How to straighten supply chain kinks

May 22, 2006

The pharmaceutical supply chain works wonders, bringing thousandsof drug products to hospitals just as local inventory is fallingtoward zero. The problem is that every chain, including supplychains, is prone to kinks.

The pharmaceutical supply chain works wonders, bringing thousands of drug products to hospitals just as local inventory is falling toward zero. The problem is that every chain, including supply chains, is prone to kinks.

On paper, drug products flow seamlessly from manufacturer to wholesaler to hospital pharmacy to patient. The pharmacy purchasing manager keys in an electronic order this morning and the wholesaler delivers that afternoon or the next day.

On the financial side, group purchasing organizations, or GPOs, negotiate group purchase contracts on behalf of multiple hospitals and health systems. By aggregating demand, GPOs are able to negotiate more favorable prices than individual buyers might get by negotiating solo contracts with manufacturers.

On the information side, GPOs and wholesalers pass information on current and projected order volume from hospital buyers back to manufacturers to help guide production planning. GPOs and wholesalers also monitor hospital drug utilization to help guide contract and product selection decisions. The two organizations can also monitor purchases to ensure that hospitals meet their contract requirements and pay contract prices.

The entire system is designed to minimize inventories and associated costs at each level, explained Ron Hartmann, Pharm.D., pharmacy division VP for MedAssets Supply Chain Systems, a national GPO. "But there are a lot of moving parts that must remain in equilibrium," he said. "If any key part-manufacturer, wholesaler, GPO, or hospital-slips, the entire system slips."

Every link in the supply chain is prone to slip, Hartmann said. On the supply end, manufacturers try to match production with projected demand. But if a key ingredient becomes unavailable, production slows and product supply falls. If a key production facility goes off line, supply falls. If a key manufacturer decides to stop making a product, supply falls.

If the supply shortage is temporary, there may be enough of the product in wholesaler inventory to insulate hospitals. If the shortage continues, hospitals will not be able to get the product.

"Most wholesalers fill 94% to 97% of orders on a daily basis," said Larry McComber, senior VP, contracts, for Novation, one of the nation's largest GPOs. "None of them expects to hit a performance level of 100%. But we have performance measures in place with wholesalers that involve financial penalties. We also have supply agreements with manufacturers. If we have consistent problems with a particular manufacturer, we put that product back out to bid to protect our members."

Wholesalers are the essential link between manufacturer and hospital. And like pharmacies that distribute drugs but focus on clinical services, wholesalers prefer to focus on information services rather than on drug distribution. "If you are a distributor, you just drop boxes off at the loading dock," explained Porter Burtelson, senior VP of Cardinal Health's pharmaceutical supply chain division. "In today's industry, hospitals are looking to us more as supply chain partners who can help streamline operations."

Cardinal can automatically pick, pack, and ship containers destined to refill specific Pyxis dispensing cabinets in a hospital, Burtelson noted. Most other major wholesalers offer a similar service. Wholesalers can also monitor contract compliance on the hospital side and price compliance on the supplier side.

Hammering out purchase contracts and monitoring compliance and price levels are business functions that few pharmacy directors have been trained to perform. That's where wholesalers and GPOs can make the difference between a thriving pharmacy operation and a financial crisis.