Supply Chain Issues in Healthcare and How to Manage Shortages

Kara L. Nadeau, Healthcare Industry Contributor

Wednesday, March 20, 2024

From product shortages to logistical challenges, healthcare organizations must navigate a complex web of suppliers, distributors and regulatory bodies to ensure they have the necessary resources to provide high-quality care. Identifying and addressing supply chain issues in healthcare can provide organizations with opportunities to improve the patient experience and achieve cost optimization.

Why strong healthcare supply chains are important
Common causes of healthcare supply chain issues
Advancements in supply chain technologies
How COVID-19 impacted supply chain operations
The benefits of effective supply chain management
Solutions to optimize supply chains in healthcare
Best practices for supply chain logistics management

The importance of strong healthcare supply chains

Effective and efficient healthcare supply chain management is key to ensuring patient safety and satisfaction, reducing costs and waste, improving healthcare outcomes, and addressing supply chain issues as they arise.

In the current healthcare delivery environment, where health system and hospital leaders are challenged by shrinking reimbursements, limited cash flow, rising labor and supply costs, and increased pressure to deliver value (low cost/high quality care), supply chain leaders are playing a more strategic role in optimizing clinical, operational and financial performance.

Elements of healthcare supply chain management

Robust supply chains are critical to ensuring high-quality healthcare delivery and improving patient experiences and outcomes. However, healthcare supply chain management is highly complex because many stakeholders, processes and data must be aligned to make it effective and efficient. Many intricacies and nuances factor into the equation, such as:

Industry relationships: Healthcare organizations rely on group purchasing organization (GPO), distributor and supplier contracts to mitigate rising supply costs. That means having systems and processes in place to ensure supplies are procured at negotiated contract prices. Today, hospital purchasing leaders prioritize reliability in their supplier relationships, with 76% of those surveyed citing it as a top value driver for their teams.
Transactional procure-to-pay (P2P) processes: The process by which a supply chain team generates a purchase order (PO) within its enterprise resource planning (ERP) system to purchase or replenish needed supplies, the supplier acknowledges the order (POA), it is shipped, received by the facility, the supplier invoices the healthcare organization, and a payment is made.
Inventory management: Once a product is delivered to a healthcare facility, it must be managed from receipt through to use. Supplies are typically stored in different areas depending on type, quantity and demand. Some health systems have consolidated service centers (CSC) or warehouses to store large quantities of items for self-distribution. Within a facility, there are also many supply storage locations, including central supply areas, storage rooms, closets and carts in clinical areas.
Consignment orders: Certain clinical areas may need to procure products from suppliers outside of the organization's ERP system. So-called “consignment” orders (e.g., bill only, bill and replace, waste and replenish/requisition) are made for items such as knee and hip implants. There are typically specific quality control and patient safety considerations for products in this category. Both the procurement processes and management of this inventory differ from standard medical supply chain workflows.

Common causes of healthcare supply chain issues

Despite the post-pandemic environment, significant global disruptions continue to impact the U.S. healthcare supply chain in 2024. A January 2024 Premier report noted how “healthcare providers are still experiencing hundreds of different products shortages that can negatively affect the delivery of patient care and hinder quality outcomes.”

But it’s not just external factors that challenge supply chain leaders. Here are three internal challenges common to health system and hospital supply chain teams.

1. Manual procure-to-pay (P2P) processes

Without systems and solutions to facilitate automated and touchless procure-to-pay transactions, many teams end up bridging the gaps with manual, time-consuming labor that increases the risk for errors.

For example, POs and invoices that are processed manually and sent/received via email or fax (or worse, by postal mail) involves many touchpoints that add time, labor and costs. It also prevents an automated three-way-match between PO, purchase order POA and invoice to confirm the correct prices are being paid.

Discrepancies in the P2P process can lead to delays in suppliers receiving, processing, and fulfilling orders; order inaccuracies where suppliers ship the wrong products or the wrong quantities to provider customers, and PO/invoice mismatches that must be resolved before providers can process invoices and generate payments to suppliers.

2. Manual inventory management processes

Inadequate inventory management that relies on manual tracking and documentation of products as they are received, stored, moved and used is a tremendous burden on supply chain and clinical staff. It also limits visibility into supply status, which can lead to stockouts, overordering, added costs and waste.

Lack of integration between a health system’s ERP and EHR systems and the need for manual intervention to document supply utilization in the EHR system at the point of use (POU) prevents supply chain and clinical teams from gaining a true picture of supply versus demand.

3. Manual data management and data quality challenges

In complex supply chain networks where distributors, suppliers and providers must align on continuously changing product and price data, manual updates fall short because of the constant data churn. This leads to pricing inaccuracies, rework and significant time and labor allocated to resolutions.

Manual processes limit the ability to access comprehensive and accurate data in real time, leading to poor quality control, lack of forecasting accuracy, and the inability to perform meaningful analytics to support healthcare supply chain optimization initiatives.

A healthcare organization will struggle to achieve a clinically integrated supply chain when it doesn’t have access to timely, complete and credible data from its procurement processes (ERP) and clinical usage of products (EHR) for analysis.

Furthermore, manual processes and inability to access and leverage actionable data and insights from the medical supply chain can also contribute to supplier relationship issues. This same lack of data on product usage and supply demand inhibits collaboration between providers and suppliers.

Advancements in healthcare supply chain technology

Healthcare supply chain technology solutions continue to evolve, offering health systems and hospitals streamlined system integration, greater process automation, digital data access, and advanced analytics capabilities.

Cloud integration and migration

Hospitals are increasingly implementing cloud ERP systems that integrate seamlessly with their EHR systems, supply chain management (SCM) solutions and financial/patient billing systems. The move to the cloud can reduce manual processes/human intervention and increase access to data and analytics.

A survey of 103 hospital and health system leaders, representing a broad range of provider types and sizes, suggests that nearly 70% of all hospitals are likely to have adopted a cloud-based approach to supply chain management by 2026.

When asked why they transitioned supply chain management to the cloud, the biggest drivers cited were improved efficiency, reduced costs/improved operational resiliency, and improved security/digital transformation.

The combination of cloud system integration, process automation and automated digital data capture is also supporting supply chain’s ability to establish a complete, accurate and timely data source on which to train AI models.

Using AI to detect supply disruptions

AI can analyze vast amounts of data to forecast supply needs accurately, track shipments in real-time, and suggest alternate suppliers or routes in case of delays. Healthcare is increasingly utilizing AI to mitigate supply chain disruptions by predicting demand, optimizing inventory levels, and identifying potential bottlenecks before they occur.

These capabilities help healthcare organizations maintain steady supplies of critical items, from medications to medical equipment, ensuring patient care remains uninterrupted. New research by Economic Impact, supported by DP World, found 46% of companies in the healthcare sector are using AI to identify and address potential disruptions in their supply chains.

Digital processes and data

Supply chain digital transformation has been shown to reduce process costs by 50% and increase revenue by 20% across many industries, and hospitals are no exception.

Digitized processes and data, and the ability to generate actionable analytics, make it easier for healthcare organizations to communicate value-added information to their suppliers, such as forecasting and demand planning data. In turn, they can also generate more accurate and timely supplier performance metrics to strengthen these relationships – and their supply chains.

Real-time access to accurate and credible data on procurement processes and supplier relationships can also help healthcare supply chain management teams improve compliance with sourcing initiatives, such as value-based purchasing and on-contract sourcing.

Auto-ID technology: RFID & IoT

RFID (Radio-Frequency Identification) and IoT (Internet of Things) have become the foundation for healthcare supply chain optimization for many U.S. health systems and hospitals. These technologies significantly enhance healthcare supply chains by providing real-time tracking of supplies and equipment and improving inventory management and more.

These technologies facilitate the automation of inventory processes, reducing human errors and enabling precise tracking of each item's location, status, and history. This leads to better resource allocation, reduced waste and improved patient care through timely availability of necessary supplies and increased overall efficiency within healthcare facilities.

For example, automated inventory management systems (like those available through GHX) that leverage RFID technology for product identification, tracking, tracing and documentation facilitate greater efficiency and accuracy.

How did COVID-19 impact the healthcare supply chain?

Supply chain disruptions driven by COVID-19 put hospitals and their industry partners in the spotlight, prompting many organizations to prioritize healthcare supply chain optimization.

COVID-19 had a significant impact on healthcare supply chains – the most visible of which were supply shortages of personal protective equipment (PPE). The pandemic sent supply costs skyrocketing as hospitals struggled financially from fewer elective surgical procedures coupled with rising clinical labor expenses.

Healthcare supply chain professionals were faced with a myriad of important challenges including finding critical supplies while ensuring they were safe and effective, adjusting procurement processes to this new environment and expanding supplier relationships across broader distribution networks.

Lessons from the pandemic to mitigate future risks

The pandemic changed the scope of healthcare supply chain management responsibilities and heightened appreciation for reliable relationships with suppliers and other business partners across distribution networks.

In the post-COVID era, research by HIDA shows that the top three priorities to address the shortcomings in healthcare supply chains highlighted by the pandemic are:

Mitigating supply chain risk
Forming strategic partnerships with suppliers
Streamlining logistics

Effective healthcare supply chain management benefits

The benefits of effective management and the consequences of supply chain disruptions have become glaringly obvious, not only to healthcare logistics professionals but also executives, clinicians, patients and even the general public.

From efficient procurement processes, strong supplier relationships and reliable distribution networks to effective inventory management, optimizing the healthcare supply chain can influence patient safety, quality control and costs.

Patient safety and care: When providers, suppliers and distributors work together, sharing relevant data via integrated systems with automated processes, clinicians have effective, safe products to care for patients when they need them. The ability to capture and analyze data from the ERP and EHR to correlate product usage with outcomes helps clinicians and supply chain professionals make choices that can help improve patient care.
Quality control: Inventory visibility and control helps keep potentially harmful products out of the facility's supply stock (e.g., recalled, expired items), which reduces the risk that they will be used on patients. Automated product data capture at the unit level, such as standardized identifiers (e.g., UDI, GTIN), makes it easier for the facility to manage recalls.
Cost optimization: Supply chain leaders have expanded cost optimization to procurement processes and inventory management. This has led to significant hard and soft dollar savings through improved pricing accuracy, greater process efficiency, error reduction and supply standardization, to name a few.

Optimizing Healthcare Supply Chain Management

The business and delivery of healthcare continues to evolve. With reimbursements increasingly tied to value - higher quality care at a lower cost – and the cost of care delivery rising, particularly labor and supply expenses, health systems and hospitals must find ways to operate more cost-effectively without negatively impacting clinical outcomes.

The healthcare supply chain is a key area for operational, clinical and financial optimization. Supply chain leaders in health systems and hospitals have proven their strategic value to their organizations and continue to do so. Contract optimization and product standardization have long been effective strategies to cut costs.

Now, with more sophisticated systems, centralized data and advanced analytics, supply chain leaders are playing an integral role in the clinically integrated supply chain – helping value analysis teams identify products that can improve clinical and financial outcomes by reducing costly infections and readmissions not reimbursed by payers.

Even with change in the industry, it’s important to note that core supply chain and logistical functions remain vital to patient care delivery. Supply chain leaders are still tasked with ensuring the right products at the right prices in the right quantities are delivered to the right locations at the right times.

These procurement and inventory management processes continue to grow in sophistication as supply chain leaders leverage new technologies for enterprise-wide visibility and data-driven decision making.

Best practices for healthcare logistics optimization

The foremost challenges for supply chains include lack of system integration, data silos, manual product data capture as well as poor data analytics and reporting capabilities. For organizations looking to optimize supply chain management and healthcare logistics, consider the following areas.

Supply chain design and network optimization: Examine current design and distribution networks to identify opportunities for healthcare supply chain optimization.
Demand forecasting and inventory planning: Determine if the current level of system integration and data sharing facilitates the generation of accurate and timely analytics for effective demand planning and forecasting.
Transportation and warehousing optimization: Strengthen supplier relationships and distribution networks through supplier diversification initiatives, prioritizing on-shore or near-shore manufacturers. Shortening the length of the supply chain and reducing the complexity of logistics, can help minimize potential roadblocks to getting needed supplies in the door.
Continuous improvement and performance measurement: Evaluate available supply chain data and analytics to determine if they are credible, timely and useful to the organization. If data issues are prevalent, as they are in many healthcare organizations, determine the root cause of the issues.

Real-world examples of supply chain strategies

Here are some examples of health systems and hospitals that have overcome supply chain challenges with technology and automation:

Challenge: Incomplete data and inconsistent product documentation

Solution: Forest Baptist Health has automated the process of capturing supply data in its EHR system at the point of use. As a result, the system has reduced the time and labor burden on clinical staff for point of care supply documentation, enhancing the quality of data recorded in the patient record and fed downstream for charge capture and patient billing.

Challenge: Contract data misalignment drives price exceptions

Solution: Piedmont Healthcare aligned contract pricing with trading partners, automated pricing validation, and implemented digital processes for price exception resolution, reducing overall price exceptions by 81% (down to 6%), and contract price exceptions by 70% (down to 5%).

Challenge: Manual invoice processing strains AP resources

Solution: Children’s of Alabama converted invoice processing from paper-based and manual to digital and automated, increasing productivity and efficiency with up to 90% of all invoices untouched.

Challenge: Late payments to suppliers and missed savings opportunities

Solution: Nebraska Methodist Health System’s (NMHS) work to automate supplier payments allows the organization to pay suppliers in a timely manner, take advantage of savings opportunities, and avoid late payments and credit holds.

Challenge: Manual P2P processes challenges health system’s growth

Solution: Northwestern Medicine fully digitized its procure-to-pay (P2P) workstream, automating previously manual processes, eliminating manual intervention, and positioning the health system for continued growth.

Strengthening Healthcare Supply Chains through Collaboration and Innovation

Healthcare supply chain optimization requires all parties along the continuum to collaborate on improvements, including health systems and hospitals, their distributors, suppliers, group purchasing organizations (GPO), etc.

The COVID-19 pandemic revealed the critical importance of provider and supplier collaboration and communication and has since driven many trading partners to strengthen their relationships.

Cloud-based systems and digital transformation of supply chain processes on both the provider and supplier sides continues to improve visibility and data sharing. For example, when a provider and its suppliers have real-time visibility into digital P2P process, they can work together to resolve issues before they impact patient care delivery (e.g., backorders, errors and exceptions, etc.).

As technology has evolved so has the sophistication of provider and supplier collaboration. Digital data sharing of provider supply demand signals can help suppliers better manage and plan product production.

As the authors of a recent Brookings Institute article stated:

“A potent first step is to improve end-to-end supply chain visibility, which provides companies with real-time data and a holistic understanding of their partners across the end-to-end supply chain, starting upstream at the procurement of materials or semifinished goods and ending downstream when products reach the end customer.”

Disclaimer: The third-party contributor of this piece is solely responsible for its content and accuracy, and the views expressed do not necessarily reflect the opinion of GHX.

Healthcare Supply Chain Issues FAQs

Q. What are the most common supply chain challenges faced by healthcare organizations?

A. Health system and hospital supply chain leaders often struggle with controlling supply expenses, transacting efficiently and accurately with trading partners, procuring enough supplies to meet clinician demand without overstocking, managing inventory enterprise-wide to optimize its usage and avoid waste (e.g., expired items, missing items), and generating complete, accurate and timely data for analytics to inform strategic decision making (e.g., forecasting, demand planning), among other challenges.

Q. How can healthcare organizations mitigate supply chain disruptions?

A. To maintain adequate supply levels for patient care, supply chain leaders can leverage technologies to gain visibility and control over their supply inventories and capture POU data to understand product utilization and uncover trends to inform procurement decisions. Externally, they can collaborate with their suppliers, communicating data and information on their supply utilization and inventory levels to help suppliers meet demand.

Q. How can healthcare organizations improve their supply chain visibility and risk management?

A. Cloud-based system integration (e.g., ERP, EHR) and digital transformation of supply chain processes improve supply chain visibility so supply chain leaders can identify and address risks with greater efficiency and accuracy.

Q. What are the key trends shaping the future of healthcare supply chain management?

A. Value analysis and value-based purchasing, cloud ERP adoption and the evaluation of products based on Cost, Quality and Outcomes are important trends shaping supply chains today in healthcare.

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Kara L. Nadeau

Healthcare Industry Contributor

Kara L. Nadeau has more than 20 years of experience as a writer for the healthcare industry, working for clients in fields including medical device/supply manufacturers and distributors; software, solution and service providers; hospitals and health systems; and industry associations.