Supply chain risk management and hospital inventory: Effects of system affiliation

• Date: 01 May 2016
• Author: E. David Zepeda,Gary J. Young,Gilbert N. Nyaga
• DOI: http://doi.org/10.1016/j.jom.2016.04.002
• Published date: 01 May 2016

Supply chain risk management and hospital inventory: Effects of

system affiliation

E. David Zepeda

a

,

b

,

*

, Gilbert N. Nyaga

a

,

b

, Gary J. Young

a

,

b

,

c

a

D'Amore-McKim School of Business, Northeastern University, USA

b

Center for Health Policy and Healthcare Research, Northeastern University, USA

c

Bouv

e College of Health Sciences, Northeastern University, USA

article info

Article history:

Received 12 March 2015

Received in revised form

15 April 2016

Accepted 19 April 2016

Available online 16 May 2016

Keywords:

Health care supply chain

Hospital operations management

Supply chain risk management

Inventory management

abstract

In this study we examine the effects of horizontal inter-organizational arrangements on inventory costs

for hospitals facing two key environmental conditions, namely the logistics services infrastructure where

the hospital is located and the demand uncertainty for clinical requirements that a hospital experiences.

Utilizing detailed data from hospitals in the State of California, we investigated the potential mitigating

effects of affiliation with multi-hospital systems while controlling for service performance. We argue that

these arrangements potentially influence managers' confidence in their supply chains, which in turn

impacts inventory accumulation. Results suggest that while affiliation with local, regional, and national

systems has mitigating effects under weak logistics services infrastructure, the mitigat ing effect is

greatest for affiliation in local systems. The results also point to potential for improved operating effi-

ciency with system affiliation, a factor that is often not considered in policy discussions regarding

hospital system formation. Theoretical and managerial implications are discussed.

©2016 Elsevier B.V. All rights reserved.

1. Introduction

Faced with increasing reimbursement and competitive pres-

sures, many U.S. hospitals are focusing on reducing operating costs

through internal process improvements. In this vein, hospitals have

been giving growing emphasis to supply chain management. Hos-

pital supply chain costs (i.e., supplies and purchased services) ac-

count for as much as 30 percent of a hospital's operating budget

and thus represent an important opportunity for cost savings for

hospitals individually but also for the US given that hospital bud-

gets collectively account for more than six percent of the country's

gross domestic product (Montgomery and Schneller, 2007; Burns

and Lee, 2008; McKone-Sweet et al., 2005; CMS, 2011). However,

limited systematic research has been conducted to identify prac-

tices and strategies for improving hospital supply chain

performance.

An area of hospital supply chain management that particularly

warrants close study is inventory. Among hospitals and the health

care sector in general, inventory accumulation and obsolescence

are several times higher than in the retail/industrial sector (Ebel

et al., 2013). This is partly because unlike product-based supply

chains, cost is typically not the main driver of inventory decisions in

the hospital sector. Instead, inventory levels are dictated by the

need to meet service performance outcomes. Yet, wide variation

exists among hospitals in terms of inventory costs that do not

appear to be explained by service performance. For example, Fig. 1

presents inventory costs among top performing California hospitals

in 2009 which we define as those in the top 50th percentile on

three measures of service performance. As can be seen, hospital

inventory costs, as a percentage of their operating budgets, vary

markedly within the same peer group for service performance.

1

The supply chain literature indicates that organizations

encounter challenges in managing inventory because of two typical

supply chain risks: demand exceeds supply (supply risk) resulting

in stockouts or supply exceeds demand (inventory risk) resulting in

*Corresponding author. 360 Huntington Avenue, Boston, MA, 02115, USA.

E-mail addresses: d.zepeda@neu.edu (E.D. Zepeda), g.nyaga@neu.edu

(G.N. Nyaga), ga.young@neu.edu (G.J. Young).

1

We obtained each hospital's inventory costs from the hospital's balance sheet

available from the California Hospital Financial Disclosure Report (CFDR) available

from the state Office of Statewide Health Planning and Development (OSHPD)

(http://www.oshpd.ca.gov). The hospital service performance measures were ob-

tained from the Medicare Hospital Compare databases (http://www.medicare.gov/

hospitalcompare).

Contents lists available at ScienceDirect

Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

http://dx.doi.org/10.1016/j.jom.2016.04.002

0272-6963/©2016 Elsevier B.V. All rights reserved.

Journal of Operations Management 44 (2016) 30e47

surplus inventory (Craighead et al., 2007; Kremer &Wassenhove,

2014; Sodhi et al., 2012; Talluri et al., 2013). Much research has

focused on relationships between an organization and its suppliers

as a key element of an organization's ability tomanage supply chain

risk (i.e., Wiengarten, et al., 2014;Zsidisin and Ellram, 20 03). While

this type of vertical inter-organizational arrangement (i.e., rela-

tionship between buyer and supplier) is important, far less atten-

tion has been devoted to horizontal inter-organizational

arrangements among organizations with regard to the manage-

ment of supply chain risk (Chen et al., 2013).

In this paper, we report results from an investigation of the ef-

fects of horizontal inter-organizational arrangements among hos-

pitals on their inventory costs in the context of key drivers of supply

chain risk for these organizations. For U.S. hospitals, an increasingly

common horizontal inter-organizational arrangement is multi-

hospital systems which entail common ownership of two or more

hospitals (Burns et al., 2015; Chen et al., 2013). Currently, well over

50 percent of U.S. hospitals are affiliated with such systems (AHA,

2011; Cutler and Morton, 2013). Because these types of horizontal

inter-organizational arrangements create opportunities for pooled

resources including inventory (Bazzoli et al., 2000; Carey, 2003;

Burns et al., 2015), managers of affiliated hospitals may be less

likely to be concerned about the need to accumulate excess in-

ventory as a buffer against supply chain risk. In effect, affiliation

with a system may mitigate hospital supply chain risks resulting in

lower levels of inventory.

To conduct our investigation, we utilized detailed financial data

from hospitals in the State of California. Weexamined the effects of

system affiliation on a hospital's inventory accumulation in the

presence of supply chain risks arising from its environmental

conditions, namely the logistics services infrastructure where the

hospital is located and the demand uncertainty for clinical re-

quirements that the hospital experiences. We also examined the

potential moderating effects of system affiliation on a hospital's

response to these key supply chain risk conditions. Our study

makes two primary contributions.

One contribution is to the general supply chain management

literature as our study focuses on the largely understudied area of

horizontal inter-organizational arrangements and their

implications for supply chain management including inventory

costs. The extant supply chain literature on integration has tended

to focus on vertical integration within the manufacturing sector

(i.e., Flynn et al., 2010; Swink et al., 2007; Wiengarten et al., 2014).

By comparison, we address integration in the service sector and in

the context of horizontal as opposed to vertical arrangements. We

build on recent work by Wiengarten et al. (2014)suggesting that, as

a form of structural integration, horizontal inter-organizational

arrangements are more effective in terms of managing inventory

costs under conditions of weak logistics services infrastructure. In

particular, we investigate how horizontal linkages among organi-

zations with commonality in assets and resources can be exploited

at the operational level where the influence of supply chain risk is

more immediate (Narasimhan and Talluri, 2009), and where de-

cisions regarding the deployment of assets and resources are

eventually made (Swink et al., 2007). By examining such inter-

organizational arrangements in the context of environmental

conditions that drive supply chain risks and for organizations

where product availability and service are more critical than cost

considerations, our study offers new insights regarding the po-

tential operational benefits of horizontal integration. As such, we

extend the supply chain integration literature by contributing to

the discussion regarding the link between integration and opera-

tional performance (i.e., Flynn et al., 2010; Koufteros et al., 2005;

Gimenez and Ventura, 2005; Saeed et al., 2005; Germain and

Iyer, 2006; Stank et al., 2001; Wiengarten et al., 2014). More spe-

cifically, our study provides insights into horizontal inter-

organizational arrangements as an efficient alternative to vertical

integration with suppliers and customers in service operations

where geographic proximity between partners allows for risk

pooling benefits.

Another contribution is to US health policy. The growing trend

in the number of hospitals that belong to systems has generated

much debate among policy makers and industry analysts over

whether this form of industry consolidation will enhance hospital

operating performance. Numerous studies have been conducted to

assess whether system-affiliated hospitals have superior operating

performance compared to hospitals that are independent (i.e.,

Coyne, 1982; Menke, 1997; Carey, 2003; Burns et al., 2015). The

results of these studies largely point to little or no advantage for

system-affiliated hospitals in terms of operational performance. At

the same time, there exists growing concerns that this form of

consolidation is driving up hospital prices by enhancing the

negotiating leverage of hospitals with health insurance plans (i.e.,

Gaynor and Town, 2012; Cutler and Morton, 2013; Dafny, 2014).

This concern combined with a lack of solid evidence that system

affiliation is associated with better hospital operating performance

has resulted in calls for more heightened antitrust scrutiny over the

formation and expansion of multi-hospital systems (i.e., Daly,

2014). However, the extant literature regarding system affiliation

and hospital operating performance is limited in two important

ways. First, many of the relevant studies treat system affiliation one

dimensionally; that is, whether or not a hospital is system affiliated.

This potentially masks substantial variation in the operating per-

formance of system-affiliated hospitals as they vary markedly in

terms of the structural characteristics of the systems to which they

are affiliated and the environmental conditions to which they are

exposed, both of which have implications for their operating per-

formance. Two, the studies largely examine hospital performance

based on total operating expenses. While system affiliation

potentially enhances hospitals' operating performance in certain

areas, it may also impede their operating performance in other

areas (Burns et al., 2015). As such, if only aggregate performance

measures are used the differences may offset one another.

Accordingly, we have conducted our investigation to account for

Fig. 1. Distribution of hospital inventory costs for top performing California hospitals

in 2009. Top performing hospitals represented by the top 50th percentile in hospital

service performance on either of three service performance categories: 30-day

pneumonia related mortality rates, timely service patient experience, and surgery

patients receiving proper antibiotic to prevent infection.

E.D. Zepeda et al. / Journal of Operations Management 44 (2016) 30e47 31