transported and consumed. Academic researchers and practitioners believe that pharmaceuticals are different; they cannot be treated like other commodities. SCM practices in health care are more complex compared to other industry (Bakoo and Chan, 2011) and face several obstacles in building SCM strategy as follows: Priority conflict and lack of SCM knowledge among HC professionals (McKone-sweet et al., 2005). Physicians as the key decision makes on the medicines procurement but with limited understanding (Shah, 2004; Scheller and Smeltzer, 2006) Lack of support from senior management (McKone-sweet et al., 2005) Relationship bottleneck between purchasing organizations and other parties in SC (McKone-sweet et al., 2005). Regulatory institution influence pharmaceutical industry, related to patent and generic drugs (Shah, 2004). Regulation push wholesaler and manufacturer to increase transparency and reveal costs for purchase and prices sold for customer including those related with distribution. Product life cycle. Pharmaceutical products have certain developmental cycle that will determine supply chain strategy, capacity planning and inventory management (Shah, 2004). The high cost and long duration for research and development, and the repercussions of the product not being available, hence again its criticality. New technology is shortening life cycles,

creating new pressures on the distribution channels (McKone-Sweet et al., 2005). Forecasting. Uncertainty of patient consumption is regarding with demand fluctuation and supply bottleneck (Jarrett, 1998; Scheller and Smeltzer, 2006). Lack of standard nomenclature and the preference of the physicians create further uncertainties (McKone-Sweet et al., 2005). The result is the pharmacy has to maintain excess stock to respond emergency needs and unpredictable demands (Beier, 1995; Danas et al., 2006) that will lead to other problems such as drug expiry. Diverse market channel such as mail order, direct shipping, etc. (Shah, 2004). Profit margins. Operating margins are small in the wholesaler sector particularly, while pharmaceutical products have high value over-controlled by hospitals, retailers, and manufacturers (Mustaffa and Potter, 2009).

Several literatures have described some method contributed to pharmaceutical supply chain development. JIT system was argued to be an ideal operation in material management and pharmacy departments as they deal with high volume products, tangible items and repetitive operation (Kowalski, 1986). Another operation has been described in previous literature is hybrid stockless that was suggested to be used for high volume products (Rivard-Royer et al., 2002). These two approaches represents pull type inventory management system can reduce inventory holding costs while maintaining service levels (Mustaffa and Potter, 2009). Other approach that builds on the information requirement of hybrid stockless is vendor managed inventory (VMI) system. In this system, supplier take responsibility in monitoring retailer's inventory levels and makes periodic replenishment decisions based on order quantities, delivery types and replenishment time. Other previous researches on inventory management in the health care have been described as follows:

Forming a virtual hospital pharmacy in which the pharmacy department can access information on different pharmaceutical stock-keeping unit stored in the same geographical area (Danas et al., 2006). This suggestion has benefit for inventory reduction, increasing customer service level and transport costs. Developing a classification framework from a very important class to not important based on factors such as treating patient critically, supply characteristic, inventory problems, and usage rates. The pharmacy maintains every drug class based on different characteristics. Inventory management decisions in hospitals are influenced by myriad stakeholders such as pharmacy departments, distribution, senior management and clinical staff. The

decisions made related to some issues such as top management support, project management issues and the setting of health delivery. These factors can be analyzed using simulation models. 4. Methodology A case study approach is adopted to investigate the current level of supply chain management in a health care provider. It will help to answer the questions of what major problems and factors that influence the development and purchasing decision in clinical pharmacy inventory management and how different actors in the supply chain collaboratively manage inventory. The study involves two echelons in the supply chain-the wholesaler and the clinic, two health care practitioners-physician and pharmacist, and patient as the end user.

CLINIC Pharmacist
Dispensing room Pharmacy warehouse OTC/delivery room

Patient

WHOLESALER

MANUFACTURER

Physician
____ = drug distribution _ _ _ = health care providers and patient relationship _._._. = product order

Figure 2. Supply chain process in the study Process mapping method was conducted to model the business process flow to visualize the actual process and look for improvement to make it more effective. Other information related to current inventory and delivery process from the wholesalers to the pharmacy and how they decide product to order are gained from interview with the pharmacist and the pharmacy staff. 5. Findings

5.1 Supply Chain Process The supply chain process was analyzed to identify the main problems and factors that influence the inventory decisions based on process mapping and interview. Figure 2 show the supply chain process among health care provider and practitioners in the clinic. The pharmacy is responsible for monitoring and managing the inventory and the pharmacist place the order to the wholesaler. Before purchasing, the inventory staff in the warehouse collects the data of product stock out from the dispensing room where ethical products are stored and the OTC display/delivery room where over-the-counter products are displayed and patients receive the medication. The replenishment in the dispensing room and OTC display is based on patient demand from both medical prescription and self medication needs. Medical prescription consists of several products that are usually physicians preference based on pharmacy inventory or individual suggestion as rational treatment for patient. Physicians have their own knowledge about product items and continually update with the new pharmaceutical product development from pharmaceutical industry and wholesaler. The decision on which product to order at each period and the quantity required are gained through these process. Pharmacist makes an order directly by phone to the wholesaler and gives surat pesanan (SP) signed as the purchase order when the products are shipped and delivered by the inventory staff. The orders are usually placed in the first day of the month and in the middle of the month and will be processed and delivered in the same day as possible. 5.2 Issues in the supply chain Based on the information collected from the case study, several issues within the supply chain are identified. Pharmacy department faced several problems in collaborative arrangement with SC partners--the wholesaler

and the customer--patient and physician in complex situations as follows: Urgent orders. Urgent orders need to be delivered if the product reaches critical inventory level or if there is no alternative treatment for the patient. In certain time, the demand of a product can be very high due to the epidemic disease that occurs unexpectedly. The urgent orders can be worse when it has to deal with physical and technical infrastructure, such as the space required for storing products and transportations. When the urgent demand is critical in providing patient care, just a few products are ordered and delivered. Therefore the wholesaler cannot always afford the urgent requirement of the pharmacy. Stock availability in the wholesaler. The wholesaler may face difficulty when most of the clinics and hospital order the same products at the same time, for example twice a month as observed in the study. The situation will cause stock out problems in the wholesaler replenishment with manufacturer. The clinic will have to wait until the new stock arrives. Divergent goals. The pharmaceutical manufacturers and the wholesaler were driven by profit maximization and this situation can be elaborate with the pharmaceutical product marketing strategy implemented by the manufacturer in which they widely distribute the product information through massive advertisements and approaches to health care practitioners and influence the customer awareness and preference of products to be delivered to the patients. The clinics and hospitals were weary of the fact that a collaborative arrangement would lead to an increased dependence on this entity.

All these three major problems found in the case study involve several supply chain participant that interact one another and the critical one in the collaborative arrangement

will lead to trust issues among health care providers and also patients. 5.3 Suggested Improvement Strategy New approaches must be considered to control the inventory more efficiently that can lower the operating costs and improve the service level. For urgent orders, the JIT method can be applied with the suggestion that the wholesaler and the clinic are located close to each other with effective transport network between them. The most efficient route may be used in order to replenish inventories for different clinics which are close to each other. Increased or massive demand of pharmaceutical products due to certain disease epidemic must be anticipated responsively by the pharmacy using annual inventory data in several past years. The development of collaborative supply chain management is influenced by several contingent factors such as product characteristics, spatial complexity, goal congruence and degree of trust or commitment between organizations, regulatory environment, physical attributes such as the size of the hospital, availability of storage space and the stage of IT adoption (Bakoo et al., 2012). Supplier cooperation has become one of the most important strategies for long-term growth of the organization (Chan et al., 2008). Hospital managers and the government strive to find ways to contain medical costs through more effective purchasing. To select the best suppliers, organizations have examined dimensions of supplier cooperation based on four attributes of suppliers: quality of product, service, price, and delivery (Lambert et al., 1997). His study examined that the healthcare industry has prioritized quality of products and services over cost reduction. Pharmacies identified the same three main criteria as important when choosing a main wholesaler: service level and efficient operations, delivery times that is vital to be early enough to issue to pharmacy customers, good financial terms and competitive discounts. Pharmacy must have complete and informative data of main supplier selected and alternative to

ensure the fulfillment of stock availability. Relationship with the wholesaler and manufacturer can be strengthened by prime vendor contract that provides incentives for the pharmacy to consolidate purchase such as discount and reduced service fee (Beier, 1995). In a dynamic competitive industry, collaborative supply chain also must involve efficient SC operation which refers to profitability, flexibility, reliability, and waste elimination (Chen, 1997; Heikkila, 2002). Efficient SC can be achieves through effective supplier selection as suggested above. Chen (1997) stresses flows of cost and information to achieve SC efficiency in the acquisition process. Information networks help develop a positive relationship between customers and suppliers and derive benefits such as speed in response, waste elimination, and information networks within and between suppliers and customers (Pin, 2001; Heikkila, 2002). Information flows between health care practitioners-pharmacist and physicians must be built through good communication regarding to the supply chain decision that will contribute to successful treatment for patient wellness. The physicians and pharmacy have to cooperate well especially on how to provide new product with rational purpose and affordable price for patient, how the proposed demand procedure will be conducted, and both of them must obey the terms and agreement that has been made. Physicians cannot force certain product in the medical prescription if they have not made agreement with the pharmacy and the product has not yet provided in the inventory. Lack of effort in communication between practitioners may lead to bad performance in drug delivery to the patient and the pharmaceutical supply chain as a whole. The wholesaler and the manufacturer also must ensure the availability of the product demanded as they massively inform and promote via product information to the customers (patients and health care practitioners). When companies develop or use more efficient information networks, they can improve

processes for continuous replenishment and shipping based on ordering notices. Companies can also explore other information technologies such as radio-frequency identification (RFID) for transportation tracking and shared databases, electronic data interchange (EDI) for order placement and invoicing, and the internet to improve communication with customers. 6. Conclusion The supply chain is an integral part of providing quality care to the patient in the healthcare system. In this paper, the supply chain management practice at a clinical community organization in Bandung is explored. This paper particularly focuses upon the inventory and delivery management process in the supply chain and answers the questions of what major issues and factors that influence the inventory and purchasing decision in clinical pharmacy inventory management and how different echelons and health care practitioners in the supply chain collaboratively manage inventory in the future as perceived by supply chain participants. From the analysis, it was found that urgent orders, stock availability in the wholesaler, and divergent goals among health care providers are the major issues in the pharmaceutical supply chain in the clinical community organization. In addition, many clinics were placing urgent orders due to poor inventory control methods. Therefore, the clinics have to find improvement strategy to reduce the operating costs and increase the customer service level. Based on the study, JIT system can still be applied to manage urgent orders in limited situation. Major problems should be handled with the collaborative supply chain arrangement with the focus on the supplier cooperation, supply chain efficiency, and good information flow among the participants. This should overcome some weakness from the application of JIT systems. Further research is needed to conduct longitudinal and case study approach to describe the natural environment of pharmaceutical supply chain and capture

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