An Analysis of the Effects of Intra‐ and Interorganizational Arrangements on Hospital Supply Chain Efficiency

• Published date: 01 December 2015
• DOI: http://doi.org/10.1111/jbl.12109
• Date: 01 December 2015

An Analysis of the Effects of Intra- and Interorganizational

Arrangements on Hospital Supply Chain Efficiency

Gilbert N. Nyaga, Gary J. Young, and E. David Zepeda

Northeastern University

Efficiency in supply chain operations is increasingly a key strategic goal as organizations focus on containing cost. This is especially the

case for hospitals where supply chain costs account for a substantial portion of operating budgets. In this study, we examine the impact of

incentive mechanisms for internal stakeholders and negotiating leverage with external partners on supply chain efficiency in the hospital indus-

try. We premise the study on agency, stewardship, and power theories. We use data from over 200 California hospitals in a five-year period

(pooled data) to estimate regression models using generalized estimating equation. We find that physician employment and contract management

enhance supply chain efficiency. Surprisingly, we did not find that better supply chain efficiency was associated with either hospital affiliation

with systems or high-volume purchases through large national group purchasing organizations. The results have important theoretical and man-

agerial implications for supply chain management.

Keywords: hospital; supply chain efficiency; incentive alignment; GPO; systems

INTRODUCTION

Efficiency in supplychain operations has been of interest to scholars

and practitioners in part because of the diverse factors that influence

it and the impact it has on organizations’competitiveness. Past stud-

ies have examined several intra- and interorganizational factors

influencing an organization’s performance (Eisenberger and Fasolo

1990; Agarwal et al. 2010). Internally, organizations invest substan-

tial resources not only in process improvements but also in securing

employee buy-in and support of various performance enhancing ini-

tiatives (Eisenberger and Fasolo 1990; Samson and Tervioski

1999). Organizations often adopt different employment and com-

pensation terms to secure employee buy-in. Generally, such

arrangements are intended to align the interests of employees with

the organization’sfinancial and strategic goals.

Externally, organizations often seek greater negotiating lever-

age with their supply chain partners not only to secure better

prices but also to achieve value-added services such as favorable

delivery terms and dedicated technical support (Nollet and Beau-

lieu 2005; Tella and Virolainen 2005; Agarwal et al. 2010). In

many cases, organizations gain negotiating leverage against sup-

pliers by affiliating with competitors through mergers, alliances,

or group purchasing coalitions such that their combined purchase

volume enables them to extract favorable prices and other con-

cessions from the suppliers (Anand and Aron 2003; Burns and

Lee 2008; Hu and Schwarz 2011). However, past studies report

mixed findings regarding the effectiveness of such arrangements

on organizations’performance (Hu and Schwarz 2011).

In this study, we examined both intra- and interorganizational

arrangements that potentially influence supply chain efficiency in

the hospital industry. Specifically, we focused on a hospital’s

employment arrangements with key clinical staff who are in a

position to influence supply chain decisions and efficiency. Past

studies underscore the importance of employee engagement on

success of total quality initiatives in the health care sector

(Tucker and Edmondson 2003; Gowen et al. 2006). In accor-

dance with agency and stewardship theories, we argue that the

nature of clinical staff employment arrangements influence sup-

ply chain efficiency because employment arrangements not only

align incentives of clinical staff to hospital goals but also create

a greater sense of responsibility and ownership on the part of

clinical staff. We also focused on three interorganizational

arrangements that in principle confer hospitals with greater nego-

tiating leverage over suppliers: hospital systems, group purchas-

ing organizations (GPOs), and contract management (Schneller

and Smeltzer 2006). In accordance with power theory, we argue

that these arrangements give the hospital greater influence in

negotiating with suppliers, which results in concessionary terms

that enhance supply chain efficiency. However, as these arrange-

ments involve different resource requirements and managerial

challenges, their effect on hospital’s supply chain efficiency may

vary substantially (Burns and Lee 2008; Hu and Schwarz 2011).

Consequently, examining their impact simultaneously offers

insight on enhancing supply chain efficiency.

The hospital industry offered an excellent setting for our study

because of the emphasis that hospitals have placed in recent years

on improving their supply chain efficiency. The U.S. hospital

industry is a large sector of the country’s economy accounting for

more than $850 billion in expenditures, or approximately 6% of

gross domestic product (CMS 2011). Because hospital costs

account for approximately 40% of total health care costs and have

been increasing at a much faster rate than inflation (CMS 2011),

health plans and other purchasers of health care services have

imposed tighter reimbursement controls on hospitals, which have

reduced operating margins in the industry (Devers et al. 2003;

MPAC 2012). Such policies as well as various competitive pres-

sures have forced hospitals to pay closer attention to their supply

chain operations (Schneller and Smeltzer 2006; HFMA 2009).

With supply chain costs estimated to account for more than 25%

of hospitals’operating budgets (McKone-Sweet et al. 2005), more

effective supply chain management practices offer hospitals an

important opportunity for improving their efficiency (Schneller

and Smeltzer 2006; HFMA 2009).

Corresponding author:

Gilbert N. Nyaga, D’Amore-McKim School of Business, Northeast-

ern University, 214 Hayden Hall, 360 Huntington Avenue, Boston,

MA 02115, USA; E-mail: g.nyaga@neu.edu

Journal of Business Logistics, 2015, 36(4): 340–354 doi: 10.1111/jbl.12109

© Council of Supply Chain Management Professionals