Pharmaceutical supply chain and inventory management strategies: Optimization for a pharmaceutical company and a hospital
A high level of service for medical supplies and effective inventory policies are essential objectives for all health care industries. Medicine shortages and improper use of pharmaceuticals can not only lead to financial losses but also have a significant impact on patients. Many health systems and hospitals experience difficulties in achieving these goals as they have not addressed how medicines are managed, supplied, and used to save lives and improve health. Studies are essential to understand operations in health care industries and to offer decision support tools that improve health policy, public health, patient safety, and strategic decision-making in the pharmaceutical supply chain. We present an inventory model that integrates continuous review with production and distribution for a supply chain involving a pharmaceutical company and a hospital supply chain. The model considers multiple pharmaceutical products, variable lead time, permissible payment delays, constraints on space availability, and the customer service level (CSL). We develop a procedure for determining optimal solutions for inventory lot size, lead time, and the number of deliveries to achieve hospital CSL targets with a minimum total cost for the supply chain. A numerical example illustrates the model application and behavior.
1. Introduction
Research into supply chain and inventory management has been extensive in the field of health care. The main goal of this research is to reduce health care costs without sacrificing customer service. Pharmaceuticals represent a significant part of health care costs, account for approximately 10% of annual health care expenditure in the USA and about $600 billion globally in 2009 [1]. Pharmaceutical products can be expensive to purchase and distribute, but shortages of essential medicines, improper use of medicines, and spending on unnecessary or low-quality medicines also have a high costs in terms of wasted resources and preventable illness and death. Almarsdóttir and Traulsen identified a number of reasons why pharmaceutical deserve special consideration in the control of inventory [2]. In the current economic crisis, increasing attention is being focused on the rising costs of health care and specifically pharmaceuticals.
Careful management of pharmaceutical is directly related to a country’s ability to address public health concerns. Aptel and Pourjalali stated that management of pharmaceutical supplies is one of the most important managerial issues in health care industries [3]. However, many health care industries experience difficulty in managing their pharmaceutical products. A pharmaceutical supplychain (PSC) can be defined as ‘‘the integration of all activities associated with the flow and transformation of drugs from raw materials through to the end user, as well as associated information flows, through improved supply chain relationships to achieve a sustainable competitive advantage’’ [4]. The PSC comprises three major players: producers, purchasers, and pharmaceutical providers. Producers consist of pharmaceutical companies, medical surgical product companies, device manufacturers, and manufacturers of capital equipment and information systems. Purchasers include grouped purchasing organizations (GPOs), pharmaceutical wholesalers, medical surgical distributors, independent contracted distributors, and product representatives. Providers include hospitals, hospital systems, integrated delivery networks (IDNs), and alternative site facilities [5].
The PSC is very complex and carries high responsibility in ensuring that the right drug reaches the right people at the right time and in the right condition to fight against disease and suffering. It is a highly sensitive supply chain in which anything less than a customer service level (CSL) of 100% is unacceptable because of the direct impact on health and safety. The solution adopted by many pharmaceutical industries is to carry a huge inventory in the supply chain to ensure a fill rate close to 100%. However, ensuring 100% product availability at an optimal cost represents a huge challenge unless the supply chain processes are streamlined towards customer needs and demands. Product perishability is another critical PSC issue. Outdated or expired items may be overlooked and dispensed to patients, which could have potentially disastrous effects on both patient care and public relations. In a 2003 survey, the estimated cost for expiration of branded products in supermarkets and drug stores was over 500 million dollars [6]. Apart from this perishability issue, health care managers are challenged with developing inventory policies given changing demands, limited space capacity, CSL, patient safety, and regulations affecting supply.
In considering a PSC, health care managers have to decide order quantities and purchasing dates and the inventory level they carry to effectively serve their customers. They also have to manage their interactions with pharmaceutical companies to minimize the integrated total cost for PSC and inventory management without sacrificing CSL. Therefore, PSCs require effective inventory management policies and coordination among producers, purchasers, and providers. PSC decisions are significant because a shortage of medicines and improper use of pharmaceutical products lead to financial losses and have a significant impact on patients. Therefore, PSC decision-makers require expert knowledge to make the best use of their organizational resources and improve customer satisfaction without negatively affecting public health, patient safety, or relations with PSC members.
Unlike many industries, hospital administrators and pharmacy managers have to manage very complicated distribution networks and inventory management problems without proper guidance on efficient practices. This is because most hospital administrators and pharmacy managers are doctors with expert knowledge in medicine, and are not supply chain professionals [7]. Hence, given the high costs, coordination, constraints, and perishability of pharmaceuticals, more study is necessary to help health care managers in setting optimal PSC and inventory management policies. Operations research (OR) provides a wide range of methodologies that can help hospitals and other health care systems to significantly improve their operations. A number of studies have considered problems related to health care using OR techniques [8–11]. Here we develop an OR model for PSC and inventory management for a pharmaceutical company and a hospital. The next section reviews the literature on supply chain management issues from the perspective of health care industries.