As Supply Costs Rise, the Importance of Supply Chain Management Grows


Purchasing and distributing supplies traditionally accounts for less than half of a health system's operating costs. Over time, that proportion has increased, necessitating optimization of product distribution systems.

Purchasing and distributing supplies traditionally accounts for less than half of a health system’s operating costs. Over time, that proportion has increased, necessitating optimization of product distribution systems.

Supply chain management is an increasingly important financial consideration for managers of specialty pharmacies and hospital institutions. In the past, approximately 45% of the cost of operating a hospital was related to inventory, including pharmacy supplies, surgical supplies, and laboratory supplies. In recent years, operating costs associated with inventory have begun to account half to more than half of spending each year, in part, due to increases in the cost of medical devices and medications.

With these increased costs, administrators are being forced to identify efficiencies in supply chain spending, and investments in supply chain management technology has an increasingly important role in reducing substantial supply chain costs. These technologies, which include information systems and automation technologies, help administrators track transactions and provide analytic information that may help identify inefficiencies.

By tracking the supply chain in real time, a hospital administrator or a specialty pharmacy manager might note a spike in the delivery of certain product, and might arrange for a delivery of that product in expectation of the annual peak demand through a regular supplier. In this way, a manager might reduce supply chain costs by anticipating demand, and purchasing a medication at a lower cost that would be possible if the medication was ordered on an emergency basis to deal with a shortage.

By using forecasting to make management decisions, supply chain management helps pharmacy managers and hospital managers measure performance and take steps to improve performance. Automation technology also plays an important role in cutting costs and increasing supply chain efficiency, particularly in hospitals. While automation technology has existed in other industries for many years, it is only beginning to spread into hospitals, pharmacies, and specialty pharmacies.

Hospitals are subject to intense financial challenges, including thin margins, and debt obligations that are often difficult to manage. Managing the supply chain is increasingly important as the cost of medications rise, the cost of supplies begins to outweigh the cost of labor, and supply chain management accounts for more than half of a hospital's operating budget.

In the face of these challenges, it is tempting to turn to automation. For instance, a supplier might use robots that are guided along a track to pick products, pack products, and fill packages. Robots can also contribute to maintaining sterility for certain products. Because the cost of labor is no longer the predominant cost for many health systems, more efficient inventory management is increasingly important in reducing costs.

However, when considering potential areas for cost cutting along the supply chain, it is important not to forget the potential dangers of changing a business model.

Pharmacists have a critically important role in the supply chain ensuring the consistency and accuracy of medication delivery. Medical errors that are detected in time by pharmacists helps reduce other costs, such as a patient's length of stay, and minimizes the risk of legal action against hospitals.

Because of this, it is important to take into account the important role of pharmacists in minimizing costs, even when automated delivery systems might seem like an attractive option. Ultimately, such systems could lead to increased costs through suboptimal patient care and insufficient availability of pharmacist cognitive services that reduce medical errors and improve patient outcomes.


  • Kowalski JC. Needed: a strategic approach to supply chain management. Healthc Financ Manage. 2009;63(6):90-98.

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